www.Bust.com

0 Comments | Insight on the News, March 26, 2001 | by John Elvin

Scores of e-businesses have folded and the dot-com investment bubble has burst, sending $1.75 trillion in speculation to money heaven and drying up capital liquidity.

The year 2000, widely predicted to herald the collapse of a technology-dependent world, was instead ushered in with another festive Super Bowl sponsored by 17 dot-coms among its 36 high-rolling advertisers. Viewers shook their heads in collective bewilderment at ads for companies that seemed to have more money than sense. Savvy observers noted that they weren't about selling products but about luring ever-more investors into the dot-com bubble.

One of the ads featured a cutesy sock puppet. The sponsor, Pets.com, reportedly spent more than half of its investors' money -- to the tune of $3 million -- on that advertising effort. When next heard from, Pets.com had disappeared below the surface, and its assets, including the cutesy sock puppet, were acquired by another firm. By October 2000, major dot-coms that had been appearing at the rate of about one a day were dropping at that same rate.

This year it was pretty much back to beer and sport-utility-vehicle ads for the Super Bowl. In the interim, more than 200 dot-coms had bit the dust, while many more saw formerly soaring stock prices take a dive that brought them close to extinction. Many others are living on borrowed fat, with an estimated 80 percent of companies whose primary asset is their Internet presence yet to show a profit. Losses in "market worth" for the top 280 stocks on the Bloomberg Internet Index have been estimated at $1.75 trillion.

"The dot-com bubble met all the criteria of modern popular delusions, but it's understandable because there was no way to compare it," according to Larry Abraham, editor of Insider Report and an entrepreneur involved in venture capital for 30 years. "That's how it is with these dementias," he says. "Bubbles occur in the early stages of new levels of speculation, when there is no guidance that can be laid down from historical experience. It won't happen again in this particular area because it will be in the history books, and business schools for generations will teach it as a didactic disaster. But there will be others."

The daily news indicates that the current bubble still is collapsing. Another superstar of the dot-com world, eToys, filed for bankruptcy as this story was being written and warned investors that its securities should be viewed as "worthless," With liabilities of $274 million and little in the way of tangible assets, the company simply terminated its remaining employees.

What happened? Well, as Abraham says, the bubble has burst. A bubble occurs when a commodity is so greatly overvalued that its speculative "worth" inflates wildly in an unsustainable investment frenzy that bursts in panic. The nature of a bubble is no great secret, having been fully explored in Charles Mackay's classic Extraordinary Popular Delusions and the Madness of Crowds, a standard text in both law and business schools. Mackay discussed the tulip bubble in Holland in the 17th century, when fortunes were squandered on flower bulbs; the Mississippi bubble in France that promised wealth untold in the New World in the early 18th century; and the South Sea bubble, a trading fantasy that swept England at about the same time.

Usually it is the early promoters who skim the huge profits in bubble situations, as has been the case for investment banks and underwriters in the current scenario, while the "last-in" little guy is left holding the empty pipe. The underlying delusion in each case is that someone else -- a greater fool, it is said -- will buy the fashionable stock at a higher price. The actual business involved, or even its profitability, means little.

You had the emergence of Amazon.com and eBay and all the others, some with dubious business plans or none at all, and people weren't thinking about how quickly a company can make a profit but "how big a footprint do they put in the space," says the savvy Abraham. "Conventional wisdom had it that the important thing was to `capture the space' and hold on until the great breakthrough came. The dot-com entrepreneurs were able to sell this idea to some Wall Street bankers who were by tradition skeptical people but had no experience against which to compare the new communications technologies. It became a gold-rush mentality, with everybody racing to try to nail down a piece of property in cyberspace. That fed on itself. There was a plethora of new IPOs [initial public offerings] racing into the marketplace, all of them out to capture `the space' for a particular application."

Why didn't investors heed the warnings of experienced analysts such as Abraham? "When graybeards like me asked, `Well, when does it get profitable?' it was almost enough to get you thrown off the bus," he says. "They weren't interested in profit; they were interested in getting the footprint in the space. And so you might ask, `Well, how much is that going to cost?' And they'd say, `We don't know -- 10 million, 100 million.' The numbers became totally irrelevant as they convinced themselves that, once the footprint was in that space, it would be like turning on the spigot to a perpetual oil well. The Wail Street stock analysts threw out all the old systems of valuing, putting strong buys on the Amazons of the world that had shown no earnings; it really met all the criteria of popular delusions and the madness of crowds."