The late 1990s represented the golden age of dot com investments. All a company had to do to secure a serious amount of venture capital was come up with a name, put dot com at the end of it, and build a website from which it could sell products and services. But alas, it didn’t last. The dot com bubble burst in a big way between Q3 2000 and the end of 2002. Is history about to repeat itself?
Some of the most conservative financial analysts are trending that way. There is enough alarm to cause investors to put more time into comprehensive diligence analysis before spending another penny. To continue proceeding recklessly is to prop up a bubble that will eventually have to burst.
- Creating the Bubble
Things we are seeing in the modern tech industry are eerily reminiscent of what we saw during the early stages of the dot com revolution. New startups with disruptive ideas left no stone unturned in their search for funding. Meanwhile, investors desperate to reap the benefits of a strong economy were equally desperate to find the next big thing.
This created a scenario ripe for disaster. From the startups’ perspective, no amount of money was too much to spend on advertising, market expansion, mergers and acquisitions, and so forth. A considerable number of dot com companies continued with net operating losses for years, spending venture capital as quickly as it was coming in.
For their part, investors were not getting the kind of comprehensive diligence analysis they should have been getting. Some were cutting corners, others were settling for summary analyses, and others were investing on gut instinct alone.
The biggest offenders on both sides were found in the telecom industry. With the public internet still being relatively new, investors and entrepreneurs alike took advantage of the Telecommunications Act of 1996 to try to steal market share from Bell Telephone, the very company the legislation was intended to address.
- Bursting the Bubble
The dot com frenzy reached its peak in early 2000 when spending on marketing got wildly out of control. Companies were no longer spending as fast as venture capital was coming in. They were spending money they didn’t have, hoping future rounds of fundraising would balance the books.
Meanwhile, the Federal Reserve increased interest rates multiple times in 2000. Some say the move was designed intentionally to cool the dot com market. Others say it was an attempt to control inflation. One way or the other, dot com companies with out-of-whack balance sheets suddenly found themselves without sufficient venture capital to sustain their operations.
Venture capital was drying up with every interest rate hike. In the end, bursting the bubble was inevitable. Neither startup nor venture capitalists could continue spending recklessly without sufficient revenues to at least make things competitive.
- It’s Déjà Vu in 2021
So, is history about to repeat itself? Utah-based Mezy, a company that provides comprehensive diligence analysis alongside other diligence services, says it’s a very real possibility. Technology companies are raking in millions in venture capital. Investors continue writing ever larger checks in hopes of capitalizing on tech innovation.
Without comprehensive diligence analysis, these investors could very well be repeating the mistakes of their 1990s predecessors. They could be throwing good money after bad, helping to inflate a bubble that is going to burst one way or the other. The only question is whether the burst will be sudden and explosive or slow and gradual. For the sake of both investors and startups alike, let us hope it’s the latter.