Market Crashes: The Dotcom Crash (2000-2002)

When: March 11, 2000 to October 9, 2002

Where: Silicon Valley (for the most part)

How Much: The Nasdaq Composite lost 78% of its value as it fell from 5046.86 to 1114.11. (Related: Why did dotcom companies crash so drastically?)

Back When the Internet Was New

Decades before the word "dotcom" slipped past our lips as the answer to all of our problems, the internet was created by the U.S. military, who vastly underestimated how much people would want to be online. Commercially the internet started to catch on in 1995 with an estimated 18 million users. The rise in usage meant an untapped market - an international market. Soon, speculators were barely able to control their excitement over the "new economy."

Companies underwent a similar phenomenon to the one that gripped Seventeenth century England and America in the early eighties: investors wanted big ideas more than a solid business plan. Buzzwords like networking, new paradigm, information technologies, internet, consumer-driven navigation, tailored web experience and many more examples of empty double-speak filled the media and investors with a rabid hunger for more. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever. 

Analyst Capture and the End of Free Cash

Obviously, there was a problem. The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.

Adding to the froth around dotcom companies, there was a clear trend of analysts being incredibly supportive despite a lack of anything but a back-of-the-napkin business models. This trend was most pronounced in analysts that were attached to the underwriting banks and issuing firms. When companies like Pets.com went under, analysts were slow to lower their buy ratings. As these cases multiplied, the dotcom bubble burst, turning into the dotcom crash.

Many argue that the dotcom boom and bust was a case of too much too fast. Companies that couldn't decide on their corporate creed were given millions of dollars and told to grow to Microsoft size by tomorrow. When it became clear that most companies couldn't, much of the free cash coming from venture capitalists to take these companies public suddenly dried up. A lot of ridiculous companies went under, but so did many companies that could have been viable in the right conditions. This purge set back some technologies in Silicon Valley back decades in addition to destroying a lot of capital in failed IPOs. 

Speculation Without a Pesky IPO

Like the excitement over Asia leading to a bubble and crash that delayed the actual emergence of the region, the dotcom bubble set the tech industry back years. Now, however, we've all learned our lessons and we never bid up a tech company to ridiculous P/E multiples. Well, unless it is a social media company. Or a sharing economy company. Or a player in virtual reality. Oh, and there is that other bubble where private capital delays the IPO indefinitely, allowing the term Unicorn to enter the financial lexicon. So maybe, just maybe, tech isn't done with bubbles yet.