Dotcom crisis - description, history and interesting facts

Dotcom crisis - economic bubble and periodexchange speculation and rapid development of the Internet in 1997-2001, accompanied by a rapid increase in the use of the latter by business and consumers. Then there were many network companies, a significant part of which collapsed. The bankruptcy of such start-ups as Go.com, Webvan, Pets.com, E-toys.com and Kozmo.com, cost investors $ 2.4 billion. Other companies like Cisco and Qualcomm lost a large share of market capitalization, but recovered and exceeded the peak performance of that period.

Bubble dotcom: how was it?

The second half of the 1990s was marked bythe explosive development of a new type of economy in which stock markets under the influence of venture capital and IPO-financed companies in the Internet sector and related areas experienced high growth rates. Described by many of them as "dotcom", refers to commercial websites. It was born as a term for identifying companies with Internet domain names ending in .com. Large volumes of exchange transactions were fueled by the fact that it was a new industry with high potential and complexity of assessing market participants. Their reason was the high demand for shares of this sector from investors looking for new investment objects, which also led to a reassessment of many companies in this sector. At its peak, even those enterprises that were not profitable, became participants in the stock exchange and were extremely quoted, given that their performance in most cases was extremely negative.

Back in 1996 Alan Greenspan, then chairman of the Fed, warned against "irrational abundance" when a reasonable investment of capital was replaced by impulsive investments. On March 10, 2000, the technological stock index Nasdaq peaked at more than 5,000 points, the day after the fire sale of technical shares marked the end of the growth of the "new economy".

Unreasonable investment

The invention of the Internet led to one of thethe largest economic shocks in history. The global network of computers dates back to the early research work of the 1960s, but only after the creation of a worldwide network in the 1990's began its widespread distribution and commercialization.

As soon as investors and speculators realized that the Internet had created a completely new and untapped international market, IPOs of Internet companies began to follow quickly one after another.

One of the features of the dotcom crisis isin the fact that sometimes the assessment of these enterprises was based only on the concept outlined on one sheet of paper. The excitement about the commercial opportunities of the Internet was so great that every idea that seemed viable could easily get millions of dollars of funding.

The basic principles of the theory of investment in relation tounderstanding of when a business will make a profit and whether it will happen at all, in many cases were ignored, as investors were afraid to miss the next major hit. They were ready to invest large sums in companies that did not have a clear business plan. This was rationalized by the so-called. The theory of dotcoms: for an Internet enterprise to survive and develop, it needed a rapid expansion of the client base, which in most cases meant a huge initial cost. The validity of this statement is proved by Google and Amazon, two extremely successful companies that took several years to show some profit.

Unreasonable expenses

Many of the new companies received moneyspent mindlessly. Options made employees and executives on the day of IPO millionaires, and the enterprises themselves often spent money on luxury business facilities, since the credibility of the "new economy" was extremely high. In 1999, 457 primary placements were conducted in the United States, most of which were organized by Internet and technology companies. Of these, 117 managed to double their value during the first day of trading.

Communication companies, such as operatorsmobile networks and Internet providers began to invest heavily in network infrastructure because they wanted to be able to grow along with the needs of the new economy. To be able to invest in new network technologies and acquire licenses for a wireless network, huge credits were required, which also contributed to the approach of the dotcom crisis.

How .com companies became dot-bombs

March 10, 2000 index of technological stocks traded on Wall Street, Nasdaq Composite peaked at 5,046.86 points, which was twice the value a year earlier. The next day, stock prices began to fall, and the dot-com bubble burst. One of the direct reasons for this was the completion of the antitrust case against Microsoft, which in April 2000 was declared a monopoly. This market was expecting, and 10 days after March 10, the Nasdaq index lost 10%. The day after the publication of the official results of the investigation, the technology index experienced a large intraday drop, but returned back. However, this did not become a sign of recovery. Nasdaq began a free fall when investors realized that many unprofitable new companies were really that way. Within a year of the dot-com crisis, most venture ventures supporting Internet start-ups lost all their money and went bankrupt when new funding dried up. Some investors began to call once-stellar companies "dot-bombs", since in a very short time they managed to destroy billions of dollars.

October 9, 2002 Nasdaq has reached a minimum of 1114.11 points. It was a colossal loss of 78% of the index compared with its peak 2.5 years before. In addition to the many technological start-ups, many communication companies also faced problems, as they had to cover the billions of loans they took to invest in network infrastructure, whose payback was now suddenly postponed to a much longer time than anticipated.

The history of Napster

As for legal issues, Microsoft does notwas the only dot-com that appeared before the court. Another well-known technology company of that era was founded in 1999 and was called Napster. She was developing an application that provided for the sharing of digital music in the p2p network. Napster founded by 20-year-old Sean Parker and two of his friends, and the company quickly gained popularity. But because of copyright infringements, it almost immediately fell under the fire of the music industry and eventually ceased to exist.

Hacker-multimillionaire

Kim Schmitz, perhaps best illustrated bythe actions of individual entrepreneurs in relation to the dot-com crisis. This German hacker became a multi-millionaire, launching various Internet companies in the 1990s, and eventually changed his surname to Dotkom, hinting at what made him rich. In early 2000, just before the collapse of the new economy, he sold TÜV Rheinland 80% of his shares in the DataProtect he founded, which provided data protection services. Less than a year later the company went bankrupt. In the 1990s, he was the central figure in a series of sentences for insider trading and embezzlement related to his technology enterprises.

In 1999 he had a tuned Mercedes-Benz, which among many other electronic gadgets had a unique high-speed wireless Internet connection at the time. On this car, he participated in the European rally Gumball. This competition, when many people in expensive cars compete on public roads. When Kimble (his nickname at the time) pierced the tire, the new wheel was delivered to him on a jet plane from Germany.

He survived the aftermath of the dot-com crash and continuedstart new startups. In 2012, he was again arrested on charges that he through his company Mega illegally distributed copyrighted content. Currently, he lives in New Zealand in his house worth $ 30 million and is awaiting extradition to the United States.

Have investors learned the lesson?

Some companies that were launched intime bubble dotcom bubble, survived and became such technological giants as Google and Amazon. However, the majority suffered a fiasco. Some entrepreneurs who participated in risky businesses were actively involved in the industry and eventually created new companies, such as the aforementioned Kim Schmitz and Sean Parker of Napster, who became the Facebook founding president.

After the dot-com crisis, investors began to fearinvestments in risky enterprises and returned to the assessment of realistic plans. However, in recent years a number of high-level IPOs have thundered. When LinkedIn, a social network for professionals entered the market on May 19, 2011, its shares instantly grew more than 2 times, which is reminiscent of what happened in 1999. The company itself warned investors not to be too optimistic. Today IPOs are conducted by companies that have been engaged in business for several years and have good prospects for profit, if they are not already profitable. Another IPO, held in 2012, was expected for many years. The initial issue of Facebook shares became the largest among technology companies and set a record for the volume of trading and the amount of attracted investments equal to $ 16 billion.

Finally

Bubble dotcoms of the 1990s and early 2000swas characterized by a new technology that created a new market with many potential products and services, and very opportunistic investors and entrepreneurs, blinded by early successes. After the collapse of the company and the markets have become much more cautious when it comes to investing in new technologies. However, the current popularity of mobile devices such as smartphones and tablets, their almost limitless possibilities, and the holding of several successful IPOs, opens the door to a whole generation of companies that will want to benefit from this new market. The question is, will investors and entrepreneurs at this time be wiser in order not to generate a second bubble of dotcoms?

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