Do you wanna know the truth? I don’t know enough about the dot-com bubble and I should, being a tech company CEO, you know. And, I’m 32. I was 12 years old at the change of the millennium,
but back in 99’ all I cared about was my N64. What I know about the dot-com bubble was this
massive overhype on internet businesses that happened in the year 2000-ish, which led to
a massive market crash. And, and,... there are some keywords in my
head, like eBay and Amazon. If it was in the 2000’s it must have been
connected to Y2K, right? But I don’t know, know. So we’re doing this video for my own research,
and because you guys asked for it! [INTRO] To truly get a grip on what happened we need to draw a timeline that starts at the early nineties. And the first, key moment in that time was
the release of a Web Browser called Mosaic. It was released in January 1993 and it was
key to popularizing the internet. The internet (as a network of interconnected
computers) existed before then, and other browsers like WorldWideWeb, Erwise,[9] and
ViolaWWW, but it was Mosaic that helped bring WIDE access to the web. It was developed by the National Center for
Supercomputing Applications, and the credit goes for two developers: Eric Bina and Marc
Andresseen. They both later went on to found Netscape,
and release the Netscape Navigator, in December 1994. Marc Andressen is, of course, one of the co-founders
of Andreesen Horowitz, one of the most important venture capital firms today, a firm that has
invested in Skype, Twitter, Facebook, Groupon, Zynga, Buzzfeed, Medium, Figma… just to
name a few. But I’m getting sidetracked. The thing is Mosaic was the first popular
internet browser. We could call it the beginning of a widely
accessible internet. And other browsers came along later and stole
most of its market share: there were, quite literally, browser wars in the 90s. Now, let’s fill this timeline with internet
speeds. In 1993, the internet was limited to dial-up,
with a modem, over the phone. Maximum data transfer for modems was 56K,
so we are looking at 42h of steady internet connecting to download 1GB of data: and the
connection at this time was anything but stable. Even at the turn of the millennium, 256kb
was as fast a connection as you could get in your home. Let’s add computer access to that timelines. Households in the US with a personal computer
went from 8% in 1984 to 36,6% in 1997 and 51% in 2000. But even in this early internet, entrepreneurs
saw a field of opportunity. Let’s add the number of websites. From 1991 to 1995, uploaded websites went
from 1 to 23,500 and there were no signs of slowing. From 1995 to 1996, it jumped 996% to 257,601
websites uploaded. These factors, along with a few others like
the launch of Yahoo, led to people seeing the internet as a goldmine. To me, it’s crazy to think that I was alive
for this fundamental transformation in our lifetimes, but I was just worried about other
things. The point was that in these 5 years or so,
the internet stopped being a world exclusive for geeks in dark, stuffy basements. There was a lot of hype surrounding Internet
companies. Now, here’s another fundamental episode
in this story. In August 9, 1995, Netscape went public, and
the world was blown away. Going public means a company’s shares, which
were previously owned by the founders and other private investors, can now be traded
by the public. Companies define an IPO price, initial public
offering price, or the price per share they expect people will be willing to pay. The point is, Netscape went public at $28
a share. By the end of the day, the price per share
had almost tripled, to $75, and ended up closing at $58. Now let’s remember that Netscape was founded
by these guys less than 18 months prior to that. Their valuation went from $0 to $2.9B in a
year or so. This insane soar for Netscape suddenly meant
that anything and everything with a .com in its name was a golden ticket to millions. The web promised new fortunes and, like cowboys
driving into the new frontier, investors rushed to inject money into companies. But, there was no restraint. These companies needed to grow as fast as
possible to have more and more users. So, many companies invested mostly in advertising. It didn't really matter that many of these
companies weren't profitable at all. All that mattered was getting bigger and bigger. In 1999, for example there were, there 457
IPOs, many of them Dot Com companies. And those IPOs were very successful. Just for reference. In 1996, IPOs yielded an average of 17% in
their first-day returns. This percentage increased to 58% for non-internet
companies in 1999. For Dot Coms, the return was a stunning 89%. 117 Dot Com companies doubled their price
on the first day of trading. In total, from 1995 to 2001, 439 Dot Com companies
raised $34 billion in capital. This got mixed up with a bunch of other variables. In the late 90s, US's interest rates were
at their lowest point since the seventies.The Government had lowered tax rates on capital
gains from 28% to 20%. This meant that investing in bonds, for example,
was boring and wouldn’t pay well. On the contrary, investors were now motivated
to favor low-to-no dividend-paying stocks over those that paid considerable dividends. For reference on that, a company may decide
to pay dividends to its shareholders, if it has leftover profits. Dividends are distributed equally, and usually
range from a few cents to a few dollars per share. For investors, however, it was better, tax-wise,
to invest in stocks that gained a lot of value (on paper) and didn’t necessarily pay dividends. These dot-com startups were spending like
crazy, profitability was not on the horizon, and it didn’t matter. They didn’t want to turn a profit, they
just wanted domination! If that sounds strangely familiar, it’s
because it is. But let’s get back to the 90s. In the mix of all this crazy spending, one
person thought differently. Alan Greenspan, the Chairman of the Federal
Reserve, warned that this spending was too exuberant. But this warning in itself is a topic of debate. In retrospect, some experts have said that,
yes, Greenspan did warn of this erratic behavior but did little to correct it. Still, Greenspan's warning reached deaf ears. Until it was too late. There's a saying: hindsight is 20/20. Of course, if we look back, we'll see the
signs that told people that there was a bubble. But, if you go back then, what you'd see would
be an illusion, high hopes, and lots of partying. They don't say: let's party like it's 1999,
for nothing. Here comes word of mouth: a lot of it was
fuel by an endless loop of hype. Hearsay spread like a virus, motivating more
and more investors to get into the mix, amateurs and professionals alike. Think of it as a toxic positivity that would
vastly damage the economy. Once again, does this sound familiar? It wasn’t all speculation, though. Companies like Amazon and eBay were born in
the 90s and not only showed promise, but were successful business models. The detail here is that there was only one
Amazon and one eBay. The reality was that most Dot Coms weren't
meant for success. Some examples, for research sake,
Boo.com: was an online clothing retailer that ended up spending $188 million in just six
months. It filed for bankruptcy in May 2000. There was a company called Pixelon: a Streaming
video startup that hosted a $16 million dot com party in October 1999 that had bands like
KISS, Sugar Ray and a reunion of The Who (you are probably too young to understand what
that means). Anyway, the point was that there was inevitable
FOMO involved here. Such a return was too much to pass up, but
at the same time, it became the perfect storm. And now, it’s about to blow. When you look past the hype at the end of
it all, a company must generate cash and produce a profit. It's that simple. But, when you're high, it's hard to see reality. These companies were spending like crazy on
marketing and aspects that had nothing to do with generating revenue or improving cash
flow. If they can continue raising money, why focus
on revenue? Right? Part of
the problem was that the expectations created by these massive investment rounds and IPOs
was so much, that the value these companies promised far exceeded their capacity to respond. HSBC once reported that companies would've
had to grow their revenue by 80% per year to satisfy the valuations during those crazy
years. Microsoft was one of the best-performing companies
at the time, and it "only" managed 50%. On March 10, 2000 the NASDAQ index reached
an all-time high of 5132,52 points. But, the needles that would prick the bubble
were creeping in. But hold on, we’ve made it to 2000 and we
haven’t talked about Y2K. Let’s go back for a sec. You, children of this millennium won’t get
it. The theoretical problem that Y2K brought was
that computers in the past century often counted years with two digits. 88. 95. This wasn’t programmers being lazy, on the
contrary, it was optimized for the very limited storage at the time. Additional bits were required to store a full
year, and bits back then were expensive. So when the computer clock changed millennia,
it would go to 00. But how was 2000 different from 1900. Other problems were that some programmers
had misunderstood the Gregorian calendar rule that states years that are exactly divisible
by 100 are not leap years, assuming that the year 2000 would not be a leap year. While that rule is correct, there’s an exception
to it that states years divisible by 400 are leap years – thus making 2000 a leap year. Finally, there fear with that people could
confuse the day/month/year format on the date. When you have a 99 at the end, it’s easy
to tell which one’s the year. But what if it’s 01-11-05. Which is which? (Which by the way, would be simpler if everyone
just adhered to the logical DAY-MONTH-YEAR, rather than mixing them pointlessly). There was fear, widespread fear, that the
world would collapse. Your bank accounts could be locked because
you weren’t born yet. The US Secretary of Defense said that The
Y2K problem is the electronic equivalent of the El Niño and there will be nasty surprises
around the globe. Companies like AT&T revealed that "60% of
the time and money needed for its total compliance efforts" would be devoted to testing the source
code changes made to address the issue. I kid you not, I remember having conversations
with my friends in school on whether the world was going to end over the December vacation. The US had braced the country for the financial
chaos that Y2K would cause, and that included lowered rates. But, in February 2000, when it was clear that
we had survived, Alan Greenspan announced the need for a dramatic rise in interest rates. He had long warned about the overheated, exuberant
economy and that these increases would be necessary. But, as soon as he mentioned the increment
in interest, speculation grew rampant, as it was unclear how the higher borrowing costs
and increased interest rates would affect Dot Com stocks. Then came another big hit. Just three days after the NASDAQ had hit an
all-time high, Japan announced that it had entered into a recession. From October to December of 1999, the Asian
country had seen the third-largest quarterly decline since World War II. Japan was a crucial player in the tech market,
so this news spread like wildfire, starting a worldwide sell-off of already vulnerable
stocks. In no time, NASDAQ fell -39% in 2000 alone. This drop showed the fragility of internet
stock as the market suffered significant losses while other markets rose. By March 13 of 2000, the NASDAQ had seen its
fourth-biggest point loss in history. And we were just getting started. On March 20, like a swift sword slaying any
remaining hope, the Federal Reserve raised interest rates. Interestingly enough, at first, the Dot Com
market believed it wouldn't affect them, and the numbers suggested they'd be safe. Add another punch to the market, Microsoft
was facing anAntitrust lawsuit by the US Government. Just like the one Facebook is facing right
now. At the time, Microsoft was said to have created
a monopoly using the legal and technical restrictions it put on the abilities of PC manufacturers
(OEMs) and users to uninstall Internet Explorer and use other programs such as Netscapeand
Java. A failed early settlement of the case hit
Microsoft with 15% in losses, and an 8% drop in the NASDAQ. It was then, and only then that investors,
analysts, and experts all raised red flags. To them, it was finally time to look at the
numbers. But, it was too late. There simply was no more money. All the hype was gone, all those promises
of overnight millionaires disappeared when hit after hit reminded the world that a bubble
might be a perfect sphere, but it can also burst easily. The year 2000 turned into a rollercoaster
with only one direction: down. Tech companies were falling and fast. By November of that year, they had lost $1.75
trillion. In that year alone, 22 000 people had lost
their jobs in the Dot Com world. All those overvalued Dot Com companies lost
75% of their value in a matter of months. There’s a funny metric to show this insane
drop in value, and that’s SuperBowl ads. In 1999, only two Dot Com companies purchased
Super Bowl ads, one of the most expensive thirty-minute slots in history. The next year, twenty Dot Com companies bought
ads. And, just one year later? Only three Dot Com companies bought Super
Bowl ads in 2001. Unfortunately, and tragically, 2001 was not
a kind year. The September 11 Attacks and several major
accounting scandals like ENRON only helped in worsening the crisis. By October 2002, NASDAQ had lost 78% of its
peak value and returned to 1114.11 points, which were 1995 levels. Five years of hype, speculation, advertising,
and dreams disappeared in just 14 months. And the consequences are still present, for
better or for worse. The Dot Com world dried up into a desert. The species that relied on outside money were
dying, starved of their food. Investors were more cautious, and many promising
companies just ceased to exist. But some survived, of course, with names that
you might remember like Microsoft, Google, Amazon, and Apple. In fact, those that survived saw that, in
these harsh conditions, they had an advantage. Real estate was cheap, labor was plenty and
even less expensive, and the competition was limited. That's not to say they weren't immune. Their stocks plummeted. Amazon, for example, went from $107 to just
$7, Apple went from $5 to just under $1. Some might say that they survived the crisis,
so they should be examples, and they are. First of all, they had a solid business model
and brilliant people at the helm. We're not saying the others were dumb, by
the way. But, focusing on these companies doesn't answer
questions such as what happened? And, who's to blame? Alan Patricoff, the Chairman of a New York
investment firm that handled no less than $11 billion at the time of the crisis, recalls
looking back and, once the dust settled, coming upon the harsh truth. "Real companies are built on earnings and
cash flow. We gave away millions of dollars for crazy
projects, and no one did the hard analysis of what companies could realistically earn. Rationality is coming back." There's a critical comment there: we gave
away millions of dollars for crazy projects. Analyst Quinn Mills agrees. He wrote on Harvard Business Review that we
shouldn't blame the Dot Com themselves. In fact, the total opposite. To him, and to many, the real culprit was
the capital markets. In his words: Venture capitalists bear a marked
responsibility for the dot-com disaster, as do the investment banks and brokerage houses
that hyped dot-com shares. And behind all three stands the Federal Reserve. Just as the capital markets helped in injecting
cash into this growing world, they also mishandled it. They put their efforts into the wrong things,
such as rampant advertising, fueled by greed and desire to expand and grasp everyone in
their hands. But, they left the business model behind. Quinn reminds us of other culprits, too. The powerful and sometimes dangerous alliance
between Wall Street and the Federal Reserve created a lot of money, too much, it might
seem. Part of it was to prepare for an apocalyptic
phenomenon that never occurred. The consequences of this crisis were so vast
that many wondered if the world would ever recover from this bubble. It sounds irrational now because we've seen
that the tech world has regained its strength. But, back then, it was a founded fear. That of course brings us to today. Who here has a parachute for 2020? Even with a health crisis, 2020 was the busiest
year for IPOs in a very long time. The last time it was this alive? 2001. Tulips, Dot Coms, Real Estate, we've been
there before. So, what do you think? Is it just a matter of when?
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