Travel Reference
In-Depth Information
The Dot-com Crash Explained
I wasn't there, but I can tell you exactly how it happened. One Sunday morning at some
power breakfast in Palo Alto where the venture capitalists gather to exchange news and
gossip, Bill Ventura let drop the bombshell: his company, Harbone and Schlitz, was not
planning to ante up for a third round of funding for Inteleginx. A hush fell over the small
group and they paused in mid-latte.
“You're kidding. You've pumped nearly 3 million into them.”
“That means Inteleginx isgonnagobelly-up.They'renotpullinginenoughcashyettostay
afloat.”
“Why would you guys pull the plug on them now?”
“I guess we've stopped believing that Inteleginx will ever start making money. No point
throwing more good money after bad.”
Inteleginx had a business model very similar to some of the startups the other breakfasters
themselves were funding. If Harbone and Schlitz had lost faith in the light at the end of the
tunnel, maybe it was time for them to re-evaluate some of their own gambles. Each of the
players knew right away which were the riskiest bets they had in the game. Might as well
start with those.
In the next few days the news spread that not only Harbone and Schlitz but several other
top tier VC firms were starting to turn off the tap on some of their pet startups. If the smart
money was getting out of the game, maybe it was time for alert investors to reconsider
some of their bets as well.
Within a few weeks, stock prices were sinking, larger companies were losing their capital-
ization and profit margins, and start-ups were withering and dying as their funding sources
cut them off left and right. The little companies who had just bought expensive servers and
workstations from the big guys went bankrupt, and their earthly possessions were sold at
auction for pennies on the dollar. The big guys now had to deal with a glut of barely used
hardware on the market that was selling for a tenth of what their new systems cost. Their
sales nose-dived virtually over night. And that cycle of fear, contagion and collapse is what
came to be known as “the dot-com crash”.
One of the new dynamics of the internet age is the phenomenon of vastly accelerated feed-
back loops where bad news creates worse news faster than we can blink. And, ironically,
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