A favorite quote from last week:
Every single person working in the media today who experienced the dot-com bubble in 1999 to 2000 believes that we are going through the exact same process and can expect the exact same results—a bust. It's déjà vu all over again.... I can assure you that after this next collapse, nobody will think of the dot-com bubble as anything other than a prelude.
I'm actually in a camp that disagrees with most of what Mr. Dvorak has to say (like Marshall), but I'll play along. Let's say the bubble is only a year or two away from bursting and imagine how that hypothetical world would function.
STEP 1: Investors Flee from Public Internet Stocks
This is typically the first step - some bad news comes out of Yahoo!, Google, Microsoft, IAC & Amazon all in the same few week span and stock market traders start selling shares at losses like it's going out of style. Remember how the stock market works, though - no one's bidding on what they think the value of a stock is, nor are they bidding on what they think others think it's worth. The stock market prices shares based on what other investors think other investors think (yes, you read that right). It's all about the opinions of the opinions of others - hence the Random Walk theory.
STEP 2: Private Investors & Venture Capital Gets Squeemish
With the possibility for massive valuations from a public offering diminished, private money retreats into hiding. This, combined with the Wall St. losses create -
STEP 3: Investment, Marketing, R&D and Overall Growth Screech to a Halt
When money starts drying up externally, companies of all kinds freeze spending, start layoffs and kill development projects. In the last dot-com crash, we saw plenty of irrational spending freezes - freezes even on those spends that had a positive ROI - simply because management didn't want the association with the doomed "Internet sector."
STEP 4: Eveyone Goes Out of Business
This is the part I hate. Companies large and small declare huge losses and, often, Chapter 11. Why? Because all of that development they've done and all of those products and service they provide suddenly aren't doing much of anything because none of the other companies are buying. The irony is - the stock market and the private investors will hold up the companies' failures and closures as evidence for why their withdrawal of money (up in Step 1 & 2) were wise moves, when, in fact, they were the catalysts for the events, not the fortune tellers they'll claim to be.
STEP 5: Enterpreneurs Start from Scratch
All those scrappy, smart, out-of-work programmers and biz-dev leaders will pout for a few months, then eventually find a job, oftentimes in startup environments with little to no capital. Over time they'll produce the next Google/YouTube/Facebook, investors will come flocking back and the cycle of boom will begin anew.
Here's what doesn't happen during the above process:
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Users don't stop searching the web for products, services & information
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Said users don't stop clicking search ads
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They don't stop being influenced by online branding
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They don't stop buying (unless the macro-economy has gone to hell at the same time, but even then, many of them will still be buying)
Remember when Frankie told us that "the only thing we have to fear is fear itself?" Truer words were never spoken - and they're just as relevant to the dot-com collapse as they were to the stock market crash. But, if there's nothing we can do to stop investor pessimism, at least we can profit from it.
So, now that we know what's coming, how do we take advantage of it?
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Build a Rainy Day Investment Fund - you'll need to have some cash to keep going through potentially tough times, but if you can spend while others have to save, you'll be in beautiful shape.
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Operate Properties in Multiple Spheres - consulting is a great gig while times are good, but a downturn can mean a lot of irrational halting of expenditures, so make sure you've got some pre-determined business ideas into which you can invest yourself.
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Select Sectors with Immunity - In the offline economy, alcohol and funeral homes are good examples of businesses with cyclical immunity. The online world has plenty, too - ecommerce (remember that no one stops buying online just because investors think Internet stocks are a poor choice), adult content, news, luxury goods - these are all consumed with little regard to the economic perception of the web.
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Spend When Others Slack - If the ad market on the web suddenly dries up (as it did last crash), you can sweep in and grab a lot of very juicy ads at far below market value, and get a massive ROI on them.
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Release Positive News - The media will want to harp on the downturn for a while, but they'll also be looking to temper that with good news, so if you can make your business stand out during a slow period, you've got a great chance to be in the press.
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Gobble Up Competitors - If memory serves, acquiring Internet properties in 2002 was like taking candy from a baby. Get ready for that market again by keeping your eye on companies and sites with real value who might have overextended themselves but have great potential to rise again.
I'm sure you've got more tips for how to prosper in a downturned market - please do share. If Dvorak's right, at least we'll know what to do when the Silicon Valley party goes to bed.
p.s. Back from vacation and gearing up for San Jose SES next week. So much email to slog through.... ugh. And thanks to Brian for the great link round-up.
5 signs of the approaching ApocalypseYou've been warned, if you hear these questions being asked, run!
"What do we do with all this cash?"
"Curved corners or straight corners?"
"Why is Boo.com our business model?"
"Whose start-up roof-top party are we attending this weekend?"
"Who's job will be made redundant next?"
During the last bubble burst, in true Survivor style I lasted until the final round of forced resignations - a 5 man skeleton crew looking after the desiccated remains of a financial start-up. Even then, we were given the boot from our overpaid jobs a few weeks later.
It was an eye-opener for a then self-absorbed, inexperienced 20 year old. If nothing else, it has taught me the religion that is diversification.
Spread your skillset and spread your investments.
During the last dot-com bust, when people asked "What do we do with all this cash?", I proceeded to explain how they should save their money and stop being morons. This time, I'm just going to grab the cash and run.
This post gave me chills...that's not supposed to happen at SEOmoz!
Back in the late 90's, my husband worked for a cutting-edge trading company that rode the dotcom wave like nobody's business. Huge bonuses, lavish parties...we thought we had it made. Then 9/11 happened. A few months later my husband was out of a job. It took him 8 months to find another, as nobody was hiring. (I was home with a new baby and hadn't started my own business yet).
He's in a much more stable industry now, but I shudder to think that it could happen all over again. As for my own business...teachers always have to teach, right? Still, you've made me want to hide some money under my mattress =)
As someone who spent many hours going through web 2.0 sites recently, I think we may be at a "something's gotta give" stage. I wasn't in the industry in 2000 and 2001 (I was still in high school, but holding that against me will only make you look old, so don't do it). However, I saw very little real innovation during our Web 2.0 Awards research this year. I just saw clone after clone of ten or eleven interesting, successful web applications and business models.
Web 2.0 jargon is starting to sound as tired and cliched as 90s terms like "cyber cafe". There are probably only so many more VCs who are prepared to invest in a revolutionary way to integrate syndicated paradigms and enhance ubiquitous applications. Just saying...
The biggest different with the explosion of Web 2.0 businesses is the level of investment required. What cost a cool quarter-million during the first dot-com boom may only take $25K to get off the ground in 2007. Many of those business may fail without disastrous consequences (and I say this as someone about to take that leap).
Dude, I'm older than Jane? What the hell happened, I have so much to do!
Singing "Old man take a look at my life, I'm a lot like you were...."
Everyone is older than me. Apart from Neil Patel. Neil Patel is 14.
Hey, did you read my profile before posting that? Because you just brightened up my day with one of my "favourite things about SEO".
Heh. Yes tha's right, everything IS about me :P
There are (small) booms with every kind of new business type (which the internet still is). The rollercoaster starts somewhere, the opportunities grow, money is invested, business grows until it acquires critical mass. At this point everybody with half an idea gets on and wants a piece of the pie which means that the business starts growing exponentially but there is no sound basis for it so it needs to crash.
This is what happened 5-6 years ago, but was it really a bad thing? The crash put people back to earth, the internally strong companies survived at the expense of the weak companies and it gave the industry the opportunity to reflect on itself. Of course, a lot of people lost their job and a lot of money was lost, but the smart investors recovered and the strong employees found new jobs with new challenges. In a way, the industry cleansed itself.
I think things are different now because a) the pace is a lot slower now, b) companies are looking at ROI more than they did 8 years ago and c) the basis is a lot stronger because there is more knowledge among the community (professionals and users) as a whole.
I have to agree. The boom and bust that happened 5-6 years ago was inevitable. VC's were handing out money to anyone with a website even if there was no real business plan or any way to make money. They may have had some good ideas but there was nothing behind it. Add this to the confluence of events that coincided with this funding situation and everyone cam back to reality.
The Internet crash actually was necessary because it forced everyone to recognize that sound business practices are necessatry whether you are doing business online or offline. Without a solid business plan and revenue potential the business will have a real hard time. While we may see a few casualties if there is a corrections I believe business owners and investors have wisened up enough to make build and invest in real businesses and not just websites with neat names and funny mascots.
I think a bursting of the bubble is inevitable. I don't know when, but with all the start-ups getting bought up for billions and articles like this one about how sometimes it's just easy to get rich, I figure it just has to happen.
And if and when it happens... nope -- I don't have a plan.
By the way, when you indicated that you were about to quote Frankie, I thought you were going to write "Relax."
I disagree. I don't think there will be a Web 2.0 crash anytime soon. Those companies (Google, Microsoft, Yahoo, etc.) that are buying Web 2.0 startups are huge and even in a depression they will have more than enough money to keep buying startups.
I also don't think we are in a bubble right now.
I tend to agree, though I'm sitting on the fence and leaning strongly one way :)
The nature of the social web is very different, and unless the switched-on youth (generalisation) decide en mass to stop social networking (yeah... that will happen) I don't see that a crash reminiscent of the last one is likely. I do think that investors may become a little more circumspect and prudent though when the 'get-rich-quicks' start falling off or relocating their interests, but the foundations of the industry are likely to remain pretty solid.. at least until the next best thing comes along :).. just my pov.
with all the start-ups getting bought up for billions and articles like this one
I counted 10 external links in this NYtimes article. That is amazing! When did they start copying bloggers and release their walled borders?
Also copying (many) bloggers is the lax style. The last 1/3 of the article wanders around like the author is in a drug induced haze.
When it seems like everyone is basically saying that they are going to write a Facebook plugin to help them get rich...I get nervous.
I believe there is enough evidence out there that the technical aspect of web2.0 (AJAX, APIs, etc) provides real consumer and corporate benefits so I am betting that part will survive if not flourish, but I have to agree that the "marketing web2.0" is headed for a big crash.
You're right Rand. It may be sooner or later, but every business cycle will cycle. If your fundamentals are sound, you have a fall back position, and you are ready to make hard decisions before they are forced upon you, then a downturn can be an opportunity. An unpleasant opportunity, but an opportunity none the less.
After 9/11 my company suffered massive contract cancelations because of economic uncertainty, but by falling back to our core business, and cutting our expenses to the bone we survived and came out more efficient and with less competition. It did suck though.
Security is an illusion.
Been reading a long time and finally a topic I can participate it.
I managed mutual funds for some very large investment firms a few years before, during and after the dot.com bust. You touched on some good points. Unfortunately, you’ve left out a couple very important points as well.
Do I believe there is going to be another bust? Certainly and I think its going to be much worse then 2000, or at least I think the recovery time will take longer. You can make an argument for it two ways
1.The most obvious is trends cycle: From Fashion and music, to [insert your favorite trend here]. too tired to think of examples 2. The more realistic reason is the Real Driving force behind the markets - the real money. VC’s don’t drive markets with their petty little 5 million dollar investments. The first cycle of real money just started retiring – baby boomers.
The first big wave of baby boomers have been in their spending years since 1999(ish). Buying their houses, making their last big round of internet investments, BMW’s, 401K’s. ramping up for their retirement years.
Now they've officlally started retiring, that’s a boat load of money that will taper off now because they are older, more conservative and money will be going to safer things like Rand mentioned.
They will be taking their money from names like Google, Ebay & Starbucks and putting it names like Proctor & Gamble and Caterpillar If you really want to scare yourselves read “The Great Boom Ahead” by Harry S. Dent. Has some pretty undeniable, hard to argue with facts that point to 2008 as the beginning of some big changes.
P.S. Hey Rand, howya been? :p
Busy but mostly good - nice to see you around here, Scott :)
> (I was still in high school, but holding that against me will only make you look old, so don't do it).
Well we won't hold inexperience against you...especially when you're so observant. ;-)
Gee, some people think there's a bit of a bubble going on? Huh.
Ya. LOL.
Froth = What happens near the end. Example: Demise of Digg, which some inexplicably still see as surprising.
Dunno if it's a crash coming per se; dislocation takes all sorts of forms. But Web 2.0 is no more what the Web will be all about in five or ten years than crappy e-commerce sites were what the Web was in the first go-round.
Funny thing. The whole time people were talking about the "bubble" bursting after 1.0, only a few took the time to understand even the basics...like, during the entire period of the so-called bubble, crash, and recovery, the Web never had a down QUARTER, let alone a down year, in total rev's. Weird. Oh wait, headlines don't = business...hehe.
Those who know how to make money were simply quietly going about their business AFTER the bubble burst, understanding that BAD headlines usually spell O-P-P-O-R-T-U-N-I-T-Y. :p
Crappy businesses died in the arse, while the smarties cornered the market to became some of the powerhouses we know and love today.
The adage, 'Work smart, not harder' is even more true in when a 'bubble bursts'.
Wow, this is all a lot of food for thought. I hate crashes of any kind so I've never really thought about it before. Hmmm.
Nice Rand. After getting as far as Step 5, I was ready to chastise you for perpetuating this, doing exactly what you describe as causing Step 4.
But you turned it around! And provided great positive, practical advice on how to pull through if such an event happens. Hell, armed with advice like this, a crash might be just thing to launch my entrepreneurial career ;)
I've been reading this blog for a long time and have thoroughly enoyed it. This is the one of the first posts that I've actually been moved enough to comment on. (I'm more of an observer type.)We went through the first bubble bursting at another company and I think the 2 most important things we learned were:If it doesn't make sense as a business then it's not going to work. Someone gives you money, you give them back something that has value.Rainy Day Fund. So important. If you've got enough saved to keep things moving along you don't have to make decisions from a desperate position. Thanks for posting this!
This is a new industry and I would say that I agree that there will be hard times in the future. We have to learn from our mistakes and I think the previous downfall has teached all of us lessons. I doubt that the same mistake will be repeated, but this time the effect will be felt elsewhere. The fact of the matter is that the web is working for us right now, where there might be a shocker waiting is with the direction the market leaders are taking. In this case I am talking about Google, Facebook, Yahoo! etc. They are shaping the future to a large degree and they are the trendsetters. We have alot to look forward to and it will be very interesting to see where the knock will be next.
Simply the term "Web 2.0 Crash" says everything.
This is declaration of the "Web 2.0 bubble" where people talk about some new widgets, some Javascriptish websites and ultimately a mass of kids hanging out on sites (bookmarking sites, that is today) as if it would have created value, or would to so in the future.
In fact even Google prefers traffic from manipulated Digg kids over real quality signals from content and inbound links.
Frankly, I've lost a lot of money in the 1999-2000 crash, but my investment portfolio is 8 times the size it was back then, and I made good money with stocks like eBay, Amazon and Yahoo... but got out already....the ratings even of those old-school companies are hilarious... Yahoo is back at a P/E of 100+ , but trades at levels of 2003 only... so the market HAS gone down already.. I cashed in on Amazon with a nice 100% profit ... but where would you expect that to from here?
And all those cheesy companies with the nice "web 2.0 template" sites that receive VC money right now got just the same problems as the bubble-companies in 1999 - they are not cashing in - the have visions, motivation, video games in the office and free fruits and snacks (yeah google has too, and so does my company :-)
But THAT motivation is not a reason to pump millions of $ into a couple people that just graduated... sorry...
So - in my POV, the web20 crash won't happen in 1-2 years, we see effects it NOW, with the subprime market problems and the fed lowering rates last week - first time in 3? 4? 5? years? clear signal imho.
Were are IN the crash !
cheers,christoph
Here is what I fail to understand. The fundamentals of Web 2.0 are by definition self-corrective. As long as we place the power in the end-user, web properties will adapt and adjust to any changes.
Nothing will change. The businesses with a strong retention model will thrive, and those which are looking for the "here and now," will get the blunt end of the stick.
Investor concerns likewise, are far from worrysome. there is enough VC money coming from people who truly understands the dynamics of the internet user and consumerism in general, and will continue to fund projects with real value.
There will always be the opportunity to monetize eyeballs, that is just simply the dynamics consumerism. You wouldn't be in business if you weren't providing value to the open marketplace. As long as you are providing value, the only thing seperating you from the top is marketing.(letting people know that you exist and what you have to offer.)
Yeah, all the businesses today which aren't bringing unique content, or some other real value will fade away.
We all know the key to online success is providing quality content, and real value. The internet community has spoken, and declared they are sick and tried of spam and other online shenanigans.
This pending web 2.0 bubble is actually the very reason successfull online marketers succeed, because we decided we will constantly take out the garbage, and only patronize good quality sites.
If some idiots invest unintelligently, thats fine, the good businesses will just feed off the weaker competition, and become stronger and better.
Just my thoughts.
I feel we are in a very different place now, than back in '99 - '00. The internet to many was a 'fad' and 'not here to stay'. I would say this is certainly not the case in this 'golden age' of the web.....
This post can also be applied to the cyclical nature of the Real Estate Market...you can sweep in and grab a "property" at far below market value, and get a massive ROI on them.
Diversification and trying to avoid long term high fixed costs must
be a good strategy. Short term leases and trying to tie salaries into
performance will help.
The companies who are probably most at risk are the ones where
they are over dependent upon just one or two clients.
That is dangerous.
Let's not forget that the dotcom bust was exacerbated by other extraordinary events, including corporate governance scandals and 9/11. I'm not saying that we won't see another downtown, but my guess is that it will be comparatively moderate and contained. Another "perfect storm" of exogenous events, however, could precipitate a second bloodbath. It's actually interesting to consider how easy money policies that were designed to facilitate a recovery a few years ago might now be the cause of another disaster.
And before we close the book the dotcom bust, we should recognize the extent to which many of the technologies created by those now-forgotten companies contributed to significant productivity gains over the last few years. Many of the mainstream ecommerce technologies we take for granted today are the result of failed entrepreneurial efforts in 2000-2001. Schumpeter lives.
Actually, the dot-com bust was going full speed by March 2000, well before Enron and 9/11. Those were just the nails in the coffin that spread the bust into a general IT slowdown.
The real cause of the bust is that a lot of companies that should have been a couple of people working part time out of a basement got millions in investment capital. While there's some craziness going on with venture capital again, most of the Web 2.0 startups seem to be a little smarter about starting lean.
"Let's not forget that the dotcom bust was exacerbated by other extraordinary events, including corporate governance scandals and 9/11."
Urm... Like credit worldwide credit crises, illiquidity issues, hedge funds going belly up, and expensive foreign wars?
I'm also one who sees the pending 'crash' (I actually think it'll be more like a 'correction') as a good thing. The really quality companies are going to survive, and the qualified ones that don't will move on & invent something even better.
Rand, your advice to diversify one's web properties is certainly a great one though.
It is a hard worked article,! although there is no need to "play along" if you disagree.The main difference between 2000 and 2007 is that, then we used to like technology per se. I remember I guy who was in the cover of a IT magazine named the men of the year: revenue 1 million, expenses 50 million and value of the company 200 million. Non-sense.I certainly hope that when we burst, some of the companies will be due to adjustments as any other industry (like the real state today) but not faced to to disappear if they indeed have customers, sound revenue, according expenses and product to different of the market. I find some companies that comply with these practices at this web 2.0 era.Mario Ruiz
https://www.oursheet.com
I don't see a crash. I do see companies who haven't learned from their mistakes before getting burned. This includes VC's, private investors, and entrepreneurs. When new industries are created like this, the economic tendency is to throw money at them and let them battle to become much more powerful.
Google isn't going anywhere. Neither are the other big search engines.I do see some small web companies closing doors. They're hobbyist sites or little "toy" web apps. Cool to use for a while but just become a fad.
I think the crash before had much more to do with infrastructure than it did web companies. I look at it as financing the end of the beginning.
The interesting thing about the web is its always up for grabs. Come out with a classified ads site that does things better, has more exposure, or its easier to use/search. You don't have to employ 100 people and have a ton of overhead. You could beat AutoTrader.com within a year.
There's not much separating web companies except providing a great service with great marketing and being able to sell it well.
I wouldn't listen to Dvorak or Wall Street. It's just "speculation."
I wouldn't be surprised if the appearance of a pending economic crisis opens the door to a lot of opportunity for skilled SEOs and web marketers. Companies are going to want to stretch their marketing budgets as far as possible and over the long term the ROI of good SEO is hard to beat.
But the real opportunity is definitely going to be in distressed domains. It's almost always a good time to buy beach front property from someone who can't make their mortgage payments. Over the last six months the first wave of web 2.0 co's who couldn't justify their business models either sold out or went belly up. I am talking to a lot of funded start-ups gearing up for a new round of funding in the fall. Some of these co's are not going to get funded. A number of smart domainers will start to proactively go after some of these underexploited domains and do the equivalent of a LBO - buy the sites with leverage, strip it bare, SEO and affiliate the hell out of it and then flip it in a couple of months for a nice profit.
Three words: diversify, diversify, diversify. It's never a good idea to have all of your eggs in one basket.
Although I don't think the excesses of the Web 2.0 craze will result in the same kind of bust we had circa 2001, even the original dot-com bust didn't destroy the internet industry. Broadband rates continued to increase, online spending increased, and the web only got bigger and better. Even advertising and investment numbers sprung back within a few short years. One way or another, the internet isn't going to disappear, nor is the money being spent on it.
I agree with some of the previous comments. The "Bubble" burst long before 9-11 and the primary culprits were poor business models, unchecked lavish spending, inordinately high capital expenditures and just plain lack of business experience. Finally, many companies were just ahead of their time. I have no doubt there are "2.0" companies out there guilty of some of these same problems. However, I believe the majority are savier.
Overvaluation on the other hand...could be an issue. But that is a different issue and part of the normal business cycle.
Mike
The market has a history of correcting itself and savvy investors understand that this is necessary.
You have to diversify. Your money, your skillset. Change is inevitable and successful businesspeople not only account for it but expect it and WANT it.
I don’t see a crash coming Web 2.0 maybe a slow down. Having come from a large Telecom company during that time; I was aware of a lot of vapor ware that was being financed and pushed out the door. I can see some adjustments in the future but more from the VC side. Funding will be harder to get but nothing like what happened during that time. VC money will dry up as more stories appear about how they get burned. Back then it all looked like the new gold rush, if you had an idea, let’s throw money at it and make millions. Times have changed and big business isn’t gobbling sites anywhere that pace.