Join the New Dot Com Boom

Posted on 27 Feb 2006 at 15:25

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The new dot com boom could help you turn your online ventures into cash - but what lessons can we learn from those first dot com entrepreneurs? Jon Thompson discovers that it pays to be prudent

It's hard to believe that just five years ago there was a technological gold rush. Perhaps this is because it was so brief. The dot com mania of the mid- to late-1990s enabled a few lucky geeks to buy Ferraris with their sudden fortunes, but it wasn't long before the bubble burst and the cars, houses and cool toys had to go back.

'Dot com' was the name given to those companies that existed solely as websites, rather than having a physical presence. Any such company worth its salt had to have a URL that ended in '.com', hence the dot com label. Sadly, the original dot com boom ended in bankruptcy for many. But it wasn't all failure as it heralded the birth of a few success stories.

Now there is talk of a new dot com boom. Evidence suggests conditions are ripening to the point where it is possible to make a good living on the web if not an overnight fortune. However, there are pitfalls to be avoided. To consider these fully, we need to look at what went wrong first time round.

The late 1990s saw a boom in heavily backed internet-based companies, the founders of which hoped to repeat the spectacular success of Marc Andresen's Netscape and Jeff Bezos' Amazon.com. They began to beat a path to venture capital firms, who in turn started gambling larger amounts on increasingly untested propositions.

Jining the dot coms

The underlying idea that powered the dot com boom was a simple one. You attracted initial venture capital to hire staff and set up a website, and then tried to attract visitors via media campaigns, which is where the bulk of the money tended to go. Having multitudes of visitors meant they were likely to buy your goods. Once it was up and running, you either sold your company or floated it on the NASDAQ stock exchange to generate more finance for expansion, making you, your staff and your original investors seriously rich in the process.

Behind this reasoning is Metcalf's Law. Robert Metcalf of Ethernet company 3Com found that adding more nodes to a network increased its usefulness exponentially. Think of a phone network. One phone is useless because there's no-one else to call. But as more people get them, their usefulness starts to increase. Metcalf said the usefulness of a network was roughly equal to the number of nodes squared.

The dot com world believed Metcalf's Law was applicable to its own success. If a few people registered at a site, it wasn't very useful. But if millions visited, the thinking went, then it must be very useful, and therefore very valuable. Hence the love of advertising that characterised the dot com boom. During the 1999 Superbowl final, for instance, 17 internet companies paid $2 million (around £1.1 million) each for 30-second television advertisements. A company that becomes valuable because people visit its website was a radical concept, but a very attractive one.

The idea of value without profit ran quickly through Silicon Valley and eventually around the world. As more companies floated to raise increasingly large chunks of capital (there were 497 dot coms floated in 1999 alone), investors began panic-buying shares to cash in, and prices shot up. NASDAQ's average rose over 500 per cent in five years and peaked during trading on Friday 10th March 2000 at 5132.52.

But by the following Monday, the party was over. The index fell 2.8 per cent in one day. The only trickle of income many sites received was from the advertising space they sold to other e-businesses, and not from sales. With the realisation that profits would never materialise, investors got cold feet and started panic-selling shares. Stock values fell the world over and bankruptcies began. Two-and-a-half years later, in October 2002, the NASDAQ index had bottomed out after losing a full 78 per cent. Paper millionaires became real-life paupers. In a last attempt to claw back losses, some dot com owners started selling their customer lists, something many of them had said they would never do. To add to the problem, the US Federal Reserve increased interest rates five times during 1999 and 2000 to cool an overheating American economy.