I. Introduction
In
the middle and late 1990’s, dot com companies were all the hype. [1]
However, when the dot com bubble unexpectedly popped in 2000, many
investors and stockholders were left asking, “Where did we go wrong?”
[2] While a few companies survived due to hard work, solid business
plans and faithful employees, most lower level employees and top
executives of internet companies were left jobless and in debt. [3]
This article will explore the history of dot com businesses and the
causes of the 2000 stock market crash, then it will discuss common
mistakes made by dot com entrepreneurs and will conclude with
suggestions for aspiring dot com business owners to ensure a successful
future for their businesses.
II. History
The
early 1990's marked the beginning of the dot com era. [4] As computer
games and interactive media became an integral component of the
industry, computers became popuar among young people, as well. [5] The
computer and Internet industries in the United States were on the rise,
with students and experienced entrepreneurs alike starting businesses
in hopes of reaping high profits. [6] Start-up dot com companies were
created with the idea that, "When the company went public, the early
shareholders would become instantly wealthy." [7] However, as a result,
"[t]oo many companies rushed into the market in defiance of all known
business fundamentals, and when the crash came, all but a tiny fraction
of them just as quickly imploded and went away." [8]
III. Common Mistakes of Dot Com Entrepreneurs
There are four common
mistakes made by dot com entrepreneurs that, if avoided, would ensure a
sounder future for their business. First, most entreprenuers before the
2000 crash did not have a substantial business plan, but were riding
the wave of Internet hopefuls. Every new company, whether in the dot
com industry or otherwise, needs a solid business plan. [9] Initially,
"Investors wanted big ideas more than a solid business plan. Buzzwords
like networking, new pradigm, information technologies, Internet,
consumer-driven navigation, [and] tailored web experience . . . filled
the media adn investors with a rabid hunger for more." [10] However,
without the backing of a business plan designed for long-term goals,
profitability and customer service, these companies had nothing to back
up their propoganda. [11]
Second, most dot com
companies had the leeway to spend investors' money without being
monitored. [12] During the mid and early 1990's, independent investors
and venture capitalists freely invested money in the dot com companies
because of the hype surrounding the industry. [13] However, some
venture capitalists are still willing to give funding. [14] "If you
take away the bubble . . . there is a core of healthy spending that
will continue in enterprise resource planning systems, security
technology, and systems that enable enterprise applications to talk to
one another." [15] This pattern suggests that venture capitalists are
looking at the industry as one that requires commitment and time,
rather than one of immediate gratification. [16]
Third,
many dot com companies were staffed with individuals who did not have
the necessary experience or goals to successfully work in the industry.
[17] Since the public's exeperience with and knowledge of the Internet
in the 1990's was so limited, dot com company owners hired highly
competent individuals with graduate degrees, but no experience in the
industry. [18] "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 venture capitalists to guide you
along the way." [19] Additionally, individual's commitment to the firm
has proven highly important in its potential to survive. [20] "[T]hat
happened with a lot of dot com companies. They grew, but when times got
tough, everbody jumped ship." [21]
Fourth,
because of the overall effect of the market crash, even companies who
had the potential to be successful failed because investors stopped
funding dot com companies. [22] After the crash, venture capitalists
and investors lost faith in the ability of dot com companies to be
successful. [23] Additionally, after the market crash, investors
realized many companies were inflating their profits in an effort to
gain more funding. [24] "In reality, people create most of the risk in
the market place by inflating stock prices beyond the value of the
underlying company." [25]
IV. Suggestions for the future
If
dot com entrepreneurs make a conscious effort not to make the mistakes
of their predecessors, the companies may not be doomed to the same
fate. Besides making a solid business plan and securing the proper
funding, dot com businesses should also seek the help of experienced
professionals. Mentor capitalists provide just that. [26] "Mentor
capitalists . . . are 'smart angels' distinct from venture capitalists
and angels, who are cashed-out entrepreneurs, familiar with both
success and failure. Mentor capitalists put their own money into a
startup and try to provide coaching and expertise. 'They want to give
back . . . but mostly they're people who don't want to live the 24/7
CEO lifestyle.'" [26]. Additionally, taking growth slowly, rather than
forecasting high profits exceedingly soon after starting teh business,
can ensure that employees have the proper training and understanding of
the business to guarantee long term success. [27]
V. Conclusion
The
best option for those entrepreneurs considering the journey through the
dot com business world is to seek the advice of attorneys. While this
method of protection is never foolproof, it ensures a security
available through most other means. A solid attorney presence
throughout the start-up process can ensure that companies avoid the
downfall of another dot com bubble pop.
[1] Ryan P. Allis, The Causes of the Dot Com Crash Article, Economics & Policy Resource Center, http://www.zeromillion.com/econ/dot-com-crash.html (last visited Oct. 7th, 2007).
[2] Id.
[3] Jim Kling, Entreprenuers: Surviving the Dot Com Crash, Science, Oct. 7th, 2005, http://sciencecareers.sciencemag.org/career_development/previousissues/articles/2005_10_07/entrepreneurs_surviving_the_dot_com_crash.
[4] The Stock Market Crash: The History of Financial Train Wrecks, http://www.stock-market-crash.net/nasdaq.htm (last visisted Oct. 7th, 2007) [hereinafter "The Stock Market Crash"].
[5] Id.
[6] Id.
[7] Id.
[8] Lee Gomes, The Dot-Com Bubble is Reconsidered- and Maybe Relived, Wall St. J, Nov. 8, 2006, available at http://online.wsj.com/public/article/SB116294042194116133tQxnyU5mE6PaQdO9xT1_uaFusQs_20061208.html.
[9] Allis, supra note 1.
[10] Crashes: The Dotcom Crash, Investopedia, A Forbes Media Company, http://www.investopedia.com/features/crashes8.asp (last visited Oct. 7th, 2007).
[11] Id.; Martha Lagace, Why dot.coms Will Rise Again, Harvard Business School: Working Knowledge for Business Owners, June 4, 2001, http://hbswk.bhs.edu/item/2274.html.
[12] Allis, supra note 1.
[13] Wendy Guild & Martha Lagace, Wrap-Up: Software, Telecom, and Recovery, Harvard Business School: Working Knowledge for Business Owners, Feb. 12, 2002, http://hbswk.hbs.edu/item/2783.html.
[14] Id.
[15] Id.
[16] Id.
[17] Allis, supra note 1.
[18] Id.
[19] Id.
[20] Kling, supra note 3.
[21] Id.
[22] Allis, supra note 1.
[23] The Stock Market Crash, supra note 4.
[24] Id.
[25] Guild & Lagace, supra note 13.
[26] Lagace, supra note 11.
[27] Id.