'Dotcom Bubble' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The dotcom bubble inflated during the wild Internet and computer software heyday of the mid to late 1990s. It was epitomized by the dramatic and fast paced rise of equity markets which were powered by Internet-based firms and startup investments. In the midst of this bubble, the values and capitalizations of the stock markets rocketed up astronomically.
The technology-heavy NASDAQ (the so-called “stock market for the 90s and beyond”) index roared from a mere 1,000 level to over 5,000 in the years from only 1995 to 2000. Incredible fortunes were then made and lost in the span of half a decade as the bubble violently exploded in a matter of months.
It all began with the stocks of software firms which turned in excellent performances during the 1990s decade. As enthusiasm for this software industry was running at an all time high, many young just out of college and tech-savvy entrepreneurs decided to create their own tiny software startup outfits. Employees of these wiry college students and graduates were mostly paid in pizza and soft drinks, with a promise of stock share wealth to follow if they succeeded. Nearly all software startups of the day aspired to expand into the next Microsoft company.
It made sense that finally a number of these ambitious startup companies would gain the coveted interest of the venture capital firms and funds that were eager to finance the new startups of the brave new frontier of the Internet. They hoped to and actually succeeded in taking a great number of them public before the crash, reaping eye-watering profits in the process. Startups saw the writing on the wall and started to pay their employees with company stock shares instead of money.
The overwhelming majority of such software startup companies of the time arose in San Francisco area Silicon Valley. This became one of the great technology Meccas of the West. By the late 1990s decade, the NASDAQ technology index was running at a torrid pace, turning many investors concentrating on technology into overnight millionaires and billionaires.
Investors continued to recklessly throw their money into these startups believing that they could not fail based solely on the strength of their prescient ideas. All thoughts to traditional measures of a company such as track record, balance sheets, profitability, and revenues versus expenses went out the proverbial window. Investors only cared for the chances of a company involved in technology possibly one day becoming profitable. The overwhelming majority of both venture capitalists and investors abandoned the traditional and time tested approach of analyzing companies out of a fear that they might miss out on the rapidly expanding omnipresence of the Internet and software.
In retrospect, this radical increase in stock prices that defied logic could not simply go on forever. The nation had never before dreamed of such an impressive and rapid growth of capital as it was experiencing by the late 1990s. High technology solid companies such as Microsoft, Cisco, Intel, and Oracle all generated substantial sales, products, and profits and fueled the real growth which was occurring in the technology arena.
The upstart miniscule dotcom bubble companies were the ones powering on the stock market surge from 1995 to 2000 though. Cheap money and the resulting easy to obtain capital provided by the Federal Reserve’s historically low interest rates also added proverbial fuel to the fire. This drove overconfidence in the markets and radical speculation pure and simple.
Venture capitalists would throw money by the fistfuls at companies simply because they possessed a .com following their name. The values were based on profits and earnings that did not exist yet and never would unless the future business model actually performed according to optimistic scenario projections. Investors turned blind eyes to the traditional fundamentals and complete lack of track records. Firms which had never earned any revenues, turned any profits, or even produced an on-the-market product were taken public in IPOs which witnessed the never before seen tripling and quadrupling of their stock prices in a single frenzied market trading day.
The dotcom bubble violently erupted after peaking on March 10, 2000 at 5,048. This lofty peak represented a doubling of the previous year’s point. It was actually the market leading giants in the high technology sector, including Cisco and Dell, which engaged in enormous sell orders on their own company shares at the market’s peak that caused the investor-driven panic selling to commence. Once this began in earnest, it needed only a few short weeks for the market to lose 10 percent of its entire value.
Dotcom companies suddenly found their supply of financial blood rapidly drying up. Those whose market caps had run to hundred of millions of dollars were suddenly worthless in only months. By the close of 2001, the majority of publically-traded dotcom bubble firms had gone bankrupt. Literally trillions worth of investment capital had vanished with the popping of the greatest bubble the world had ever seen to this point.