Dot com bust why

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News Markets News. What Was the Dotcom Bubble? Key Takeaways The dotcom bubble was a rapid rise in U. The value of equity markets grew exponentially during the dotcom bubble, with the Nasdaq rising from under 1, to more than 5, between and Equities entered a bear market after the bubble burst in The bubble also caused several Internet companies to go bust.

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Andrew Smith [ 4 ] has argued that the Financial Industry's handling of Initial Public offerings tended to benefit the banks and initial investors rather than the company itself. This is because company staff were typically barred from reselling their shares for a lock-in period of 12 to 18 months and so did not benefit from the common pattern of a huge short-lived spike in the share price on the day of the launch.

By contrast, the financiers and other initial investors were typically entitled to sell at the peak price, and so could immediately profit from short-term price rises. Smith argues that the high profitability of the IPOs to Wall Street was a significant factor the course of events of the bubble.

He writes:. But did the kids [the often young dotcom entrepreneurs] dupe the establishment by drawing them into fake companies, or did the establishment dupe the kids by introducing them to Mammon and charging a commission on it? In spite of this, however, a few company founders made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble.

These early successes made the bubble even more buoyant. An unprecedented amount of personal investing occurred during the boom, and the press reported the phenomenon of people quitting their jobs to become full-time day traders. According to dot-com theory, an Internet company's survival depended on expanding its customer base as rapidly as possible, even if it produced large annual losses. For instance, Google and Amazon did not see any profit in their first years.

Amazon was spending on expanding customer base and alerting people to its existence and Google was busy spending on creating more powerful machine capacity to serve its expanding search engine. Public awareness campaigns were one of the ways in which dot-coms sought to expand their customer bases. These included television ads, print ads, and targeting of professional sporting events.

Many dot-coms named themselves with onomatopoeic nonsense words that they hoped would be memorable and not easily confused with a competitor. In a similar vein, CBS-backed iWon.

Not surprisingly, the "growth over profits" mentality and the aura of "new economy" invincibility led some companies to engage in lavish internal spending, such as elaborate business facilities and luxury vacations for employees. Executives and employees who were paid with stock options instead of cash became instant millionaires when the company made its initial public offering; many invested their new wealth into yet more dot-coms.

Cities all over the United States sought to become the "next Silicon Valley " by building network-enabled office space to attract Internet entrepreneurs.

Communication providers, convinced that the future economy would require ubiquitous broadband access, went deeply into debt to improve their networks with high-speed equipment and fiber optic cables.

Companies that produced network equipment like Nortel Networks were irrevocably damaged by such over-extension; Nortel declared bankruptcy in early Companies like Cisco, which did not have any production facilities, but bought from other manufacturers, were able to leave quickly and actually do well from the situation as the bubble burst and products were sold cheaply.

In the struggle to become a technology hub, many cities and states used tax money to fund technology conference centers, advanced infrastructure, and created favorable business and tax law to encourage development of the dot com industry in their locale. Virginia's "Technology Corridor" is a prime example of this activity.

Large quantities of high speed fiber links were laid, and the State and local governments gave tax exemptions to technology firms. Many of these buildings could be viewed along I, after the burst, as vacant office buildings.

Similarly, in Europe the vast amounts of cash the mobile operators spent on 3G licences in Germany , Italy , and the United Kingdom , for example, led them into deep debt. The investments were far out of proportion to both their current and projected cash flow, but this was not publicly acknowledged until as late as and During the late 20th century, the Internet created a euphoric attitude toward business and inspired many hopes for the future of online commerce.

But, obviously, many dot-coms were not rip-roaring successes, and most that were successful were highly overvalued. As a result, many of these companies crashed, leaving investors with significant losses. In fact, the collapse of these Internet stocks precipitated the stock market crash even more so than the September 11, terrorist attacks.

From individual dreamers to major corporations, Internet entrepreneurs were enamored with dreams of becoming dot-com millionaires or billionaires. By and large, these entrepreneurs were inspired by companies like Amazon, eBay, and Kozmo.

Of course, for every company that grew to be a multi-million dollar business, hundreds of others failed. Instead, investors and entrepreneurs became preoccupied with new ideas that were not yet proven to have market potential.

It seems as though perhaps the world did not learn its lessons from the first Internet bubble. The introduction of social media has led to a new Internet obsession which may be turning into another dot-com crisis. Four major players are contributing to this foreboding dot-com surge.

However, this valuation does not seem to be supported by valuation tools such as the dividend discount model , which states that the value of a company should be based on its current and future net income. Twitter Twitter is another social networking company that is struggling to get by. Twitter has not found a meaningful method to earn a profit, even though it has more than million active users.

By , losing money was the mark of a successful dot-com. And few could lose money as prolifically or creatively as Priceline. It hurts our valuation. So many of the companies that would embody what we think of when we remember the dot-com bubble — Pets. It became a joke that the dot-coms that started out promising a grand vision of a more efficient way of doing business were — almost to a company — unprofitable.

But that was not the name of the game in the late nineties. Any IPO meant an exit for venture investors. That was the early money cashing out, selling their shares to the investing public.

It became imperative to keep the pipeline of new companies — and new IPOs — coming. By the spring , one in twelve Americans surveyed said that they were in some stage of founding a business. And their annual profits? What profits? Most people knew it was unsustainable, but no one wanted to admit it. If you could squeeze your IPO out before the window closed, then you could pick your moment to cash out, hopefully before everyone else got the same idea.

One by one, the weakest of the dot-coms began to underperform. Dot-coms ceased being sure stock market winners — in a trickle, and then all at once. Falling stock prices turned into stock market delistings and then became actual bankruptcies.

The tech-heavy Nasdaq peaked on March 10, , at 5, From that March peak, all the way down to the trough it reached on October 9, the bear market bottom would be 1, Was there any one thing that pricked the bubble? No, there were a myriad of factors. The Fed had finally begun to raise interest rates: three times in and then twice more in early , the most sustained round of fiscal tightening over the whole of the late s.

Just as suddenly, Fed language shifted to an open attempt to rein in equity prices.