Causes of the Dot Com Crash
by Ryan P. Allis
Note: This article is an authorized excerpt from Ryan's upcoming book, Zero to One Million [more information].
The Causes of the Dot Com Crash
After seeing two years
of almost unbelievable growth, by mid 1998 almost every young
MBA in America either worked at a .com or was thinking about starting
one up. Silicon Valley was Mecca, and hundreds of thousands of
Americas has suddenly become Muslim. An associate of mine and
Princeton grad that I worked with on my high school's website
made the trek in late 1999, only to go right back to the east
coast six months later.
In the Ten Second Internet Manager Mark Brier, former CEO of Beyond.com, tells of his hiring away dozens and dozens of marketing MBAs from traditional consumer product firms like Coca Cola and Johnson & Johnson. He goes on to say, "You really can't demand that all your employees have Internet experience. It just hasn't been around long enough." From June 1998 until March 2000 there was an exodus of high caliber professionals from traditional firms to Silicon Valley. Enticed by stock options and exploding IPOs, who can blame them?
We all know what has happened since March 2000. However, many of us do not know why it has happened. You ask ten people and you may get ten different versions. But they are likely all versions of the same story. Essentially, there were four reasons that have caused the overwhelming majority of Internet companies to fall flat on their face over the past three years. These were:
Their business plan. While often "inspiring" or "revolutionary", they were never profitable.
They spent other people's money unchecked in an effort to gain market share as soon as possible
They had inexperienced teams whose only goal was the fastest possible growth of their company, not long term success.
Their company may have made it in the end, but
because of the failure of so many others their investor capital
What We've Learned
So what have we learned?
Well, a lot. First, it is better to be profitable with 50,000
customers than sinking in debt with 100,000. Second, rapid growth
is not the way to build a solid company. There is nothing wrong
with doubling the size of your company each year like Microsoft
did back in the late eighties, but doubling the size of your company
every three months is generally not healthy for long-term prospects.
Third, if you're going to start a company that you hope to gross
a billion dollars next year, make sure you have experience, an
experienced team, and experienced VCs to guide you along the way.
The problem for most companies was that the novelty of the Internet
made it impossible to hire anyone with experience. It's not a
good situation when neither your VCs nor your VPs understand what
is going on.
I am by no means saying that we should throw everything out the window and go back to reading 1980s business books. There has been a near-revolution in business in my lifetime. This second breed of entrepreneurs has made mistakes, but they are learning from their mistakes and the successful ones are not repeating them. Amazon.com looks like it will finally be profitable and companies like Overture, Hotels.com, and Expedia are now fully in the black.
As I said earlier, I feel extremely lucky that I've been able to watch one of the greatest business lessons in history. But now that we've watched this lesson, we must make sure we do not forget it.
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