Back to the future
Flash forward roughly three centuries. Historically low interest rates in the United States throughout the late 1990s, combined with an Asian currency crisis and an increasingly dreary economic situation in Europe, inspired investors to throw cash at American ventures such as online pet-food retailers and dry-cleaning services.
At the same time, because of banks' willingness to take risks they once would never have considered and an abundance of low-interest loans in the mid 1990s, consumers and businesses spent lavishly--even though the money was not their own.
In the second half of the 1990s, tens of thousands of Americans bought houses for the first time, as well as cars and computers. By December 2000, consumer debt was $7.5 trillion, more than twice what it was in 1990. Corporate debt was $10.6 trillion. In 2000, the average American family owed more money than it made after taxes.
As the perceived cost of capital dropped, modern investors needed a place to park their cash, and they became enamoured with the idea that the Internet would revolutionise commerce.
When those companies' IPOs resulted in stock prices that increased 100 percent, 400 percent or even 600 percent on the first day of trading, the venture capitalists cashed in--and the cost of capital became negative: Investors could make more money by selling shares after companies went public than they put into funding the companies to begin with.
In March 2000, the British tabloids learned that even Queen Elizabeth was poking around the bubble, investing 100,000 British pounds in a pre-IPO company called Getmapping.com. (In a March 20 editorial, The London Daily Mail wrote an entire article about the similarity of the queen's newest investment to the South Sea Bubble: "The parallels are uncanny. An investment frenzy fuelled largely by hype.")
As investors piled into Getmapping and thousands of other start-ups, venture capitalists threw money at entrepreneurs, business school graduates, high-level executives, rookie programmers--virtually anyone with a half-baked business plan scribbled on the proverbial cocktail napkin. It was a perfect environment for an economic bubble.
"If the cost of capital gets low, you should expect a boom whether or not there's technology to be found," Fridson said, noting that the economy ebbs and flows, but such irrational gushes of capital usually come no more than once per generation. "That explains the infinite supply of IPOs."
"Things got sloppy" The pace could not sustain itself. Although the 451 IPOs in 2000 posted average first-day gains of about 55 percent, the vast majority tumbled by year's end, to an average loss of 15 percent from the offering price, according to Thomson Financial Securities Data.
"Last year, things got sloppy," admitted Bob Marshall, general partner for Selby Ventures, a group specialising in early financing of technology companies. "Everything was getting funding."
Back to: Assessing the dot-com carnage Special Report
