I just finished a research paper on the history of the Dot-Com bust for my MBA studies. By the way, I am finally finished next week after three long years! Also this week, I have been doing extensive research on Cloud Computing, specifically Platform-as-a-Service, SOA, and Social Software. What I have noticed is some striking similarities to the Dot-Com hype of the 90's and the hype that is going on today.
What caused the Dot-Com bubble to burst?
In the early 1990’s, former Vice President Al Gore coined the term “Information Superhighway” and discussed expanding the Internet far beyond its current use. The media ran with this vision and suddenly the world was infatuated with the idea, or should I say fantasy, of creating a $200B eCommerce industry overnight (Krueger, 2007).
Suddenly, startup companies called dot-coms started appearing everywhere. The big problem was that many of these startups did not have a sound business model. Instead, they were betting on brand recognition and market share. They borrowed money from venture capitalists and generated millions from IPOs. Many of the dot-coms had a business model that was not geared towards profit, but towards how much traffic they could generate on their web site. Investors put aside best practices and jumped in head first by throwing tons of cash at these “paper” rich companies. Even worse, many of these companies put aside best practices of business and IT management to be the first one in the marketplace to capture users.
What is happening today?
Just like in the 1990’s, the media is making their living by excessively hyping key technologies like SOA, Cloud Computing, Web 2.0, and many others. Do I believe that these technologies are all difference makers? Yes, they are key technologies just like the Internet and Web 1.0 was in the Dot-Com era. But many of the promises of the Dot-Com era are starting to be realized today. This is a result of the learnings from the early pioneers who dove into the Web head first. The same will hold true for today's hyped technologies. The pioneers will stumble through trial and error and over time these technologies will mature to the point where the masses can take advantage of it at a lower cost.
But history tells us that it takes more then a cool technology to make real money. It also takes a sustainable business model, and a combination of sound business and technology management best practices to execute against the business model.
What has changed?
One of the positive things that came out of the bust was huge advancements in technology. Back then, there were major limitations in bandwidth and web functionality. Since those times, enough fiber optical cable has been laid to circle the world over several 100 times. This has paved the way for greater bandwidth and for new functionality that now makes web browsers capable of creating rich user experiences that are equal to desktop applications. Throw in globalization and the early Dot-Com vision is becoming a reality.
The biggest difference today is the amount of capital it takes to start a Web company. Back in the Dot-Com days, startups were ripping through 10’s to 100’s of millions of VC funding and IPO money. Today, a startup can quickly leverage open source technologies, run their entire infrastructure in the cloud, and leverage a combination of SaaS and mashups to quickly get a product up and running in months. The cost of entry is minimal.
But it’s all still the same
But I still see VCs investing in strange companies with questionable business models. Google the words "Web 2.0 Startups" and you will see a few announcements a week were some bizarre company has just secured Series A or Series B funding. Check this link from last year and some of these companies make me start thinking about the Pets.com sock puppet. The Web is getting so crowded with niche social networking sites (LonelyGirl.Com, NurseLinkup.com, BestPartyEver.com, etc.) but VCs are still buying. I guess investing $3-5M is not that risky to the VC firms, especially when their Dot-Com investments were 10 to 100 times larger.
It’s not the technology
What is getting lost in the sea of hype and madness is that these companies are founded on the technologies of the future. Like it or not, we will be operating primarily in the cloud several years from now. The PC will be irrelevant since there will be no need for local disk and CPU intensive processing by the client. The Client will simply be our window to the Web where everything is virtualized, broken down in functional services, and truly independent of the technology and location from where it is being executed. The problem is, the media and vendors are convincing us that we must do this now or we will fall behind. The challenge will be for IT executives to apply these technologies to solve real business problems, not to feed the pockets of vendors and media types.
Krueger, S. (2007). The Rise and Fall of the Dot-Com Bubble (Part 1). Retrieved on August 1, 2008 from http://www.entityarts.net/blog/steve_krueger/08-05-2007/rise_and_fall_dot_com_bubble_part_1