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DQ News: 4 Lessons Learned From Mistakes of Internet Past

The speculative bubble of “dot com” era was a period of rapid growth followed by a significant decline between 1995 and 2000. Many of the companies that prospered during this brief explosion relied on venture capital and initial public offerings to cover expenses.

They valued growth over profitability which later led to significant problems. Companies soared to incredible heights on paper with little actual value, leading to numerous repercussions in the financial world. Even at the time, one didn’t need a PhD to see the problems in online businesses, Companies of today may learn from the mistakes of this time.

1. Using IPOs and Venture Capital for Expenses

Many successful businesses such as Amazon.com, Google, and eBay survived the dot com era. Amazon and Google in particular relied on IPOs and venture capital for expenses, used the free spending strategy, and valued growth over making a profit in the first few years as their stocks soared exponentially. During this time, the founders mostly had no income. Many people profited from this speculative wealth that ultimately led to crash. Educated investors knew the crash was coming and thus profited from the companies’ growth and got out before the stock market crashed. Companies should have a plan for profitability and capital for expenses to avoid this pitfall.

2. Failure to Develop a Solid Business Plan

Businesses should develop plans that include strategies to become profitable within a short time. Investors are more astute since the ’90s’ dot com bubble, and are less likely to invest in companies when the stock prices are overvalued and the fundamentals aren’t favorable. Profitable business plans should include a strategy for marketing, sales, product development, and asset acquisition. Without both long-term and short-term strategy, businesses will fall victim to using the Internet for growth with little concern for their sustainability.

Dot-com-era business all had similar business plans essentially promoting a monopoly in each particular sector. Ultimately, this strategy would allow only one company to emerge successfully and the majority would fail. Moreover, some businesses’ ideas simply didn’t pan out. For instance, online retailers didn’t consider that huge shipping costs would deter users. Their business plans and models were not well researched and didn’t anticipate potential problems that e-commerce would bring, but just relied on the momentum of the public to propel the ideas.

Businesses with novel ideas that will change the way people interact in the world should recognize that these ideas are not developed instantaneously. Many companies have become seemingly successful overnight, but other vital events happened to prepare them for this success. Every company should recognize that not every idea will be profitable immediately.

3. Free Spending

Venture capitalists were freely giving money to business owners, and business owners were freely spending it in turn. They purchased lavish items for the business, took expensive trips, and stayed in luxury hotels. Executives were paid in stock options as opposed to cash. Many of the founders became instant millionaires after the IPO, then founded more dot com companies to repeat the cycle of empty explosive growth. Businesses need to spend prudently until they become actually, sustainably profitable.

4. Predictive Tools Not Used

Many business owners mistakenly expected the adoption of the Internet to be immediate. Current and historical data should be gathered and analyzed to avoid similar mistakes with other new technologies. Numerous tools have been developed since that time to help investors and business owners analyze the market. With these tools, business owners may better be able to identify ideas that don’t have the potential for longevity.

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These are just a few problems that occurred during the dot com era that were detrimental to companies. From the business plan designed to create monopoly to the lack of use of predictive tools for success, the dot com era was plagued with mistakes. The self-made millionaires of the time might disagree, as well as companies such as eBay, Amazon, and Google that survived the crash and continued as internet giants. They are, though, the exceptions, not the rule. In general, businesses should adhere to basic models and principles with proven success rates, even if a lucky few have managed to shoot the moon.

About the Author: Elaine Hirsch is kind of a jack-of-all-interests, from education and
history to medicine and videogames. This makes it difficult to choose just one life path, so she is currently working as a writer for various education-related sites and writing about all these things
instead.

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