Starting in 1991, the number of available websites doubled every month. To satisfy the need for more bandwidth, telecom companies such as AT&T started laying hundreds of miles of fiber optic cables across the metropolitan regions and between major cites. Thousands of miles of fiber were laid across the oceans from 1995 until the “bust” in 2000. By 2000, overcapacity was really becoming a problem, and there was less chance of recovering the investments as price per bandwidth plummeted. As a result, the major networking hardware companies, which were mainly based in New England, (3Com, Cisco, Enterasys, BayNetworks, Sonus Networks) suffered hard times. Some have merged or been acquired in order to survive.

The World is Flat
Thomas Friedman aptly describes this phenomenon in his book: The World is Flat. “As investors watched this mad rush to digitize everything, they said to themselves, ‘Holy cow. If everyone wants all this stuff digitized and turned into bits and transmitted over the Internet, the demand for Web service companies and the demand for fiber-optic cables to handle all this digitized stuff around the world is going to be limitless! You cannot lose if you invest in this!’ And thus was the bubble born.”

Friedman also points out that Bill Gates compared this era to the gold rush. “Gates was right: Booms and bubbles may be economically dangerous; they may end up with many people losing money and a lot of companies going bankrupt. But they also often do drive innovation faster and faster, and the sheer overcapacity that they spur – whether it is in railroad lines or automobiles – can create its own unintended positive consequences.”

From 1999 to 2000 the Feds increased interest rates six times, causing the run away economy to start to slow down. Peaking at 5132.52 in March 10, 2000, the NASDAQ started to fall. “The massive initial batch of sell orders processed on Monday, March 13 triggered a chain reaction of selling that fed on itself as investors, funds, and institutions liquidated position. In just six days the NASDAQ had lost nearly nine percent.”

Irrational Exuberance
Stock prices, speculation and exuberant venture capital spending caused businesses to overlook good business plans and to focus on increasing market share instead of a solid bottom line. The low interest rates of 1998-99 fueled capital spending, and dot com’s operated at a net loss, desperate to gain market share. They thought they could build brand awareness fast enough to overcome potential loss. Speculators were accused of buying stock in anticipation of constantly raising values, instead of practicing conservative economics and searching for stock shares that were undervalued. Many of these dot com businesses were built on large amounts of venture capital money, looking to cash out with IPOs.

People were pouring millions of dollars into companies that had no earnings, poor business plans and a lot of hubris. Barron’s magazine reported early what was going on, highlighting a 51 company “burn rate” on track to use up all their funds within a year. By April the Dow and NASDAQ had the biggest one day losses ever to that point.

Overnight companies were told they had to make money. The new buzzword, according to Carolyn Said of the San Francisco Chronicle, was “P2P – path to profitability.” To make matters worse, hackers attacked major websites, like Yahoo and EBay; Microsoft was taking a hit to break up its monopoly; and many court battles ensued about music swapping on the Internet. “The dot-com’s that stayed in business were cutting costs like mad, jettisoning employees, subletting office space and even giving up those perks like free football games. By fall it was not only the start-up’s that were suffering, but the likes of Intel, Dell, Gateway, Apple, Sun, Hewlett-Packard, Microsoft and Cisco. The new tech turmoil erased a whopping $4 trillion in stock-market valuations.”

In 2002 Michael Chait of Internetnews.com found analysis that claimed, since 2000 at least 862 dot com companies had failed. Of those, most were e-commerce (43%) and content companies (25%). That was followed by infrastructure (16%), Internet access (10%) and professional-services (6%).

Successful business grows on a structured foundation.

Throwing money at a project doesn’t make it successful.

If you’re too early, the boat’s hull is not built – if you are too late, you’ve missed the boat.

Don’t be the last one stacking the “house of cards.” It will all come down.

Honesty over hubris creates a more solid business foundation.

Rules of the road don’t stifle innovation; they just keep the fools out.