The dot-com bubble of 2001
introduction
The dot-com bubble started around 1997, peaked in 2000 and ultimately burst by 2002. As the name suggests the bubble was based on the speculation made in the stock market on internet-based companies. People started to invest blindly in internet-based companies without doing any research about the company on what are the service or products they provide.
During the crash, many online shopping companies, such as pets.com, Webvan and communication companies such as WorldCom and North point communications failed and most of them went bankrupt. Even Cisco went down by 86% and Qualcomm lost a major portion of its market capitalization.
The bubble
Between 1990 and 1997 the percentage of people using computers in the USA increased from 15% to 35%, computers turned from being a luxury to becoming a necessity. This caused a major shift to Information technology and new IT companies were started.
After so many web-based companies were started, it became the talk of the Town and it was very easy to get funding from a VC or an angel investor and a lot of the dot-com companies were started.
Netscape communication corporation made an IPO on Nasdaq on August 9, 1995, and was very successful, the stock closed at roughly $58 giving the company a value of $2.2 billion. After a few months Yahoo! made one of Nasdaq’s most successful IPO, followed by successful IPO’s from companies like Lycos and Excite.
As a result, people started to invest in any company which had something to with dot-com and there was a lot of speculation in the market, people started selling the stock they had in other industries and used the money to invest in the dot-com companies. Between 1995 and 2000, the Nasdaq Composite stock market index rose to 400%. In 1999, the shares of Qualcomm rose in value by 2619% and a lot of such companies had a similar spike in that period.
People started to quit their day job and engaged in full-time trading. The dot-com companies did not know what to do with the money they got and started to spend a lot of money lavishly on ads in the name of creating brand awareness.
Soon there was a bubble in the Telecom industry also. Many Telecom companies started to invest in fibre optic technology and the government also funded most of these companies to encourage the companies. In Europe, mobile phone companies started to spend a lot on 3G licensing, which ultimately led to huge debt. As the investments in Telecom infrastructure went out of proportion, they went out of money and there was a lot of competition between the companies and they slashed down their prices and this made a lot of companies go bankrupt.
The bubble burst
On March 10th of 2000, the combined value of stocks in NASDAQ was at $6.71 trillion; the crash began on this day, By march 30th NASDAQ was valued at $6.02 trillion. On April 6th, 2000, it was $5.78 trillion. In less than a month's time, a trillion dollars worth of stock value had been decreased. At this point in time, the dot-com companies also started to perform badly and their valuations were going down.
Soon companies started to go bankrupt. Then the media and most leading magazines started telling people to not invest or to be careful with the dot-com companies.
By the end of 2002, stocks had lost $5 trillion in market capitalization since the peak.
The aftermath
After the crash, a lot of company executives were charged for misusing stockholder money and a lot of people were penalized. VC’s became more aware after the crash and started investing carefully and they were particularly on the burn rate of the companies after that point of time. After suffering such high losses retail investors also became more aware and started investing wisely.
A few notable companies which survived the crash
Amazon.com
eBay.com
Priceline.com
shuttelfly.com
coupons.com
Companies that were killed off during the dot-com bubble
pets.com
Webvan.com
eToys.com
flooz.com
theGlobe.com
