The dot com era bubble explosion: Are we headed for another?
The dot com explosion caused large scale economic uncertainty. Will the current tech boom do the same?
Seventeen years can seem like a long time, especially in the digital space. At the turn of the new millennium, Britney and Justin were the ultimate couple, the Y2K hype was nothing more than… well, hype and the dotcom economy was happily continuing along, with a new internet-based company making headlines every day. But as all good, or slightly unstable things go, they must come to an end.
The dotcom bubble, which had been reeling in investor capital and growing at an enormous rate since 1997, was pin-pricked to explosion. Investors began to pull the plug. Stocks sunk. Companies folded quicker than a collapsible chair. Trillions of dollars were lost and the collapse of the dotcom boom saw the United States and the global economy slide a path to a full-blown recession.
Currently, we are in the midst of a tech-business boom, with web apps, ecommerce websites, digital automation solutions and social media businesses dominating the start-up culture sector. Let’s look back at the dot com era and if we can learn anything from past mistakes.
What was the dot com bubble?
The dot com bubble began to grow in the late 90’s. As the internet evolved, it created a euphoric attitude towards business with a rapid rise in equity markets fuelled by investments in internet-based companies. Investors and venture capitalists didn’t quite understand the newly formed internet commerce market and because there was no industry standard, the bubble grew purely from the presence of speculative or fad-based investing in hopes of eventually turning a profit.
The bubble that formed throughout the height of the boom was fed by cheap money, easy capital, market overconfidence and investor speculation. Investors were quick to jump on anything that had a .com at the end of its name, believing earnings and profits would not occur for at least 2-3 years if the business model proved successful. The stock market at the time wasn’t alluding to anything different, with internet businesses going to market and doubling their stocks on the first day.
The problem is, there were no business models. No industry standards to base off. No clear industry leaders and no data to prove return on investment. Internet businesses were a novelty wonderland where anyone with an idea could build a website design and begin making money.
A typical online business, whether it sold products or not, would make much of its money through advertising. Back in those days, advertisers would pay $5 per 1,000 clicks. It’s easy money for a website owner. These days, advertisers make around $0.05 per 1,000 ad clicks.
Off the back of this, in-depth analytics didn’t exist. The analytics that was available were generalised and unreliable. It didn’t take long for advertisers to realise this, so when realising they weren’t getting any return on investment, advertisers began to pull out of the digital space and return to traditional platforms like TV and radio.
After many of the dot com businesses burned through their venture capital, failed to return a profit and as their stocks began to plummet, advertisers and investors closed their wallets to internet businesses, forcing most to shut up shop.
Are we headed towards another tech bubble burst?
Tech start-ups are popping up left, right and centre these days, but will 2017’s tech bubble burst louder than the web companies of the dot com era? No, not quite.
According to Peter Cohan, Forbes contributor, lecturer at Babson College and venture capitalist expert, both bubbles share two fears: FOMO (fear of missing out) and FOLE (fear of losing everything). Yet there are several differences between their approach to these fears.
For example, the rising IPO standards mean that a company now needs to bring in at least $100 million in revenue before it’s eligible to go public. In the dot-com days, you could go public with no revenue. Stricter standards have also made companies more IPO-averse, reducing pressure on companies to “have to go public”. With lower start-up costs and overheads for web-based companies, there is also a lot less to lose if the company doesn’t turn a profit. If the bubble does burst on the current tech boom, it won’t have the widespread economic damage of the dot com days.
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