Dot-com bubble summary

The dot-com bubble was a speculative bubble covering roughly the period between 1995 and 2000. It was a global phenomenon, because many international banks, mutual funds, venture capital, private investors from all over the world were involved.

The bubble inflated quite quickly. The development of the graphical user interface for the World Wide Web, with point-and-click hyperlinks, was integrated into the previously academic-oriented Internet. Thus more user-friendly Internet was born, ready for ordinary people.

Public use of the Internet expanded rapidly through the years. Existing businesses realized they needed a presence on the Internet for information, marketing purposes or for commerce. The novelty were a group of new purely Internet based companies commonly referred to as dot-com. Dot-com theory suggested that the survival of the company depended on expanding its customer base as rapidly as possible, even if it produced large annual losses. "Get large or get lost" was the general belief.

Dot-com companies
Most famous dot-com examples Google and Amazon did not see any profit in their first years. It is interesing that Amazon was spending money on expanding customer base and advertising while Google was using the funds to create a more powerful search engine machine. Both strategies proved highly successful and profitable. Other more famous start-ups of the dot-com bubble were eBay, eToys, WebMD, HotJobs, Monster, and many other smaller internet businesses.

Hundreds of companies were being founded weekly, especially in hot spots like the Silicon Valley near San Francisco. Many people associate lavish lifestyles with the dot-com bubble, since companies regularly sponsored exclusive events filled with fine food and entertainers. Most of those companies burned out the money provided by the public offering and eventually collapsed.

American news media, including respected business publications such as Forbes and the Wall Street Journal, also encouraged the public to invest in risky companies, despite many of the companies' disregard for basic financial principles. Public awareness campaigns which included television ads, print ads or targeting of professional sporting events, were one of the ways in which dot-com companies tried to expand their customer base. Many companies named themselves with onomatopoeic nonsense words that they hoped would be memorable and not easily confused with a competitor.

Companies were seeing their stock prices shoot up if they simply added an "e-" prefix to their name and/or a ".com" to the end. A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook fundamentals in favor of confidence in technological advancements.

Internet speculation going wild
At the height of the boom, it was possible for a promising dot-com to make an initial public offering of its stock and raise a substantial amount of money even though it had never made a profit. The value of these companies was difficult to estimate with traditional methods such as the price-to-earnings ratio, a common measure of performance used by investors.

The value of these companies was difficult to estimate with traditional methods such as the price-to-earnings ratio, a common measure of performance used by investors. Instead, a new measure called burn rate was invented. Burn rate indicated just how fast the company was going through its capital in chasing growth at the expense of revenue. It basically represented the anticipation when will the company run out of money.

Stock market crash
Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble fell apart on March 10, 2000, when the technology NASDAQ Composite index, peaked at 5,048.62, more than double its value just a year before. On March 20, the NASDAQ had lost more than 10 percent from its peak and the bear market was fully in effect. Unfortunately for many companies and investors, the growth of the tech sector proved to be just an illusion as more technological stocks plummeted.

The NASDAQ Composite eventually lost 78% of its value as it fell from 5046.86 to 1114.11. Numerous high profile court cases targeted tech companies for unscrupulous business practices including borderline monopolies, and the stock market began to tumble down in a serious correction. A decline in business spending combined with market correction to deal a serious financial blow to many dot-coms, and tech companies began to fold, one by one. A rise in outsourcing led to widespread unemployment among computer developers and programmers.

The market also took a major downturn in the wake of terrorist attacks in the United States in 2001 and the NYSE even suspended trading for four sessions. Combined with the loss of consumer faith in the industry, the bubble started a national crisis and had worldwide consequences.

Next: Dot-com bubble aftermath