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WHY DID THE DOT-COM ERA GET BUSTED?
by the editor
Twenty years have
gone by and, almost daily, I still meet 'professionals' who struggle
with understanding that doing business online requires a dedicated
budget. So, in another attempt to difuse the put-it-online-and-it-will-make-me-money
belief, I am going to get back in time and try to remind us where
the internet business was in 1999 and why at that point
everything needed to be shaken up in order to bring order to an
out-of-control e-conomy that was operating on concepts, rather than
Let me begin with this overview.
businesses were, what today is properly defined, as concept companies.
Although the general idea was that these companies were being created
to generate profits, their actual business plans weren't exactly
following any rational economic models. Their business entities were reduced
to cool websites and their exact purposes were unknown, for the most
part, even to their creators. The mission was simple: get these companies an
IPO (an Initial Public Offering) as early as possible
in their existance and, from there on, everything else would (just) fall in
place. That was the point at which a new business theory was born -
"If you build it, they will come" - the 'idiocy-at-work' that eventually
brought those companies down (well, there were a few exceptions) and that era
to an end. Still, from those failed experiments greater things were about
to be born. They were, and they changed the way we now do business, and our
lives and lifestyles forever.
So, exactly, how did it all
started and why that business concept collapsed under its own weight?
order to get an IPO, certain conditions had to be met. For example,
hiring a large number of employees and opening nation-wide
branches simultaneously. And all these before having the slightest
idea whether the proposed "business concepts" would even work... This
approach not only permitted dot-coms to create the image of "BIG"
companies, but it was also a prerequisite to recruiting investors,
task which, ironically, represented the least of their worries...
The large required investments were almost invariably made available
on the promise to act BIG and FAST. The general accepted assumption
here was that the faster a company would get "big", the more solid
guarantees to make profits there will be. Big profits, might I add,
the "understanding" was. So investors - some of whom even understood
the process - were lining up begging to throw their truck-loads of
money at these companies.
Now that the money was ready to go to work, there was also the need
for some kind of blue print that would illustrate the company's market
value. No problem! There was no shortage of creativity either. To my
knowledge, (some) dot-companies were also among the first operations
which had the businesses plans written (entirely?) by their accounting
departments. The better the chief accounting engineers and their marketing
plans could "grease" the perception of what these companies "were worth",
the higher those outlets' stocks would rise. (Whoever invented, in the
first place, this practice by which we are blindly putting all out trust
and, sometimes, our entire future in companies' financial statements...?
Sadly enough, this is not an issue limited to just dot-coms).
For the investors, again, although "sooner" was the preferred time frame,
a later "BIG cash in" on their initial investments, was also an accepted
term. Their adopted position was - an old business reality - that some
businesses, if not most of them, do not necessarily generate profits right
away. (Can you argue with that?) However, in the dot-com scenario the
three-to-four year proposed incubation period was also a concept, a
perception of progress and value where business feasibility did not
have anything to do with reality. (Remember, although some dot-coms
were created by very bright people who were probably the only ones who
understood what their businesses were about, at some point in their
existence it was the money 'who' started to do the thinking...) Eventually,
some investors did cash in BIG too, but don't let their number be confused
with that of those who were, literally, wiped out from the markets and
even the business world altogether. And, we're not even counting here the
tens of thousands of well-trained, high-performing x-employees whose stocks,
which at one time were "worth" millions of dollars, were also wiped out.
(Sadly enough, today recruiters are telling them that "they're worth
nothing since their current salaries are ZERO!" ...)
Anyway, if you understand that this business concept was applied to
hundreds of companies, than you also understand why businesses with real
market value were caught up in this time-skip, domino effect when they
got stuck with overwhelming volumes of cancelled orders which were
initially "projected" by the dot-coms' "strategists". When the dot-coms
were, finally, relabeled as "dot-downs", the internet equipment makers -
for example - which have established themselves as strong, respected,
market players and, which have earned every credit by working hard and
generating REAL money, had found themselves motionless on thin ice. At
that time, and by no fault of theirs, they were forced to reposition
themselves, unfortunately, on lower levels of a new and turbulent stock
Still, in fairness to all
and everything, we should understand everything that has happened correctly.
The dot-com era was NOT a dirty, economical
plot engineered in advance by anyone who may have been caught up in
their natural drive to make
more money easier and faster, while sizing some opportunity in what was
a high-tech-favorable-market scenario. No, the people who took part in
creating the dot-com era - and the bases of a new economy - were very
well intended in their actions. Except that they were operating on a new
economic scenario where speculation prevailed logic. So, in the end, they
did learn, sorted things out, and set the grounds for a true new e-conomy.
Without them, their efforts, and their failure we would not have the
knowledge we have today, we sould not be where we are today.
So, when the dot-com-mania started, for anyone with at least a vision
for the future, those decisions seemed to have been the "proper course
of action". For the most part, the people who helped make it all happen
were some of the best and brights at what they were doing and knew very
well their jobs. What they didn't know was that when looking at the
future one can only jump so far ahead of reality. And, how could they
have known it? They weren't taught that in business schools. That kind
of knowledge one only gets at the school of hard knocks. Probably, the
best school on which progress has always been made.
(2) Not ALL
dot-coms failed. You know which ones, not only are still around,
but are in fact, the biggeste companies that have ever been build and
shaped our lives.
The Bottom Line
The dot-com melt-down
which wiped out billions of dollars in stocks was the result of a
faulty transfer and application of old business rules, habits and
assumptions to new market configurations. It WAS NOT the web sites
(behind those businesses) that created the mess.
Well, this is pretty much it. Of course, you don't have to agree with
me, but this is not the point. The point is that today, your website
and all its online supporting operations ARE your business. Twenty
years ago we didn't know how to make this work; today, we take it for
granted. And, if you still have any doubts about how all this works,
ask any twelve year old kid. S/he'll show. Still, be nice and buy
them an ice cream and a baloon, or something, for their help.