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Dot-Com Bubble 2.0: How Did We Get Here?

by Prithvi Raj ChauhanJanuary 24th, 2023

Too Long; Didn't Read

The dot-com bubble of the late 1990s saw a loss of $5 trillion from the tech market. Investors were throwing money into IPOs and funding for Dot-com companies. The same events occurred in the late ’90s. There was no sign of profitability in these companies for years because there was no funding.

featured image - Dot-Com Bubble 2.0: How Did We Get Here?

With 30$ Trillion in market loss and 315K layoffs, the Dot bubble of our era has burst.

But this isn’t the first time the tech market is bleeding.

The dot-com bubble of the late 1990s saw a loss of $5 trillion in the tech market.

**How did all of this happen?

First, let’s assess some of the similarities between the late ‘90s and right now.

What’s happening in the market?

Well-funded startups going bankrupt.

Companies losing their valuation.

VCs rethinking their investment.

Hiring freeze in companies.

Mass layoffs everywhere.

The same events occurred in the Dot-com bubble of the late ’90s.

What is a dot-com company?

First, let us understand what are dot-com companies. Companies that carry out their business online via the Internet using a website, and specifically these websites have a (.com)dot-com prefix.

Eg: How the Amazon.com website functions as an online portal to buy products.

What led to the first dot-com bubble?

In the early ’90s, only a handful number of people had access to computers. And they were used only for business purposes. At this time, Microsoft was in the news every other day because of its soaring valuation.

1993 — The release of the famous web browser called MOSAIC boosted the use of computers as internet-accessing Machines. It was the first browser that offered interactive UI to access the internet and it slowly made more and more people aware of this next big thing called “THE INTERNET”.

Then came Microsoft’s Internet Explorer which boosted the growth of the Internet. At this point, Computers were becoming a NECESSITY instead of a LUXURY. This marked a shift to the new information age based on information technology.

FOMO hit VCs(Venture capitals) and media giants started to publish articles like — “GET BIG FAST” and “GET LARGE OR GET LOST”.

Everybody wanted to invest in these new Internet companies and make quick money

(Everybody wanted it but nobody understood it — Just like Crypto and Metaverse right now)

Then, The Taxpayer Act of 1997 lowered the interest rates. This event drove up the amount of capital that was being invested in Dot-com companies.

Companies without a beta product to show, or even a valid idea, got funded. Especially the ones that had websites with a Dot-com(.com) prefix.

The amount of VC investment made in the late 90s was way more than the number of deals made in the 2010s.

Let’s take a look at the example of Netscape: A web browser company started in 1994, Netscape went for IPO in 1995 just after one year its launch. At this time, Netscape was burning cash like hell. Still, its share price went from $28 to $58 within a few minutes of the IPO.

The market cap of Netscape rose to $2.78 Billion in a day. Just to put it in perspective it took General Motors 43 years to reach $2.78B in valuation.

Nobody wanted to miss out on an opportunity to invest in a famous Dot-com company. Investors were throwing money into IPOs and funding. NASDAQ(New York-based Stock exchange that mainly lists tech companies) index hits an all-time high of $5048.62.

Bursting of Dot com bubble 1.0

By the late ’90s, a bubble of overvalued tech companies was formed.

After millions of funding over the years, there was no sign of profitability in these dot-com companies. Mainly because they never had any strategy to build a profitable product.

The investors realized their mistake!

A series of events in the year 2000 burst this bubble.

January -> Alan Greenspan(Chief of the federal reserve) raised the interest rates which caused panic among investors.
March 13 -> Japan entered a recession and triggered a global sell-off of shares.
March 15 -> Yahoo and eBay ended talks of a much-hyped merger. NASDAQ again got affected and fall 2.6%
March 20 -> A popular software company called MicroStrategy (Yes we are talking about Michael J Saylor the famous bitcoin investor) announced bankruptcy. Its share price has risen from $7 to $333 in the same year.
And the final blow came on April 3. Microsoft lost the lawsuit against the US government and was found guilty of using monopolistic practices.

Microsoft was dominating the PC industry and at this time Microsoft was valued above $500 Billion and Bill gates’ net worth was $100B.

As soon as the biggest player in the market started losing its value, everybody lost their sanity.

All of the Dot-com companies started losing valuation. These companies re-evaluated themselves and it was found that most of them never had any product and they were just burning VCs cash.

The attack of 9/11 completely destroyed the NASDAQ stock exchange.

By this time the global market had lost $5 trillion in total valuation.

But there were few survivors of this tech bubble — AMAZON GOOGLE YAHOO EBAY

The ones with a profitable business model.

The Dot-com bubble was proof that whenever an industry receives more money and attention than it actually requires, The result is over-valuation!

History doesn’t also repeat itself, but it definitely rhymes.

Dot com bubble 2.0

Something similar has been happening for the last two years. Companies and startups got highly over-valued. In the post-Covid-19 bull cycle, investors have poured trillions into the market. Everybody was trying to make quick bucks.

Like in the late 90s, people had no idea of the Internet but still they invested in the dot-com companies.

In the same way, post-covid19 people who have no idea about what blockchain or cryptocurrency are have invested millions into these technologies.

What did it lead to?

Another Dot-com bubble.

What led to the second dot-com bubble?

When the pandemic hit in early 2020, everyone got trapped in their houses. People had nowhere to go, they couldn’t meet their family, friends, and colleagues. Having nowhere to go and no place to socialize, all one could do, was spend time on the Internet.

In the below-given graph, we can see how the average screen time of internet users increased from 1.25 hours in April 2019 to 5hrs in April 2020.

image credits: pans.org

As the average screen time of internet users increased, the consumption of crypto, startups, and tech-related news increased drastically. Thus, the limelight of modern tech started to astonish people.

Professional investors were as affected by this by this phenomenon as the common people.

The valuation of tech giants was already booming and everybody wanted to be a part of these trillion $$ companies. But the chance to become an early investor in these companies was over.

So to make quick bucks, investors and common people started to look out for substitutes. Investors went towards crypto and startups.

Quarterly VC deals went from 4000 in quarter 1 of 2020 to 9000 in quarter 4 of 2021. Ironically these stats look almost similar to the stats of the first dot-com bubble.

image credit: KMPG

The crypto investment increased more drastically than ever. Meme currency like DogeCoins gained a crazy valuation of $100B and increased at a rate of 7,555% in 2021.

I would personally consider that to be the mother of all Ponzi schemes.

image credit: Statista

The increasing price of crypto and stocks were attracting more new investors every day.

All of these investments also led to panic mass hiring among companies and startups.

New employees were hired to work on projects that were never intended to be built. Companies wanted to build new products/services to utilize their freshly gained money which they never deserved.

Thus the Dot-com bubble 2.0 formed from a series of bad investments.

Bursting of Dot com bubble 2.0

The Crypto bubble

We saw the rise of Ponzi schemes like DogeCoin & Shiba Inu reaching a valuation of $100B in 2021. But where are they now? Shib is likely dead and DogeCoin is trading at a <90% and valuation is back to <$5B.

Even the price of big cryptocurrencies like Bitcoin and Ethereum reached $60K and $4K respectively in the bull cycle.

And now $BTC is trading at $14K and $ETH at $1K, back to their original value.

FTX’s Fall

In November we witnessed a massive debacle. One of the biggest crypto exchanges in the world fell to its knees. FTX was valued at $32B in the recent funding led by Softbank and FTX’s yearly transaction volume was over $625B in 2021. All of this vanished within a night.

Turns out that FTX was mortgaging their customer’s assets without their consent to raise the price of their token $FTT. Their market valuation went from $32B to 0 and the crypto market lost $800B in a night.

The side effects of the bubble burst are not limited to the crypto world.

Byju’s Struggle

The world’s biggest Ed-tech startup Byjus has raised over $3 billion since the pandemic from investors like Tiger Global and General Atlantic. They acquired 12 startups in 2020 and 2021 for a whopping sum of over $2.5B.

But raising capital and acquiring small startups doesn’t make you profitable. Byjus made $300M in revenue and incurred losses of over $500M in 2021.

Byjus has been defaulting on their payments and laid off 2500 employees even after raising $3 billion in the past 2 years.

Meta’s fading Metaverse dream

On the 26th of October 2021, the world’s biggest social media platform went all in for its dream to build the Metaverse. Brimming with passion, Meta hired thousands of new people in 2020 and 2021. Especially to their Reality labs division which is responsible for building their iteration of the Metaverse.

Their obsession led to over-hiring in these two years and now they figured out that they don’t need this many people. As a result, last November Meta laid off 11K workers. 13% of its total workforce. Meta went from a $1 Trillion market cap in 2021 to $280B in 2022, a loss of $720B within a year.

These are just a few examples to name. We are witnessing other tech giants like Google, Microsoft, Netflix, and Amazon, and startups laying off thousands of employees and losing billions in valuation.

How did the bubble burst this time?

The reason remains the same, after two years of blind investments, the investors realized that these companies and startups never deserved the amount of money they received.

Startups were unable to show any growth or any product. Cryptocurrencies still don’t have any real-world use cases and a crypto exchange platform even cheated its customers, big tech giants were unable to figure out what to do with their newly hired employees.

And no,w we’re witnessing mass layoffs, loss of valuation, and bankruptcy among startups and companies and there’s much more to come…

How long will bubble 2.0 last?

Industry experts have suggested that this recession will hit its peak in mid-2023. This is just the beginning. More repercussions of Dot-com bubble 2.0 are yet to unfold in the upcoming quarters with a higher magnitude of damage.

More people are going to lose their jobs and savings. Global Market is going to lose Trillions. And it is assumed many countries would fall into recession.

It took the market 15 years to come back to normal from the last Dot-com bubble.

There’s no real way to predict how long it would take to come back from this crash.

What’s the most relatable thing in the Dot-com bubble 1.0 and 2.0?

FOMO(Fear of missing out) and greed.

Just like in the late 90s when investors did not want to miss out on Dot-com companies in the same way post-Covid investors did not want to miss out on the next Bitcoin or maybe the tech giant like Facebook. Investors pumped money into every other Crypto, startup, and company without learning about their product, business model, or even which domain they’re serving.

Conclusion

The most disheartening result of bubble 2.0 is the mass layoffs. In bubble 1.0, we did not see so many people losing their jobs.

This week, Microsoft laid off 10K people in the cost-cutting measures and at the same time invested $10B in OpenAI (ChatGPT parent) just to be a part of the trend.

For investors and companies, this may just be another money-saving strategy. But for the average person, it was their livelihood that they lost.

It’s tough out there in the tech industry. With competition at an all-time high, companies are always looking for ways to save money — even if it means sacrificing their employees in the process.

You are never really a part of any company in today’s climate and once a company is done with you, they will let you go without a second thought.

I hope this read gave you more clarity about the current tech events. I would love to know your opinions about the same.

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