I was working on Wall Street when the dot-com bubble burst.
In early 2000, I’d joined Goldman Sachs as a managing director.
I wasn’t specifically involved with the group whose job it was to take new tech startups public.
But I watched as Goldman’s – and the market’s – bad bets on tech imploded around me…
By the time I left Goldman in 2002, a lot of startups had failed.
In the years prior, there was a real push to bring these companies public at the firm.
There was so much money to be made for the investment banks that brought these companies public.
A typical fee for underwriting – or arranging – an initial public offering (IPO) could range at 4-7% of the total value of the IPO.
On top of that… If you were “in” with a company’s IPO, you stood to make other money from that company.
How? By providing other financial services – such as acting as a broker for the IPO shares or lending money to the company to grow its business.
In other words, Wall Street could make money even if an IPO eventually went south. (By the way, that’s still true today.)
And when Wall Street sees dollar signs, it gets greedy.
In 1998, IPOs were worth only $2 billion. A year later, in 1999, they were worth about $24 billion – including Goldman’s IPO.
That means the amount of money thrown at companies to take them public jumped 1,100% in just one year.
The stock market followed. Over that same period, the tech-heavy Nasdaq Index nearly doubled in value.
When the tech bubble burst in March 2000, the impact was dramatic. As much as $5 trillion was wiped out from the market in just two-and-a-half years.
Folks who bet on the right names at the wrong time got crushed.
But they weren’t the only ones.
Today, I’m going to show you what happens when you bet on the right long-term trend – but follow the crowd into the wrong names.
Lessons From the Dot-Com Frenzy
The S&P 500 Information Tech sector has already climbed 39% this year. Compare that to the broad S&P 500’s 16% gain.
If you’re feeling the FOMO, you might be tempted to rush into any tech name. But doing so blindly can be dangerous.
Many folks learned that lesson the hard way when the dot-com bubble burst in the early 2000s.
One of the most infamous examples is Pets.com. It’s become the poster child of the dot-com bust.
After a year of irrational excitement – including a costly Super Bowl ad – Pets.com collapsed.
It filed for bankruptcy only nine months after it went public in February 2000, having lost 99% of its stock value.
And Pets.com was just one of many companies that had a great idea during the tech boom… but missed the mark on timing and execution.
Take Webvan. In the late 1990s and early 2000s, it aimed to revolutionize the grocery delivery industry.
Webvan promised customers the convenience of ordering groceries online and having them delivered to their doorstep.
In 1999, the company went public, and its stock price soared. At its peak, Webvan had a market capitalization of $8.4 billion, despite never turning a profit.
But a year later, the dot-com bubble popped. Webvan’s shares tumbled 99%.
By mid-2001, the company had to file for bankruptcy. Despite substantial investments in infrastructure and marketing, its revenue couldn’t cover the expenses, let alone make a profit.
We saw something similar with a company called theGlobe.com.
TheGlobe.com was one of the first social networking websites. It allowed users to create their own profiles, connect with others, and share content.
TheGlobe.com made headlines when it went public in November 1998. On the first trading day alone, its stock price skyrocketed from $9 to $63.50 – a 606% spike.
But theGlobe.com’s success was short-lived.
As the dot-com bubble began to deflate in the early 2000s, shares in theGlobe.com, like many other dot-com companies, plunged.
TheGlobe.com filed for bankruptcy in April 2000, just a year after its IPO.
What This Means for Your Money Today
These were both great ideas. They provided services and products that younger generations now take for granted.
Pets.com’s business model was similar to what Chewy does today. In 2022, Chewy brought in $8.4 billion in revenue by selling pet supplies online.
Webvan was similar to grocery delivery companies like Amazon. Amazon brought in $29.5 billion in sales from its grocery delivery business last year.
And the idea behind theGlobe.com was similar to modern-day social media platforms like Facebook. Today, Facebook’s parent company, Meta, brings in $115.8 in revenue every year from its social media businesses.
In other words, folks who bet on Webvan and theGlobe.com at the height of the dot-com boom weren’t wrong about the future of the internet.
They weren’t even wrong about the promises these companies were selling.
But a great idea doesn’t mean much without the right execution.
That’s where companies like Webvan and theGlobe.com fell short. And, after the dot-com bust, they couldn’t recover.
So here’s the lesson for today.
When things get frothy in the markets and valuations get distorted – like some of them are today in tech – patience and diligence pay off.
Nobody has a crystal ball to know today which stocks will go bust like Webvan and theGlobe.com… and which stocks will be the Amazons and Facebooks of tomorrow.
So don’t go “all in” on any single tech or AI investment. Bet small, and split your bets across different names.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
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