Sprague Word

The future and more from Richard Sprague

What really happened in the dot-com bubble?

Posted by sprague on November 8, 2006

An upcoming paper in the Journal of Financial Economics studied business plans from the dot-com era and concluded that the “bubble” wasn’t much different from what happens at the birth of any new industry.  David A. Kirsch from the University of Maryland (see WSJ.com) says:

  • the failure rate of dot-coms was only about 20% per year
  • spectacular blow-outs (like pets.com or webvan) resulted from the “get big fast” strategy that many pursued in order to gain their first-mover advantage.
  • many success stories happened in smaller niches that are just fine as businesses, though not as well-known as the big names.

This reminds me of the advice in entrepreneurship classes, how it’s a myth that “the vast majority of new businesses fail”.  In fact, the majority of dumb businesses fail, but well-thought ideas that focus on good, flexible business plans with good execution do just fine.

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One Response to “What really happened in the dot-com bubble?”

  1. paras bhargava said

    Richard,
    I tracked the telecom bubble. One interesting Urban Myth that fueled the bubble was the story that bandwidth demand was doubling every quarter. This story apparantley started at UUNET. bandwidth demand may have doubled every quarter in 1994 or 1995, but then seemed to double every year.

    Well based on bandwidth doubling every quarter a whole bunch of long haul companies were funded (Level 3, qwest, williams, 360 networks, worldcom) and their suppliers benefited (nortel, JDSU etc). when this myth imploded, the suppliers went bust.

    The current commodoties boom is based on demand from China. I wonder how much of the demand actually comes from US housing. When US housing goes bust, will commodoties follow?

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