1999 and all that

Here’s where you get to help me. What follows is a draft of a chapter about the dotcom bubble. What I am lacking is personal anec­dotes, so I feel it’s a bit dry, though I do have a few to add in. Did you make a mint overnight? Did you lose it again? Did you lose your job or your business? Did you buy a ‘foosball’ table for your office? Were you greedy and reckless? Was your boss? Funny stories are good. Comment on why it all happened is also good. Reply via comments or messages, as you wish. Anonymity is assured if you want it.

Current levels of interest in e-​​business are at a five-​​year high. There is a lot of interest in starting a business on the internet; in investing in other people’s internet busi­nesses; and in diverting advert­ising money from print and broad­cast cam­paigns to online. This marks the recovery of the medium from a ‘trough of dis­il­lu­sion­ment’, to use research company Gartner’s biblical description .

In the mid-​​to-​​late nineties, the internet was widely tipped as the next big thing. The own­er­ship of internet access had finally moved into the main­stream and was no longer the preserve of geeks with Computer Science degrees. It was starting to become clear to busi­nesses that having an internet presence could give them afford­able, world­wide access to cus­tomers like no other avail­able media. Increasing cap­ab­ility to perform secure two-​​way com­mu­nic­a­tions over the web led to the pos­sib­ility of carrying out business trans­ac­tions over the internet and the birth of e-​​commerce. People started to talk about ‘dotcoms’, busi­nesses that conduct a major part of their com­mer­cial activity online. Such busi­nesses would be light­weight, global and operate 24/​7. It was a fant­astic idea and it’s easy to see why people thought that the internet would provide a certain route to fin­an­cial success. Unfortunately, this led to greed and to an inab­ility to dis­tin­guish between a good business plan for an internet business and a terrible one. Tony Davis of Red-​​gate software sums it up nicely: “There was too much money being thrown at too many silly ideas. People got all caught up in an ‘everything’s dif­ferent now’ whirl­wind and forgot that the old, boring economic rules still applied.”

Netscape, whose main product was a popular web browser, is described by Tim O’Reilly as the “standard bearer of Web 1.0″ . Their launch on Wall Street was one of the first of many stag­gering offer­ings over the period. Initially, the stock price at IPO was to be $12. After all, the company had less than $25mn in annual sales at that point, and though their usage rates were growing very strongly, it was in debt. However, the buzz around a major internet IPO was so loud that on August 9 1995, Netscape Communications Inc. went public with stock valued at $28 a share. At that point, the typical asking price for a tech­no­logy IPO was around $15. This doubling in price did not seem to inhibit investors at all, though. In actual fact, it didn’t even open at this value, but at $71, such was the level of interest. The value rose to $75 and closed at $58 at the end of the day, giving the company a first-​​day cap of $2.7bn. Jim Clark, co-​​founder of the company with a 20% stake, suddenly had half a billion dollars of stock.

Confidence that Netscape was the key to the next big thing con­tinued to grow. On November 28th, the share price leapt again, gaining 20 points in a day, to $131. At the time, industry analyst Michael Levine com­mented: “Everyone wants to be con­nected with Netscape. There’s a growing real­iz­a­tion that it is the standard.”

Company PR Chris Holten recalls some of the excite­ment around the offering, which spread way beyond tra­di­tional investors :

Caller: I’m a very soph­ist­ic­ated investor who has a very sub­stan­tial amount of money to invest in Netscape stock and I want to talk to someone to find out how I can get it cheap.
Finance: Have you spoken yet to our under­writers?
Caller: What’s an under­writer?
Finance: Well, basic­ally Netscape sells the shares of stock to an under­writer, in this case it’s Morgan Stanley and also Hambrecht & Quist (inter­rup­tion…)
Caller: Was that Hamburger Kissed?
Finance: No, H-​​A-​​M-​​B-​​R-​​E-​​C-​​H-​​T & Q-​​U-​​I-​​S-​​T
Caller: Now what are you calling them?
Finance: The under­writer. So we sell the shares to Morgan Stanley and they sell the shares to the public.
Caller: Could I talk to Mr. Stanley please?

Such stories are funny, but they are also very typical of a time when ordinary members of the public started to feel as though stocks and shares could make them money. Throughout the eighties, in the UK, privat­isa­tions of public com­panies were made more pal­at­able by the Conservative gov­ern­ment by mar­keting these offer­ings to the pop­u­la­tion as oppor­tun­ities to cash-​​in. The ‘Tell Sid’ TV and press campaign around the sell off of British Gas in 1986 was perhaps the peak of this, likening the share offering to a horse-​​racing tip. Since these shares were offered well below their value, many made con­sid­er­able profits over the period.

When we talk about the huge amounts of money raised, spent and frittered away during the dotcom boom, it’s worth remem­bering that we are not just talking about the people we’d want to lose money — ‘vulture cap­it­al­ists’ and grey-​​haired zil­lion­aires who don’t under­stand the internet but want a piece of the pie. We’re also talking about life-​​savings, penny stocks and pension funds. Back in California, mean­while, as David Vise records in his history of Google, “The Netscape IPO sym­bol­ized the ushering in of the Internet era in Silicon Valley and created a gold-​​rush mentality” .

On April 12th 1996, the same thing happened again at the Yahoo! NASDAQ IPO. The stock shot up from $13 when the market opened to $43 an hour later, which equated to $1 billion for the company. Ten minutes after this, the stock dropped $10 to around $33, where it stayed for the rest of the day. In total, 8.5 million shares were traded in its first day. At that time, Yahoo! was not even remotely prof­it­able, reporting a loss of $643,000 despite sales of $1.4 million during its first ten months. The company’s strategy was to use its own IPO to build its brand to the extent that it would drive them into prof­it­ab­ility — a strategy that proved very suc­cessful. Since Yahoo! was already a well-​​known brand in the internet search market, the offering amp­li­fied this, con­sid­er­ably out­per­forming the IPOs of lesser known com­pet­itors Excite and Lycos the previous week.

The enormous fortunes being made through the stock market on internet tools and web sites were clearly of enormous interest to Venture Capitalists and other investors. Yet, they knew that these valu­ations were hit-​​and-​​miss. Investing in a single internet company was as likely to ruin you as make your fortune. So they spread their risk by investing in many internet com­panies, choosing a mixture of long-​​shot out­siders and what they thought were a sure thing. The company managers in these startups were typ­ic­ally very young.

Some of the best known ‘Siliconaires’ bear a start­ling resemb­lance. Jerry Yang and David Filo were on the Stanford University doctoral pro­gramme when they left to start Yahoo! in 1995. So was Jeff Bezos before he started Amazon in 1994. So were Larry Page and Sergei Brin before starting Google in 1998. In some respects, this was inev­it­able; you needed access to com­puters and time to research your product to come up with a suc­cessful dotcom. You also needed training and con­fid­ence with using com­puters, not to mention a lot of optimism about the business pro­spects of a company that didn’t have any physical products and operated over the web. And you needed to be in an atmo­sphere — like Silicon Valley — where people would take your ideas ser­i­ously and where the Sand Hill road Venture Capital com­panies like Kleiner Perkins and Sequoia Capital would poten­tially back your ideas. Many operated at a loss since they needed to build their brand and presence before cus­tomers would come. Some operated at a loss because their business model was fun­da­ment­ally flawed. Their need for invest­ment was tied to mar­keting them­selves or tiding the owners over until internet surfers found them and con­verted their dreams and aspir­a­tions into gold.

This youth­ful­ness led to the popular image of dotcoms being led by young men in polo shirts and jeans, handing out free soft drinks and sweets to their employees. They worked in ‘spaces’ rather than offices and installed table football (‘foosball’) in the board room. A lot were inex­per­i­ence as managers. It was their first full-​​time job, and they’d become the CEOs of com­panies after a training in computer engin­eering rather than business. Many dotcoms were like this, though at least an equal number were very serious, very organ­ised and extremely cha­ris­matic. Dotcoms also had a repu­ta­tion for working long hours and demanding excep­tional per­form­ance from their staff. Nonetheless, there were also a lot of com­panies who appeared to accept a lot of invest­ment and were burning through it very quickly without getting any closer to the hoards of internet riches their investors so coveted.

The boom rose to a peak as the century drew to a close. In the UK, the First Tuesday club was formed in October 1998 by Julie Meyer to provide a net­working oppor­tunity for dotcom entre­pren­eurs and other inter­ested parties, such as greedy VCs who sniffed the chance at a fortune. The club’s website had 500,000 registered members by 2000. In February 1999, Amazon’s Jeff Bezos, with a personal fortune estim­ated at $10.1bn, reached number 19 on Forbes’ global rich list and in September of the same year, UK Prime Minister Tony Blair warned busi­nesses: “If you’re not exploiting the oppor­tun­ities of e-​​commerce, you could go bankrupt.” There were 457 IPOs in 1999, most of them dotcoms, and in the case of 117 of these, stocks doubled in price on the first day of trading.

The new century saw record figures on inter­na­tional stock markets. On December 31 1999, the FTSE 100 peaked at 6,930.20. By January 14, the Dow Jones Industrial Average had hit an all-​​time closing high of 11,722.98.

January 30th marked the zenith of the dotcom boom. Sixteen dotcoms including pets.com (an online petfood store) and epidemic.com (an online mar­keting agency) spent up to $3mn each on 30-​​second advert­ising slots during the US Super Bowl XXXIV. As the Guardian reported on March 10th 2005, “In the US, the internet was every­where. News magazines from the stalwart Time through to the internet cheer­leaders Wired, Red Herring and the Industry Standard pro­claimed the birth of the new economy. Wall Street analysts Henry Blodget, at Merrill Lynch, and Mary Meeker, from Morgan Stanley, were feted as royalty.”

The UK was late to the dotcom party in many respects, but had the dubious honour of spawning the last great dotcom IPO. The online travel agency and ticket company lastminute.com, run by Martha Lane Fox and Brent Hoberman, was sim­ul­tan­eously launched on both the NASDAQ and London Stock Exchange on March 14 2000. The company wasn’t making a profit, but this was an internet property, so that didn’t matter. The owners were expecting to make a stag­gering £500mn out of the flot­a­tion. True to form, it exceeded their expect­a­tions enorm­ously — the shares gained 28% in a single day, giving the company a first-​​day valu­ation of £800mn.

And this was roughly the point at which everything started to go wrong. Three days after the lastminute.com flot­a­tion, Dutch ISP World Online had its IPO and raised $7.2bn. A week later, it was dis­covered that its founder, Nina Brink, had sold 1.2mn of her shares con­sid­er­ably below the offer price the day after its flot­a­tion. In May, fashion retailer Boo.com col­lapsed having burned through $135mn of investor’s money. “Mainly on a pretty website from which no-​​one bought anything,” says Steve Mulder of Molecular.

The fol­lowing month, Psion, Baltimore Technologies, Kingston Communications and Thus, having been inducted into the FTSE 100 three months earlier, were ejected from the list. Super Bowl advert­iser epidemic.com went bust, laying off 60 people after spending the $7.6mn they had raised in first-​​round fin­an­cing. Toytime and Toysmart went to the wall, as did CraftShop.com and violet.com. In November, pets.com became the first listed US dotcom to collapse. Pets.com, another Super Bowl advert­iser, had raised $82.5mn at their IPO only nine months earlier. The expres­sions “dot bomb” and “dot compost” started to gain currency.

Things went from bad to worse in 2001. Kosmo.com — free delivery of fast food and snacks — went bust despite $280mn of funding. Grocery delivery service Webvan.com went under, having raised $375mn at their IPO a mere 18 months earlier. In April alone, 17,554 people lost their jobs from dotcom startups; 64 dotcom com­panies closed the fol­lowing month. In contrast to 1999, there were 76 IPOs in 2001, none of which doubled in price on the first day. On September 21, the tech-​​heavy NASDAQ index hit 1,423.19, having lost 70% of its value since the previous March. The party was over. Stewart Kirkpatrick, writing in the Scotsman in January 2002, noted, “You don’t need the right kind of eyes to see where the dotcom wave crashed. The tidemark is there for all to see in the second-​​hand office fur­niture ware­houses of California. In their soulless aisles, you can browse among the personal effects of the dotcom cas­u­al­ties: teak board­room tables; fine, leather, exec­ut­ives’ chairs; pool tables; and all the other trap­pings of e-​​excess.”

The final irony came the fol­lowing January when Amazon announced its first quarter in profit. By that time, Jeff Bezos’ fortune was down to $1.5bn, number 293 on the rich list. Amazon, e-​​bay and Yahoo!, the most prom­inent sur­vivors of the dotcom boom, have gone on to become the giants among internet busi­nesses. But they would never again receive valu­ations quite so wildly removed from their profits.

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