Chris Hondros/Newsmakers/Getty
Buckner Hightower, left, and his son Chris Hightower examine the plunging stock market indices at the Nasdaq MarketSite, December 20, 2000 in New York City's Times Square. The Nasdaq composite index was sharply down at midday after falling the day before to its lowest level in more than a year.
- This March marks the 20th anniversary of the bursting of the dot-com bubble in 2000, which led to the demise of iconic startups with names like Pets.com and Webvan.
- Experts reminisce about the era which they say offers key lessons as coronavirus triggers another tech market crash.
- "There was a lot of cash and investors put money on companies that had a '.com' in their Web address," analyst Tim Bajarin of Creative Strategies Inc. told Business Insider. "The good news is that it separated the wheat from the chaff."
- Click here for more BI Prime stories.
In an eerie coincidence, the stock market is falling as the world marked the 20th anniversary of an earlier, spectacular crash: the bursting of the tech dot-com bubble.
On March 10, 2000, the tech-heavy Nasdaq Composite Index reached a high of 5048, doubling in just one year as the tech sector rode a wave of dot-com startups with names like Pets.com and Webvan.
That date is also known as the day the dot-com bubble burst, triggering a steep tech market slide that lasted until October 2002 when the Nasdaq was at about 1100, down nearly 80% from its peak.
As the coronavirus crisis sends stocks falling sharply, causing the Nasdaq to plunge 20% to about 7800 in just one month, experts are recalling the dot-com debacle and what lessons can be drawn as the industry faces another period of scary uncertainty.
"In March 2000, the bubble was bursting and valuations were crashing," Wedbush analyst Dan Ives told Business Insider. "With this situation, it's more of a tragic short-term shock event with more normalized demand trends on the other side of this 2-3 month outbreak is my view and hope."
The era of dot-com startups
These analysts' insights could prove valuable to a tech segment that also took the biggest hit in the dot-com crash: startups.
The creation of the World Wide Web in 1989 sparked the rise of dot-com startups looking to cash in on the internet revolution. Some of these startups became today's tech powerhouses, led by Amazon and Salesforce.
But the dot-com boom also became known for startups that received massive amounts of venture capital funding even though they didn't have viable business models. Some of the startups became notorious for throwing lavish parties and offering extravagant perks.
"There was a lot of cash and investors put money on companies that had a '.com' in their Web address," analyst Tim Bajarin of Creative Strategies Inc. told Business Insider. "The big mistake was betting on a dot-com company that could not even prove there was a real way to make money with their site."
Analyst Ray Wang of Constellation Research said the dot-com era was marked by "massive hype of the business models, the number of startups being funded that were not ready, the mad rush to go public and cash out."
'Any dot-com idea got financed'
That mad rush was based on irrational investments and highly flawed business models, said Roger Kay of Endpoint Technologies Associates. "Any idea with the term "dot-com" behind it could get financed, and the other requirements of prudent business practice went out the window, things like having a product, revenues, and (heaven forbid) positive cash flow," he told Business Insider.
IDC President Crawford Del Prete recalled how attracting huge web traffic was then the primary goal of most startups.
"There was so much talk in those days about 'capturing eyeballs,' but in many cases there was no way to get to a sustainable business model," he told Business Insider.
Analyst Steve Allen of S2C Partners said it was an era of arrogance and hubris. He was then an analyst covering the chip industry at a time when the real stars were the analysts covering the booming Internet economy.
"My most memorable memory from the frothy dot-com days was being in a room with Internet economy analysts, being the prima donnas of the moment, hearing them scowl at financial models based on earnings," he told Business Insider.
Outrageous projections
Allen said he still remembers one particular financial model. "I still see the chart as though it was yesterday." It projected 10 years of unprofitability, "yet with an exponential growth in the stocks valuation."
"It blew me away, especially accompanied by the sangfroid expression on the presenters face," he said. "He saw it as perfectly rational."
Allen said that type of hubris "was a good lesson, especially today with the AI revolution making similar echoes."
Kay of Endpoint Technologies Associates was a PC analyst with IDC during those days. The dot-com bubble burst as his team was about to release their latest forecasts which turned out to be off by 25%.
"The moral of the story is any fool can make accurate forecasts in calm waters, and no one can in an unexpected storm," he said.
In March 2000, the month the dot-com crash began, Ives, the Wedbush analyst, visited a private tech company and checked with its chief financial officer on their "cash flow trajectory."
"He started laughing and then put his feet on the desk," Ives recalled. "That same day, many of my tech stocks were down more than 20% as the market started a panic selloff. The crash had started and much pain was ahead for many."
Wang of Constellation Research was a marketing chief for a startup that was gearing up to go public in March 2000. "The IPO was ready to go and everything fell apart from there," he said
Iconic dot-com startups collapsed, including Webvan, the online grocery delivery business, Etoys.com, an online toy store and Pets.com, an online store for pet supplies which became famous for its quirky TV ad featuring a sock puppet.
'It separated the wheat from the chaff'
The tech industry eventually bounced back. In fact, it grew even stronger as new players, led by Google and Facebook, and new tech trends, such as the cloud and mobile computing, ushered in a period of innovation and growth. Many of these companies even survived the next downturn which proved to be even more devastating to the economy, the Great Recession.
"Silicon Valley learned from those experiences and today, only a few startups get funded in each category to mitigate risk among the VCs," Wang said. "Cash on hand is important and sound business models in general fuel startups. There are exceptions like WeWork where there's a disproportionate amount of cash in a market that allows for a monopoly to be created on day one."
Bajarin of Creative Strategies Inc said: "The good news is that it (the dot-com crash) separated the wheat from the chaff. Dot-coms with no business model were cast aside and only companies who could prove they could make real money got funding after that. It brought investing discipline to the former dot-com era. Because of that companies like Facebook, Twitter, Uber and others were invented and helped spur the current tech boom that is still strong today."
In fact, the presence of stronger companies, including startups, is what makes the current downturn different from the dot-com debacle, experts say. While there has been heightened concern about startup valuations, in the wake of the WeWork fiasco and the disappointing IPOs of companies like Uber and Lyft, most of today's startups have more solid business models compared to the startups of the dot-com boom.
A short-term shock event
"Many of the tech companies we cover have fortress-like balance sheets, SaaS (software as a service) visible models, strong demand trends, and valuations that are digestible," Ives said. "I view this selloff as a much different feel as this coronavirus is a health pandemic with a short-term shock event."
The shock event has already rattled many startups, amid worries of massive layoffs and dramatically less access to venture capital funding. Experts point to one of the more uplifting outcomes of the dot-com crash: new opportunities that led to the rise of such companies as Google, Facebook and many others.
"It's scary near-term times, but for employees worried about their jobs, these times create opportunities as well and many leaders today of tech companies were those that learned and survived the dot-com bubble and burst," Ives said. "The next generation of tech leaders will learn from today's crisis."
DelPrete of IDC predicted a rough year for tech as the coronavirus crisis continues to wreak havoc on the world.
"This pandemic story is yet to be written," he also said. "I suspect we will lose a significant amount of IT demand this year, but we will recover in 2021."
But he also noted the digital transformation wave that had been pushing the business world to embrace technology in their strategy and operations.
"My advice to tech entrepreneurs is that tech is still driving fantastic transformation," he said. "It's going to continue to change the world. We are in a tough period now, but 10 years from now every industry will look very different because of digital transformation."
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