Compare and Contrast: Dot Com Bust and Web Two Point Doh

I’m spending my quiet time thinking about what lays in front of us, in fact, given the market data, there’s troubled times ahead not just for tech, but the US economy which of course impacts globally, as we’re major importers of goods from other nations.

I was part of the first web bust, at a high flying startup that had 5 splits then came crashing to Chapter 11 –twice. I tell my story about Exodus and remember it vividly, as without recalling history, we’re doomed to repeat it again.

In this post, I’ll compare and contrast how this was different from the last dot com bust in 2001, but I’ll do my best to provide an objective viewpoint –not one filled with panic.

Compare and Contrast: Dot Com Bust and Web Two Point Doh

VC funding
I don’t have access to a 10 year funding graph, but this article shows a rise in the number of silicon valley companies that were funded during the first web wave. While Techcrunch shows a noticable increase (a doubling from 05-08 in funding dollars from 2006-2008) in funding for the second wave, but shows VC confidence drastically lowering in 2008.

IPOs
In the first web wave, the exit strategy was IPO, where private equity was then made available to the free market, selling the ownership of the company to shareholders. In the second round, most companies exit strategy weren’t M&A but instead are acquisitions, or merger activity.

911 and Credit Crunch
This tragic day was the start of the collapse in the United States and other global partners. For the second wave, this was triggered by the credit crunch, perhaps very disastrous as well, and appeared to hit us out of nowhere.

Stock Drops
In the first dot come bust, many industries were reeling from the impacts of 911, (airlines come to mind) this set off a different kind of panic. We saw stock prices of dot coms bottoming out, then becoming penny stocks and resulting in a few companies collapsing. While some of the big players like Google have seen 60% devaluation of their share prices, most startups, being private, haven’t be hit in this way.

Market Performance
I’m not a financial analyst, so I can’t give much insight to this arena, but although the Dow Jones Industrial Average Index is currently at 9387 today, we forget that it was even lower at 7528 in October 2002, this Google Finance map (set to 10 years) shows.

Revenues
In the first web wave, while many were able to stand the test of time with actual revenues like Paypal, eBay, Yahoo, Weather, Google, Amazon, Linkedin, for many others it was about getting eyeballs, brand awareness, and pumping stock prices with announcements. Today, we don’t hear of many stories of companies who are now hand over first profitable, in fact, the largest players like Facebook, Twitter, and other social networks still struggle with defining clear revenue model.

Layoffs
The first web bust was known for the massive hacking of jobs, I remember many being layed off in silicon valley, and they fled to other tech centers like Seattle, Portland, Texas, and San Diego. I also recall that the number one migration of jobs in the valley was to become a realtor. I shifted to the banking industry (intranet) but would be somewhat hesitant today given all that’s gone on.

Innovation
The first web boom was funded by VC and private investors who had to put in a substantial amount of investments to get companies lifted off the ground, as a result, there were just a few players in each space. Today, development technology and open source have enabled companies to get launched from very little funding –sometimes none at all. Of course, this comes with a downside as you soon start to have too many players in one space, my list of community vendors caps out at 90 companies doing the same thing. Update: Jeroen de Miranda, points out in Twitter that today’s web delivery is more software as a service, not on premise software, making adoption faster, cheaper, in many cases.

Recruiting
Barbera Ling in the comments below nods to the point that recruiting will suffer now as it has suffered before. One contrast however is that now anyone can build an online reputation, and network with others with little technical skill using social media tools.

I’d love to hear your compare and contrast of the first web bust and what could happen in the next few years.

  • Recruiters will see a tremendous decrease in business, smart recruiters will focus their offerings on servicing job seekers instead of searching for non-existent clients, and smart individuals will take branding themselves online seriously.

    Finally.

    Data points, Barbara

  • Barbara

    What about self-branding, for some jobs, companies may be able to forgo recruiters if some folks social media to build up their professional contacts and personal brands.

    Unlike the first round, you don’t have to be technical to get your name out.

  • Another trend might be an even stronger migration to SaaS platforms, decreasing sw license costs for enterprises

  • Hi,

    Of course it’s a grim picture currently, however I am not comfortable commenting on how it will evolve in the coming days. I would like to opine that the business environment in days of 2001 vis-à-vis in current is not identical. I would agree to a point that there can be some similarities. Now, economies and countries no more merely dependent on each other rather they are more interdependent. Current global crisis is an unfortunate but a wonderful example of such interdependence.

    When something bad happens in US market, something bad has to happen in India, China, and so on. When Chinese pull out their investment in US, someone looses his/her job in India. That is a classic example of complex web of interdependence.

    Other prospective that I would like to bring to table is the emergence of Social Media. I am sure by stating that I do not plan to undermine the social media back in those days however it emergence and evolution has changed the way(s) we are conducting our individual self’s and our business(s) today. Hence with squeezed budgets Social Media could be leveraged by company(s) & individual(s) all across for far better reach and discovery, what we could have imagined back in early 2000.

    I would end saying that due to such enormous interdependent economies and countries it will be hard to predict that will we all sink together or rise together. However the one underlying attribute would be “together”. So now with people like you sitting in US are equally impacted vis-à-vis people like me in India or my friend in other parts of planet earth.

    Thanks to “ALL”

    Shiraz Datta

  • Due to the massive interconnectedness of a global economy, there won’t be much of a difference in effects between dot com bust ’02 and credit crunch ’08. The repurcussions will ripple to everyone’s door in time. The real difference is yet to happen. The strategies we will employ to get through it will be different from anything before. A radical rethinking of all varieties of credit evaluation is going to be essential, including start-up (VC) evaluation. I suspect that better revenue models will be key. We need to define them clearly, expound on the operational theory, and they need to be dynamic, flexible, and of course innovative. In other words, the technology will start to follow revenue models instead of the other way around. That’s my prediction anyway.

  • Ah, yes. The dot com bust. Good times.

    As with everything in my life, I was in an odd corner of the world when everything came crashing down just over there. My “dot com” never really was a dot com, and it survives – even thrives – despite the industry it serves: newspapers.

    Back then, I remember everybody talking about the collapse of the internet, how nobody would ever make any money, how it was just a fad. A whole lot of “I told you so”.

    Uh, maybe not.

    And so now, with dot bust 2.0, we’ll hear all the same things, regardless of the facts.

    This was my take back then, and it’s my take now. If you’re looking at the web (1, 2, 3 or 73) as a cash cow, this is what you get – a big bust except for those precious few who really, really, really get it right.

    If, OTOH, you’re looking at the web as an efficiency generator, a super-low-cost communications tool, an information aggregator, a people aggregator, a way to get a lot more for a lot less, you will probably get where you’re trying to go.

    The web is a medium – a thing that connects A and B. It’s not a product.

    If you’re clever enough to create a product that a) works on the web and b) meets a demand at an attractive price point, then hells yeah you can make a killing.

    But if you think you can stick a “2.0” at the end of a stupid idea (as they did “dot com” back in the day), you’ll be sadly disappointed.

    endofrant

  • http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint

    Good presentation from Sequoia Capital.
    Starting at slide #46, some recommendations especially for startups.

  • The similarities in business models are striking between the dot com bust and the current 2.0 shakeout. Our company was born out of the ashes of the dot com bust. Watching today’s events unfold is like deja vu all over again (thanks Yogi).

    For example:

    The Building of the Bubble:

    Then – Web sites for everything under the sun focused on accumulating eyeballs on the site in hopes of somehow making money from them later. Start up executives with big ideas, little of their own capital, speak in jargon to make the internet the most revolutionary change our world has seen. Venture money flowing freely to anyone with a big enough idea and a rough business plan. If it has a www, it gets funding. Exit plan – IPOs or acquistion by Yahoo, MSN, AOL, or a tiny company called Google.

    Now – Social networks and corresponding apps for everything under the sun focused on accumulating impressions/members/downloads on the site in hopes of some how making money from them later. Start up executives with big ideas, little of their own capital, speak in jargon to make social networks and content aggregators the most revolutionary change our world has seen. Venture money flowing freely to anyone with a big enough idea and a rough business plan. If it has a 2.0, it gets funding. Exit plan- Maybe Facebook will buy us.

    The Bust:

    Then – Irrational Exuberance uttered by Alan Greenspan wakes people up, they understand that the King has no clothes. Investors learn that tech stocks can indeed stumble. With internet stock analysts in disgrace for pumping stocks, the general public watches their portfolios fall off a cliff. Pud has the number one site for the valley. Most dot coms without a business plan and some that do have one, start dying off. Venture capital companies begin making “portfolio adjustments” by merging sick companies into other companies in their portfolio. Dot com wreckage everywhere, Aeron chairs drop to $50 in resales.

    Now – Wall Street’s house of cards built on sub-prime loan syndication crumbles. All stocks hit with massive redemptions of hedge funds. Investors assume the fetal position. Venture capital companies get out tough love powerpoint presentations. Valleywag, Scoble, Arrington, and Swisher become must reading in the same way we all read the Star in the check out line to see who is in rehab this week. The dead pool grows, we’re early in the cycle.

    The Recovery:

    Then – Companies and individuals who controlled costs, had products and services that provided value to their customers, and who generated revenue and profit survived. Some like Amazon and Google get huge. But many are smaller successes, still around celebrating their 10th anniversary somewhere.

    Now – TBD, but I’d only bet on those companies that are cash flow positive now. It’s going to get much harder in the coming 12-18 months to ‘monetize’ anything.

    The more things change, the more they stay the same…and that’s from an optimist!

  • Scott

    I see a correlation between the dot com bust and Web Two Point Doh especially in the social media sites. There is also a difference as SaaS, cloud computing, etc are here to stay and offer a new business models for software applications. These last maybe the ones to withstand the test of time as some survived the dot com bust.

    Unfortunately, what I don’t see is how we go up from here. As tragic as 9/11 was, it was more a crisis of confidence than one of substance. Today’s credit crunch is similar. When the financial markets unwind all the CDO/CDS/SIV/etc we will see liquidity restored. The question is what will lift us out of the doldrums as the real estate bubble did for us post 9/11? Where will our economic growth come from? US economic growth slowed in 2007. With the housing bust in full stride and the associated credit crunch on top of it will that push us into a recession with growing unemployment and the vicious cycle that it brings?

  • Excellent comment Mike R. I was fortunate enough to escape with my life by selling my company just before the bust. Sometimes it’s better to be lucky than good.

    Today I agree that like the first bust, many Internet companies are businesses in search of a revenue model (not to mention profit). I find it absolutely baffling that Facebook only has 500 employees, $300M in revenue and will still lose $50M this year (EBITDA) – and that doesn’t even take into account the capital expeditures estimated to be another $150M on top of that.

    The term ‘monetize’ is everywhere. As in, how on earth do we turn those eyeballs into cold hard cash. Especially when we know that typical advertising in social networking doesn’t work (http://www.technologyreview.com/Biztech/20922/). If social networks earn money selling advertising and advertising doesn’t work, companies will start putting their marketing dollars elsewhere. Unless social networking sites can a) create new methods for companies to measure marketing performance within their networks or b) figure out some other way to ‘monetize’ all those eyeballs, they’ll be setting themselves up to be part of a web 2.0 bust.

  • One thing that is different, and this may be obvious, is that we have a lot more web-related professions. I remember when the dot-bomb happened I was working as a “Web Designer” at that time this meant that I was doing diverse tasks that later would become the domain of the Information Architect, Interaction Designer, Usability Specialist etc.

  • Shiraz, Andrew good points, and you’re saying similar things. I don’t think the internet has changed this, in fact this global economy has been going on for decades –maybe centuries, but the web just makes it happen much faster.

  • Not enough new companies are being created fast enough with as little oversight to have a true second dot-com bust. However, the companies that are being created with those issues will likely fail. Thankfully, no one is as gullible as they once were, and companies trying to take advantage of VC money have to work so hard that they may as well be in legitimate business.

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  • Clair Martin

    I admire steady optimism. It has been more helpful than pessimism in almost every historical situation. However, I do believe the time line we are entering is previewed in Luke 21 in the bible.

  • vk

    work becomes a painful slog, founders leave
    bean counting kills serendipity, consolidation
    founders back from leave of absence
    vacancy’s and rents plunge in Palo Alto/SF
    old founders solve new problems,
    O’Reily has a party/then writes the defining article
    A new group of firms are embraced by the voice of the next generation

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