Dot Com Bust

From the AgileTestingMailingList:

As someone who lived the dotcom boom, I can say with great conviction that the internet startups did not fail because, as Stefan asserts, they "did not have any infrastructure and they did not have any business plan."

First, there is no one reason for the demise of all dotcoms. Every dotcom had its own story. That said, there are patterns. Most of the dotcom failures resulted from profligate spending of other people's money.

Rather than a lack of infrastructure being a problem, too many of the dotcoms had too MUCH infrastructure. They forgot they were startups. They forgot the image of a handful of people working in a garage. Instead, they built organizations that were far larger than needed to accomplish the immediate task. (Webvan is a prime example of this.) They also bought too many Aeron chairs and foosball tables, but that's another story. The luxury items were a symptom of a "think big" attitude: hire expensive people, buy expensive furniture, lease expensive space, and build an extensive infrastructure we can't support.

The problem was also not a lack of a business plan: it was the lack of a VIABLE business plan. Venture capitalists do not fund companies with no business plan. But they were happy to fund hot-looking companies with flawed business models that involved valuing the company based on eyeballs or clicks or members or something other than actual revenue and net income.

Finally, there was the domino effect. Two things fed the Internet bubble: too much venture money chasing too few viable business plans and the rate of spending on Y2K remediation efforts made the technology sector very hot. When Y2K was over, spending dropped. When spending dropped, companies started feeling the hurt. When companies started feeling the hurt, investors got scared. When investors got scared, they started pulling out their money. When the investors pulled out their money, the companies with no viable business plan were taken off life support and died.

It was a house of cards and it came tumbling down. Note that companies failed whether they had good testing or not, good infrastructure or not, good quality or not, good products or not. The key differentiator between those who lived and those who died was the very simple question: were they making any money?

--ElisabethHendrickson

I mostly agree with Elisabeth's observations, but I'd like to add mine. I have worked for two dotcom startups, both of whom are still around, at least one of which is almost profitable. I was with one during the startup days and the other later on, but still having a startup mentality.

One had tons of funding and spent a lot of money on infrastructure. They had a test environment that was identical to production, same number of servers and everything. They had a range of software development, test and other tools that ranged from the ridiculously expensive to nice, lightweight and cheap. They had a heavyweight process which was too slow, but which at least prevented train wrecks (while I was there, at least).

The other was stingier with money, wrote every software system in- house, used all open-source tools and software development frameworks, had no automated testing (while in startup mode), marginal but evidently enough infrastructure, had what I perceive as not much of any kind of process, and was extremely lucky.

Both had bold business plans and vision.

I think the business plan is important, and money is important, and you have to have some sort of infrastructure (at least a test environment!) but what is most important are the people (as Alistair Cockburn found in his study of what makes projects succeed). If they are good people and are somehow allowed to do good work, they might have a chance to succeed. Someone needs to have a strong vision, too.

-- LisaCrispin

Aeron chairs and foosball tables get mentioned for the dot coms, but they seem really cheap to me. An Aeron chair is maybe $800? How much is a programmer's salary? If a good programmer gets paid $60,000 a year (?) and an Aeron chair costs $600 more than a cheap chair, then it seems like you're increasing your cost of keeping that programmer by under 1% (keep in mind computer, desk, rent, insurance, and all that other overhead per employee). If that Aeron chair made your programmer even 1% more productive, isn't it worth it?

-- AmitPatel

No, it's not worth it. It is impossible to quantify whether or not the chair had any effect on productivity other than serving as a generic "chair", so that's money wasted. More importantly, it leads into a mind-set of spending a lot of money with no quantifiable return, which was lead to the dot com bust in the first place. --AndyPierce

There are studies that have shown that quiet, sufficiently-sized, ergonomic environments do increase productivity. Companies that refuse to buy "expensive" software packages (at $500), furniture, hardware, etc seem cheap to their employees. The little things go a long way to making people feel "loved." Morale has a great effect on productivity, and if the employees think that the managers are being unfairly stingy, especially with providing a comfortable and welcoming work environment, then the startup will have problems that might doom it. There's a difference between running lean and being cheap. Not everybody can ignore the fact that they are working on a 15" monitor that saved the company $150, especially when their salaries approach six figures. --Anon

Perhaps if many of the failed companies started up one by one rather than have say 10 fighting in the same niche at the same time, then they would have more likely succeeded. It was just too many too fast, taking them *all* down when the bubble popped.

Venture capital invests in rising markets. Had some chosen to not invest for the good of the sector then they would surely be subject to lawsuit from their own investors. The utterly mechanical nature of the decision process has to make one wonder why folks have so much faith in markets.

Seems to me that the problem wasn't high expenses as much as no revenue. You never outgrow your revenue. That should've been obvious to people, but many in the DotComBust forgot it.

The two factors I saw at work in the bust were:

1. "We lose money on each transaction, but we will make it up in volume." If you lose money on each transaction, volume is your enemy, not your savior.

2. Investment banks using dot coms (and telecoms) as pawns in investor fraud schemes. They realized if no one could understand business plans based on high tech buzz words and therefore no one could debunk the hype.

It's astonishing that this is all true of the web2.0 bust that is just around the corner (in 4/2008). 20 year old programmers might not know the mistakes of the late '90s, but the VCs and investment banks should know better.