Web 2.0 Bubble May Be Worst Burst Yet

athloi writes with a link to an editorial by John Dvorak over at the PC Magazine site. Rather than his usual tilting at windmills, Dvorak turns his attention to possibility of another big internet economy 'pop': "Every single person working in the media today who experienced the dot-com bubble in 1999 to 2000 believes that we are going through the exact same process and can expect the exact same results — a bust. It's déjà vu all over again. Each succeeding bubble has been worse than its predecessor. Thus nobody is actually able to spot the cycle, since it just looks like a continuum. I can assure you that after this next collapse, nobody will think of the dot-com bubble as anything other than a prelude." It certainly seems like another burst is imminent; will this one be worse than the original, or have less of an impact?

Comments

I dont believe so.

[jshriverWVU]

It's not like the 90's where anyone with a basic idea and a BS/BA degree could get venture capital to start up "the next best thing". Most of those companies died out, and people are more cautious with their money. Most of the new companies and ones who survived are service related. Those can live on, and whether it's AJAX or the next big tech, it doesnt matter. If you fill a real niche and make a solid product you will survive. If you're a new company living in an AJAX web 2.0 dream thinking you're cool, and hiding behind some pretty effects but no real substance you're in for a long trip. This is true for any business.

Re:Companies come and companies go

[kcbrown]

With the initial money, these companies might go for around 2-3 years or so before the money ran out. This puts us right at the 1999 or so timeframe. What happens when you have dozens of companies, each one having gotten several millions of dollars each running out of venture money at the same time without any positive income? Suddenly the venture capitalists realized their mistakes, and they put the breaks on funding these go-nowhere fluff companies that were based on an idea but without the skills or products to allow for a payoff.

Boom, the stock market took it hard, and the .com bubble burst. At that point, you really had two big classifications of tech companies, those with products that could make money, and the companies that were founded based on hype and not much else.

Yeah, but if it were just a problem with the way the VCs were funding things, the entire stock market wouldn't have tanked, because venture capital funds are generally regarded as relatively high-risk anyway and, in any case, a company that goes off the radar before going public has little effect on the stock market. No, there's another connection here that you didn't mention.

When a venture capitalist funds a company, it will often put its own executive management into place in order to ensure that the goals of the VC are met. The question then is: what are the goals of the VC?

Well, to make money, of course. Thanks to the internet hype during the dot-com boom, internet companies were able to go public and get some crazy money for the initial stock offering. VCs typically own the bulk of said stock, and thus VCs were able to make a lot of money off of that. Initially, the companies in question generally offered something of value, but when the VCs caught on to how easily IPOs made money for them, they started to fund pretty much any internet startup, even those without any solid business plan or any real product. Their goal was to make money as quickly as possible.

They would do this by manipulating the appearance of the company to outsiders, by forcing (via the executive management they put into place) the company itself to grow rapidly regardless of need. In those days, company growth was seen as an indicator of future success, and the VCs took advantage of that. In fact, they did so at the expense of the long-term prospects of the company, since they wanted to make their money as quickly as possible. The companies would go IPO and the VCs would make a pile of money on it.

Why did the market crash, then? Because investors eventually wised up. The companies in question went public via IPO but because they often had no real product and no real business plan they were unsustainable. Even companies that had good products and a good business plan ended up failing because their long-term financial outlook was severely compromised by their unneeded growth. And their post-IPO stock performance eventually reflected that.

Stock investors eventually caught onto the scam, and stopped buying into IPOs. IPOs as a result started failing out of the gate, and VCs started losing money as a result as well. But most importantly, the whole thing destroyed the confidence of investors in the stock market. And the market naturally crashed as a result, with all the fallout that comes of such a thing (which you described nicely).

The bottom line is that VCs are, from what I can see, primarily responsible for the dot-com crash. Some of it was the result of stupidity, but most of it was the result of willful greed.