What Was the Dot-Com Boom?
- In the 1990s, online business concepts attracted a lot of investor interest. Taking a business online was seen as the way forward, and when the stock markets showed rapid growth in share valuations for dot-com companies, investor confidence grew as well. Venture capital companies took more risks with investments and hoped, by spreading them across a range of dot-com businesses, that the market would sort out the survivors. Low interest rates spurred investors on and increased the amounts invested.
- The typical dot-com business model created a boom. This model worked on the basis that businesses operated at a loss. The idea was that by offering services for free, businesses would build market share and become established online brands. Once the brand was established, the company would then start charging for its services. During the period of making a loss, the businesses relied on venture capital investment, or an initial public offering (IPO) to pay staff wages and other expenses. This business approach was flawed, as market sectors were overcrowded with dot-coms all trying to capture the same group of customers. Not all of the businesses could survive.
- Dot-com IPOs attracted people who wouldn't usually buy shares, and dot-com stock was seen a "get rich quick" investment. With so much interest, stock prices soared and the dot-com entrepreneurs became dot-com millionaires. A stock market bubble formed. This happens when shares keep rising in a particular industry sector, and investors buy more stock in anticipation of further rises. This led to an overvaluation of dot-com company shares. A rise in interest rates at the end of the 1990s, the economy slowed down and market analysts pointed out that the dot-coms were using up the investment money and that with no more money to come, the businesses would fail.
- The NASDAQ Composite index was primarily made up of new technology companies. NASADQ is the acronym for the National Association of Securities Dealers Automated Quotation. On March 10, 2000 the NASDAQ Composite share index peaked at 5046.86 points, but dropped to 1114.11 by October 2002. A general stock market crash and the attack on the World Trade Center accelerated the failure of dot-com companies, and some had to file for bankruptcy. CNET's list of the top dot-com flops cites webvan.com, pets.com and boo.com as being among the most spectacular. The stories of these illustrate the folly of expanding too quickly and spending huge amounts of investment money in a short space of time.