The dot com crash has had a big impact on how venture capitalists invest in the current market. To understand why, it is important to know a little history about the impact of the Internet and why these investors are leery.
The Internet became commercially popular in the mid-1990s. By 1995, there was an estimated 18 million users on the net. This led to the creation of online businesses which led to speculation about how big these companies could grow. The problem came with how much these companies were actually worth vs. how much they were perceived to be worth.
What causes a bubble and eventual crash? When people get excited about a company stock, it can drive the price up but if it inflates to an unrealistic point where investors get wise to the fact that the company can’t be worth as much as they hoped, people bail, sell the stocks, the price drops, and the company crashes.
The pain of those dot com crashes are still felt today. Venture capitalists now may be more hesitant to invest. Tom Abate with SFGate.com said that venture capitalists in 2000 made about 8000 investments valued at $100.5 million. “In 1999 and 2000, Wall Street invested in 534 venture-backed initial public offerings.” Those, who cashed in early, made a lot of money. As large amounts of money were being put into the market and speculation was growing, the bubble was forming. NASDAQ hit its peak on March 10, 2000 at 513252, only to lose 78% of its value by October, 2002 when it dropped to 11411.
In 2001-2002 while a lot of companies were over-valued and going bankrupt, people found their stock purchases were not such a great investment. So now when Facebook and Twitter are considering going IPO it has some potential investors concerned. This is especially true in the case of Twitter that has yet to publically show their business plan.
What has the effect been on venture capitalists investing? An article in Investopedia stated, “In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.” SFGate.com reported, “In 2008 and 2009, a total of just 18 venture-backed companies went public.”
Investments have picked up for the consumer-oriented companies like Facebook and Groupon. However there has been a venture squeeze for companies with business products. Wall Street Journal reported, “In the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier. Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier. The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time.”