The dotcom bubble 20 years on: ‘It felt like the gold rush’

On Friday March 10, 2000, the Nasdaq composite closed at 5,048.62. The tech-heavy index had risen 24pc in the first 10 weeks of the new millennium, notching 16 record highs in the process. 

Investors were giddy at the prospects for the “new economy”, distinct from the stale industrials of the previous era (the Dow Jones had peaked 10 months earlier). 

On the same day, Microsoft, then the world’s most valuable company, announced plans to enter the video games business with a console it had codenamed Xbox. Exactly two months earlier, AOL and Time Warner announced plans for a $350bn (£267bn) merger that the two companies had said would create a “media and communications company for the Internet Century”.

The Tuesday after the Nasdaq hit its record, the UK got its dose of dotcom fever. Shares in lastminute.com, the first major British internet company, leapt from 380p to 511p in its first hour of trading, valuing a company with quarterly sales of just £409,000 at £768m.

But by the end of lastminute’s first day of trading, shares had fallen below their offering price, turning celebration into alarm, recalls Pete Flint, a founding employee at the company.

“All of the company was euphoric on the day of the IPO and then the day after, when it actually started trading, there was this sense of disbelief and disappointment, that all this hard work hadn’t been recognised in the same way by the stock market,” Flint says.

March 10 proved to be a high water mark for the Nasdaq. By mid-April, it had fallen by a third. It would not return to record levels for 15 years.

Shares in lastminute would fall to 150p in the first month of trading, but Flint says the situation would have been far worse if the company had waited any later. “No-one predicted how quickly the tide shifted and how fortunate the company was to raise when it did. It would have been impossible to do it just two months later.”

The severity of this crash was a consequence of the scale of the bubble that preceded it. Deregulation of US telecoms markets and rising home computer ownership, combined with low interest rates and tax cuts on capital gains, created a swell of optimism about the internet that combined with an explosion in retail investing.

Companies could generate valuations of hundreds of millions, often simply by applying the prefix “e”, as in eToys, or the suffix “.com”, as in pets.com.

One of these companies was Webvan, a grocery delivery company founded in 1996. The company raised $375m when it went public in 1999, valuing it at almost $5bn. Emily Jacquette, the company’s sixtieth employee, recalls the party as “one for the ages”.

“It definitely felt like the gold rush, everybody trying to find the best mine with the best chance of paying out.”

“Everything was going up,” recalls Tom Bevilacqua, who handled strategic investments for E-Trade, one of the first web trading services. “There was this feeling of invincibility that this was going to be a long-term bull market.”

Bevilacqua recalls one incident when his taxi driver rushed to buy Cisco shares after overhearing a speculative phone call he was having.

“It was sheer optimism about this new era of companies, centred around the internet.”

Chris Eberle had a front-row seat to the bubble. He joined AOL in late 1999, a few months before the Time Warner deal was announced. Millionaires in their twenties and thirties would shout “up one” or “up two” from their cubicles, referring to jumps in the company’s share price.

Eberle says many of them were throwing further money into trendy companies like eToys, whose shares had rocketed from $20 to $76 on their first day of trading in March 1999.

Today, eToys is listed among a handful of dotcom bubble catastrophes, alongside pets.com, which sold pet supplies, and Webvan. By 2001, all three had gone bankrupt, having never made a profit.

Jaquette says she knew something was amiss at Webvan when she noticed the company’s chief financial officer fast-tracking expense claims, to ensure they were paid while there was still money available.

How did so many get it so wrong? Ilya Strebulaev, a professor of finance at Stanford Graduate School of Business, says that 20 years ago, investors found it almost impossible to assess how big areas such as online shopping were going to be. Given how nascent the internet was, it was difficult to separate a pets.com from an Amazon. 

“For mature companies, the future cash flows and profits are easier to gauge. For start-ups and technology companies, [they] are further into the future. It’s very easy to say with the benefit of hindsight [it was] madness. The future was much more vague.” 

Fear of missing out blinded investors. Bevilacqua says an investor doing typical due diligence on a deal would mean being too late. But the same herd mentality that sent shares soaring subsequently led them to crash down. 

The bubble bursting has been pinned on rate hikes from central banks and retail investors selling to pay end-of-year US tax bills, but any jolt would have done the trick. 

In 2002, the Nasdaq would fall to less than a quarter of its peak two years earlier, and the tech industry would enter a funding freeze that lasted for years until the emergence of new web companies like Facebook and Google.

The tech companies that survived the bubble bursting carried on, although without the hype. “There were camera crews camped outside the office for days, and it was sort of suffocating, the exposure. But the business was doing just fine and continuing to grow,” Flint says, of the days when the bubble was bursting.

While lastminute never regained its peak value, selling for £577m in 2005 and £76m nine years later, many tech companies did belatedly live up to the hype. 

While Amazon lost 80pc of its value in 2000, today it is worth 26 times its dotcom bubble peak. Last month Morgan Stanley agreed to buy E-Trade, Bevilacqua’s company during the bubble, for $13bn. Webvan’s spirit lives on in Amazon Fresh and Ocado.

Recent months have seen tech shares hit record highs again, and many loss-making companies have attracted valuations that some view queasily. “We definitely look at some of these things and say ‘we've seen this movie before’,” says Jaquette.

Bevilacqua, however, says the experience of 2000 acts as a brake against over-exuberance, however. “It made investors smarter and more diligent. What happened was burned into people's brains.”