Research Sheds New Light on Dot-com Bust
Contrary to Popular Wisdom, High Rate
of Companies Survived
College Park, MD November 8,
2006 New research on the dot-com
era from the University of Marylands
Robert H. Smith School of Business
reveals despite significant losses
suffered by investors, nearly 50 percent
of 1990s dot-com startups survived at
least five years. This success rate is
better than or on par with other
emerging industries, contradicting the
traditional view that the majority of
Internet companies landed belly up.
The high survival rate we observed
is both remarkable in its own right and
interesting for what it implies about
the rate of firm formation during this
period, said David A. Kirsch, Smith
School assistant professor of management
and organization and co-author of the
study. Despite public perception that
there were too many dot-coms and too
many failures, seen in this broader
light, there may have been too few
dot-com companies.
The findings are to be published in
an article, Was there too little entry
during the Dot Com Era? in a
forthcoming issue of the Journal of
Financial Economics, by Kirsch, fellow
Smith management and organization
assistant professor Brent Goldfarb and
co-researcher David A. Miller of the
University of California, San Diego. The
team conducted an analysis of the boom
of Web-based startups in the late 1990s
and the Internet industrys financial
collapse between 2000 and 2002 using
documents from the
Business Plan Archive, a historical
archive of early Internet ventures
supported by the Library of Congress and
the Alfred P. Sloan Foundation.
The research also shows that survival
is not related to venture capital and
other private-equity financing, which
was often secured in pursuit of a Get
Big Fast business strategy that, by and
large, did not work.
What made the dot-com era appear
such a failure was not a proliferation
of bad offerings but the belief in an
unsustainable business model, said
Kirsch. The Get Big Fast strategy had
businesses and venture capitalists
sinking large sums of money into
dot-coms that had yet to turn a profit.
They believed that these investments
would preempt competitors.
Back then, no one knew how to make
money on the Internet, so everyone did
what the other guy was doing: grab as
much Internet real-estate as quickly as
possible, Goldfarb said. Eventually,
investors started focusing on
bottom-line growth rather than top-line
growth and thats when the market
crashed. Nevertheless, a lot of ideas on
which Web startups were founded were
sound. Thats why so many dot-coms are
still around.
Highlighted research findings:
-
According to analysis of business
news sources, belief in the Get Big
Fast strategy was widespread until
early 2000
-
Boom and bust were strongest among
dot-com and IT firms, where Get Big
Fast ruled.
-
Five-year survival rates of dot-com
firms sampled were 48 percent,
comparatively better or on par with
four other emerging industries:
automobiles, tires, televisions and
penicillin.
-
Survival of dot-com firms is
unrelated to the receipt or amount
of private equity funding.
About the Business Plan Archive
Since 2002, Kirsch has been
collecting business plans and documents
from the early history of the dot-com
era and compiling them in a digital
database as part of a larger project
called the
Digital Archive of the Birth of the Dot
Com Era. The archive preserves a
record of business and cultural history
based on business plans, marketing
plans, technical plans, venture
presentations, and other business
documents as well as
personal narratives from more than
2,000 failed and successful Internet
startups. The Business Plan Archive is
supported by the Library of Congress
through the National Digital Information
Infrastructure and Preservation Program,
the Alfred P. Sloan Foundation and
contributions from the projects other
partners.
About the Library of Congress
With more than 128 million items,
the Library of Congress is the worlds
largest repository of knowledge and
information. In 1994 the library
formally launched its National Digital
Library Program. In 2000, the U.S.
Congress mandated that the library lead
a National Digital Information
Infrastructure and Preservation Program
to collect and preserve at-risk digital
materials of cultural and historical
importance to the nation. NDIIPP is
working with partners from both the
public and private sectors to form a
national network of institutions and
organizations that collect and preserve
digital content.
About the
Robert H. Smith School of Business
The Robert H. Smith School of Business
is an internationally recognized leader
in management education and research for
the digital economy. One of 13 colleges
and schools at the University of
Maryland, College Park, the Smith School
offers undergraduate, full-time and
part-time MBA, Executive MBA, Executive
MS, PhD, and non-degree executive
education programs, as well as outreach
services to the corporate community. The
school offers its programs in learning
locations on four continents including
North America, Europe, Africa and Asia.
