Dot-com bubble

Internet technology started to pick up its pace during the mid 90’s. Although the technology at its earliest form existed since 1958 in the form of ARPA (Advanced Research Projects Agency), it is not until the last quarter of the 90’s did the internet become practical enough for commercial use. The concept of a global network spurred new business models based entirely on the internet taking advantage of network effects. This effect is supposed to be an efficient means to spread consumer awareness resulting in huge potential profits. In the mid 90’s low interest rates in the United States freed up more investment capital through lending. Most of the available capital was channeled into new internet companies with business plans to monopolize their respective sector. However, every new internet company has the same business plan and most of them were clearly devoid of a plan to be efficiently profitable. Venture capitalists simply funded companies anticipating the enormous potential of the internet. In order to get funded, companies only have to put a .com suffix on their name ignoring their balance sheet as there really is nothing to see there. Internet companies going public such as the globe.com saw their stock jump up to over 606% on the first trading day. Investors totally turned irrational at the height of this mania that companies such as webvan.com also got fresh supply of funds even if its business model, an online grocery is severely flawed like a very low profit margin and the fact that their fleets of delivery trucks are extremely sensitive to the price of crude oil.

Looking beyond the mania generated by the internet bubble, investors are right in a way. The internet has become a global market force with users reaching almost a quarter of the earth’s population. The only thing is, the current dominating state of the internet happened 10 years after the burst of the dot-com bubble. The idea of the internet being a global market force was cashed in too early. Everybody tried to get in to the boom believing that they might get left out once the price has reached a higher plateau. Investors simply overvalued internet companies during the late 90s because the traditional pricing of companies based on its earnings are replaced by the speed on which a company would grow. The capital received by internet companies that failed simply used it for advertisements so that the public would become aware of their presence. The Federal Reserve is aware of this new developing mania and as of 1999, it slowly raised interest rates to slow down the flow of capital. Since internet companies do not have a positive cash flow from their operations, they rely on funding and profits from new share issues. When capital becomes tight as a result of expensive lending rates, dot-com companies are left without cash to burn. The idea of growth over profits failed most of these internet companies when funding is no longer easy to acquire. By March of 2000 the technology heavy NASDAQ fell from its peak of 5132.52 to 3,649 in April. People realized the over valuation of these profitless dot-com companies when capital dried up as a result of higher interest rates and brought insanity back into the market. However, most internet companies with sound business models survived the crash no matter how heavy their stocks got hit like Yahoo and Amazon. The then profitless Google stayed on the sidelines at the height of the bubble and only began offering shares to the public four years later on August 19, 2004.

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