The-Dot-com-Bubble-A-Cautionary-Tale.pptx

The-Dot-com-Bubble-A-Cautionary-Tale.pptx

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  The Dot-com Bubble:A Cautionary Tale Between 2000-2002, the bursting of the internet stock bubble erased an estimated $5-8 trillion in market wealth, representing one of the most spectacular rises and falls in financial history. by Chandru Ramaswamy
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  What Was theDot-com Bubble? The Dot-com Bubble refers to the historic speculative frenzy in internet-related company stocks between 1995-2000, characterized by: • Astronomical valuations for tech companies • Investor optimism about new digital business models • Unprecedented surge in stock prices despite limited profits
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  The Internet Revolution (1995-1999) 100M+ GlobalInternet Users By 1999, over 100 million people were online globally, creating a massive new market 18M New Domains Domain registrations exploded as businesses rushed to establish online presence 400% Growth Rate Annual internet adoption growth during the late 1990s
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  Stock Market Mania UnprecedentedGrowth The Nasdaq rose 500% from 1995 to March 2000, reaching an all-time high of 5,048.62 IPO Explosion Over 300 internet companies went public in 1999 alone, many doubling in value on their first day Stocks with ".com" in their name saw average price increases of 74% on the first trading day
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  Media Hype FuelsFrenzy The Media Machine • Business news shows dedicated to tech stocks emerged • Analysts became celebrities by promoting tech companies • Magazine covers celebrated 20-something tech millionaires • Public sentiment shifted from investment to speculation The promise of "limitless" upside created a gold rush mentality among retail investors.
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  Venture Capital PouringIn 1 1995: $1.3B Early stage internet funding begins to accelerate 2 1997: $4.9B VC funding nearly quadruples as internet adoption spreads 3 1999: $19.4B Investment reaches peak frenzy with minimal due diligence 4 2000: $22.8B Record funding just before the crash begins Many startups burned through millions of dollars monthly in pursuit of market share, prioritizing growth over sustainability.
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  Hallmarks of theBubble 1 New Valuation Metrics Traditional financial metrics abandoned in favor of "eyeballs," "stickiness," and "mindshare" 2 The "Burn Rate" Era Companies proudly discussed how quickly they could spend millions on customer acquisition 3 Land Grab Mentality First-mover advantage prioritized over profitability; "Get big fast" became the mantra
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  Iconic Dot-com IPOs Pets.com Raised$82.5M in IPO (Feb 2000); Liquidated 9 months later after burning through $300M Webvan Valued at $8.45B at IPO; Collapsed after spending $1B on infrastructure with minimal revenue Boo.com Spent $188M in 18 months on fashion e-commerce site; Filed for bankruptcy May 2000
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  Corporate Overvaluation 40% Average Overvaluation Analysisshowed dot-coms were overvalued by more than 40% based on traditional P/E ratios 80% No Revenue Companies Percentage of IPOs in 1999-2000 that had no established revenue stream at time of offering 400x P/E Ratio Extremes Some dot-coms traded at P/E ratios exceeding 400, compared to historical averages of 15-25
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  Unsustainable Business Models TheFatal Flaws • Prioritizing user growth over monetization • Extreme customer acquisition costs (often $300+ per customer) • Offering products below cost to gain market share • Reliance on future rounds of funding rather than revenue
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  The Peak: March2000 Market Top Nasdaq reaches all-time high of 5,048.62 on March 10, 2000 Tech Dominance Technology stocks represent over 35% of total market capitalization Pivotal Moment The peak represented a 1,000% gain for many tech stocks in just 5 years At the peak, investors were paying unprecedented multiples for companies with no earnings, based entirely on future potential.
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  The Unravelling Begins FirstWarning Signs • Interest rate hikes by Federal Reserve in early 2000 • Poor earnings reports from major tech companies • Online advertising rates began declining • Venture capital firms becoming more selective 40% Ad Revenue Drop Online advertising rates plummeted as supply exceeded demand 75% VC Funding Decline By late 2000, venture funding for internet startups had fallen dramatically
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  The Crash 1 March2000 NASDAQ peaks at 5,048.62 2 April 2000 NASDAQ falls 25% in one week, beginning the crash 3 2001 Dot-com bankruptcies accelerate; 9/11 exacerbates market decline 4 October 2002 NASDAQ bottoms at 1,139.90, a 76.81% decline from peak The crash erased $5-8 trillion in market value, with many stocks losing 99- 100% of their value.
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  Capitulation and Collapse TheAftermath The collapse was swift and brutal: • Over 50% of dot-coms failed or were acquired at fire-sale prices • Remaining companies saw stock prices fall by 80-99% • Overnight liquidations became common as cash reserves depleted • "Sock puppet" from Pets.com became symbol of the bubble's excess
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  Corporate Casualties andSurvivors Major Failures • Pets.com ($300M lost) • Webvan ($800M lost) • Kozmo.com ($280M lost) • eToys ($247M lost) Key Survivors • Amazon.com • eBay • Priceline • Adobe Survival Factors • Sustainable business models • Realistic growth strategies • Diversified revenue streams • Prudent cash management
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  Broader Economic Impact 200K+ TechJobs Lost Silicon Valley alone lost over 200,000 jobs between 2001-2003 $1.7T GDP Impact The recession of 2001 was directly linked to the dot-com crash 5-8T Wealth Destroyed Estimated market value erased from peak to trough ($USD) Commercial real estate in tech hubs saw vacancy rates exceed 30% as companies shut down operations.
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  Impact in India TheIndian Tech Sector While India was somewhat insulated from the worst effects, the bubble burst still impacted the emerging tech scene: • Satyam Infoway (first Indian internet company on NASDAQ) lost 93% of value • Rediff.com shares fell from $42 to under $3 • IT services companies faced temporary project cancellations
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  Causes Analysed 1 Investor Psychology FOMOand herd mentality 2 Media Hype Uncritical coverage amplified trends 3 Venture Capital Excess Too much money chasing too few viable ideas 4 Flawed Business Models Growth prioritized over profitability and sustainability 5 Regulatory Environment Insufficient oversight of IPOs and financial reporting The combination of these factors created a perfect storm for market speculation and subsequent collapse.
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  Lessons Learned 1 FundamentalsMatter No business model can permanently defy basic economics; revenue and profit eventually determine value 2 Beware New Paradigms Claims that "this time is different" are often warning signs of bubble thinking 3 Regulatory Reform Sarbanes-Oxley Act of 2002 improved corporate governance and transparency
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  Legacy of theDot-com Era Infrastructure Foundation The bubble funded critical internet infrastructure we still use today Market Discipline Investors now demand clearer paths to profitability from tech startups Cautionary Tale The bubble serves as a reminder that markets can become detached from reality Today's tech giants emerged from the ashes of the dot-com crash, having learned the painful lessons about sustainable growth and business fundamentals.