The dot.com Phenomenon


In the early part of this decade, many SMEs in Wales will have read the "success" stories of new start-up companies who, with little money but possibly an innovative idea, had launched a new Internet company. With significant support and backing from venture capitalists such companies saw values rise rapidly, on the expectation that anyone involved with such companies would gain financially. Basic business logic seemed to have gone out of the window!

Companies which were set up to use the Internet as their prime trading platform became known as 'dot.coms', an American term referring to the .com which usually comes at the end of a Web site address. During 2000, newspapers and the television were flooded with dot.com start-up stories, with people scrabbling for finance, companies making and losing huge amounts of money and companies spending vast amounts of venture capital money on advertising in order to gain customers.

Young people with little or no business experience, but with an interesting idea made possible by the existence of the Internet, dominated the dot.com world. Politicians and the media were claiming that this was the future for business and they encouraged more people to join the dot.com phenomenon.

Many investors saw an opportunity to make money very fast and jumped on the bandwagon, buying up any new Internet stocks as they came on the market. These investors played their part in the dot.com phenomenon, pushing up the already unrealistic share prices to even greater heights. Normal investment criteria seemed to have been put on hold and investors ploughed money into this sector partly through fear of missing out and partly through sheer greed, although few believed it could last.

The dot.com phenomenon has been compared to the Californian gold rush. Some people did make a fortune but the vast majority who made the trek to the gold fields lost all they had. The people who made the money were, in the main, those selling maps, provisions, or alcohol!

So it was with dot.coms. Hardware and software companies and those offering services to the Web market place showed excellent returns, although many then faced more difficult times on the back of a diminishing market, as dot.coms fell by the wayside.

The failure of so many companies has been put down to:

• Lack of management "savvy" - few of the companies had any experienced managers in place who could bring an element of realism to what was happening;
• Lack of technology know-how - money was thrown at technical solutions without a full appreciation of what was required and the implications of what might happen if the anticipated numbers of visitors used the facilities on the Web site;
• Lack of any financial rigour or cost control - money was for spending and little thought was given to controlling costs and balancing the books;
• Profligate spending of investor money - it was wryly said that the dot.com phenomenon could be defined as the quickest way of getting investor money spent by an advertising company.

In a relatively short period of time, the term dot.com took on a slightly unsavoury taste as companies failed and high initial investments showed little return. Analysts started to forecast that many of these companies would fail.

• The dot.com bubble could not continue and it was predicted that:1 in 4 dot.com companies would run out of cash within 6 months;
• The majority would be out of cash within 15 months.

Not all dot.com companies failed and some like. Lastminute.com are still in business and doing well.

There are many reasons for the failure of dot.coms. Some were simply running unsustainable Web businesses whilst others were taking too long to attract enough customers to make the business viable. The situation was being made worse when traditional businesses, who may had taken some time to put their eCommerce strategy in place, started to set up their own Internet operations.

The get rich quick syndrome associated with dot.coms has taken on a note of realism. There still will be companies who start up new and innovative businesses made possible by the potential of the Internet. Obtaining financial backing is now much more difficult and a very strong business case has to be put forward.

The failure of many dot.coms made some traditional bricks-and-mortar companies wary of using the Net to sell to consumers, but many of these firms are now starting to see how the Internet can change the way they actually run their business. The dot.com disaster has been a catalyst that has led people to understand and appreciate the impact and transformation-potential of the Internet, and without that catalyst developments would have taken much longer.