Bubble Boom Burst

April 4th, 2007 at 12:00 am
 


Let'shave a trip down memory lane coz we just might be doing it all over again.

 

The "dot-com bubble" was a period of time covering the late 1990's to the early 2000's when stock markets around the world saw their value rapidly proliferate from growth in the Internet sector. During this time, Internet based companies or dot-coms sprouted out like mushrooms fueled by venture capitals (VC) that were more concerned about easy returns than actual business models.

With the advent of the Mosaic browser in 1994, the World Wide Web offered a brand new avenue for communication and business. Many startups during this time were launching their business models and bright ideas making them millions of dollars in the process (Netscape, Yahoo!). This served as the bait for a multitude of young Bill Gates wannabes. In the following years, the internet was so hyped up that billions of dollars have been poured into the development of ideas with no solid business models. The trend for the wannabe millionaires was to get VC's to invest in their ideas promising fast and exaggerated ROI's (return-on-investment). The internet was (and still is) of course a very promising technology so investors believed that millions were easy to make overnight. As this promise and hype continued, startups' stock valuations bloated like a bubble and VC's kept on investing billions with less caution and high disregard for conventional business practices. The only business model of most startups were to build a name for themselves through advertising and marketing then rely on network effects and charge for services later. Startups got funds from VC's and public stock offerings making them virtually filthy rich. Since their business model relied on marketing and advertising their image, startups splurged on media ads, lush offices, international conventions, and lots of parties! Extravagance also went to hiring hundreds of employees and communications infrastructure.

The problem was, VC's and startups were investing too much in products that they only thought was of great value and would capture a huge market. They were gravely mistaken, and at the turn of the century, when the public was catching up, most ideas and business plans proved to be undervalued. In late 2000, stocks began to crash, the over inflated dot-com bubble was bursting. Faster than the bubble of hot air speculation and promise inflated, stocks were going down, many internet based companies were losing value and in 2001, the burst was in full swing. The shock waves of the bubble burst was evident, first there were massive layoffs, the parties disappeared, then finally closures and bankruptcies. The dot com bubble was gone, wannabe millionaires were now in debt, VC's lost heart. The few who survived would pioneer Web2.0.

There's a bunch of notorious flameouts in dot-com bubble all because of too much spending and practically no revenues. Whenever the dot-com bubble topic comes into discussion, these guys are always present.

  1. Webvan.com grew too fast. It was an online grocery store. Their plan was simple, sell groceries online and deliver it. Their approach in doing this was to build their whole infrastructure right there and then. They spent billions for warehouses, delivery trucks, merchandise and not only in one city but 26 cities across the US. They also employed more than 2000 people. Unfortunately, this idea wasn't as big as they thought it would be. They closed after 18 months from launching.

  2. Pets.com advertised too much. Pets.com was to sell pet supplies and accessories online and deliver door to door. To entice people to shop on their site, they spent millions on media ads including a $2M-30-second-Superbowl-ad. Though their advertising did get people to their site, the execution of their service was flawed and slow. Besides, pet supplies is not exactly the goods you buy pre-planned. When you need dogfood, you won't wait a couple of days for it. Finally, Pets.com burned through $82.5M of their IPO (initial public offering) and shut down in 9 months.

  3. Kozmo.com was an Indian giver. Order anything on line and free delivery within the hour. It was a great idea for people in NYC and other cities. The main problem for Kozmo was the free delivery. More often than not, the price of the goods was not enough to cover the delivery expense. It was too late to when they implemented the $10 minimum charge, they were already in debt and they've grown too big. Kozmo closed in 2001, burning $280M in 3 years.

View the top ten dot-com flops from CNET.com here

Of course there are more, a whole lot more of flamed out companies during the dot-com burst in 1999-2001. Most of the reasons were, aside from too much spending, too much hype with no gains and exaggerated advertising revenue models. For example, one company would pay another to advertise on another company's site in exchange for the exact amount. So it was a lot of ex-deals and in the end, none of them actually made a cent from it.

So what exactly is the difference of then and now? Why isn't Web2.0 bubbling up? The answer lies in the definition of Web2.0. O'Reilly Media cites the key competencies of Web2.0 versus Web1.0*.

  • Services, not packaged software, with cost-effective scalability

  • Control over unique, hard-to-recreate data sources that get richer as more people use them

  • Trusting users as co-developers

  • Harnessing collective intelligence

  • Leveraging the long tail through customer self-service

  • Software above the level of a single device

  • Lightweight user interfaces, development models, and business models.

Basically, the architecture of the websites in Web1.0 didn't give much importance to the power of the masses. It's like they (internet based companies) were playing god expecting the public to bow down and follow like lemmings. Web2.0 in the other hand emphasizes the power of collaboration. Of course aside from collaboration there are also some characteristics of Web2.0 that make it more practical and profitable.

Web 2.0 also has an advantage. The splurges during the dot-com bubble (Web1.0) lay down the infrastructure for the current generation. Today broadband is mainstream, web shopping is rampant and wireless is just another item in people's pockets. Web1.0 was too early for its time and that was its downfall. Web2.0 on the other hand depends on the users hence letting them avail what they want, when they want it. Also the sponsored ads are a better way of ad revenue sharing rather than the ex-deals in the dot-com bubble.

So is Web2.0 a bubble or a boom? Though today's generation of startups and VC's already know the history and demise of Web1.0, there are still some scary patterns in Web2.0 similar to the dotcom bubble. There's the rise of the web logs (Blogs), search engines (S2E), and social sites (networks, shopping, bookmarking, etc.). Techcrunch.com has a deadpool** of startups and though the rate of this pool filling up is relatively slow, it's still filling up with failed Web2.0 companies. Albeit VC's are more cautious now, no one can really say when fast cash and accelerated growth make a company lose touch with reality, which is the simplest explanation for the dot-com bubble's most notorious flameouts.***

Thanks to the References: Wikipedia, *O'Reilly Media, **Techcrunch , ***Wired Magazine, CNET