A:

A great example of a dotcom company that suffered the classic fate of many in the 1990s was VA Linux.

VA Linux specialized in hardware, computers and servers that used the Linux operating system as opposed to the Windows version. The founders, Larry Augustin and James Vera, had discovered a niche in the hardware business. In the throes of the internet boom, when a "back of the napkin" business model was considered too formal for the new paradigm, a profit-making tech company that was not traded publicly was unthinkable. Thus, VA Linux was cajoled into an IPO.

The VA Linux IPO was an extremely hot issue. In retrospect, it has become a good example of just how out of control the dotcom bubble became in 1999. On December 9, 1999, VA Linux shares went on sale at an offering price of $35. By the end of the trading day, they were selling at over $235. Later that week, they broke $300. Normally, a steep rise in share price is to be expected as unseasoned securities are snapped up and traded by speculators. A rise of almost 700%, however, would seem to suggest gross negligence on the part of the investment bank underwriting the issue. Not that the founders of VA Linux were complaining; in a single day, they had gone from owning a company of modest profits to paper millionaires - siliconaires, to use the lingo of the times.

Unfortunately, the VA Linux IPO came just before the dotcom bubble popped. Over the following year, Augustin and Vera watched their company shed value at an alarming rate. By April, their stock was down below $50. By December, it was trading for less than $10. In 2001, VA Linux flirted with becoming a penny stock. In 2002, the stock spent most of the year trading for less than a dollar. From 2001 onwards, VA Linux, renamed SourceForge Inc., reworked its business into a software development firm - a move that helped the company rebuild. In 2006, SourceForge recorded its first profit since its IPO. In 2008, the company has traded around the $1-3 range - a far cry from the $300 it once commanded.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. Which is better: dollar cost averaging or value averaging?

    Compare the two investment strategies of dollar cost averaging and value averaging, and learn which one usually generates ... Read Answer >>
  2. What lessons did the tech bubble crash give to investors in the Internet sector?

    Learn how investors contributed to the dot-com bust and how Internet services and investing has changed since the market ... Read Answer >>
  3. How has investing in the Internet sector evolved over time?

    Learn how early investors of the Internet sector received a valuable lesson and influenced modern-day markets after the dot-come ... Read Answer >>
  4. Who are Microsoft's (MSFT) main competitors?

    Discover the main competitors of technology giant Microsoft and the stiff competition facing this industry leader. Find out ... Read Answer >>
  5. Why did dotcom companies crash so drastically?

    The craze of the dotcom bubble and the flood of capital that came with it led to many back-of-the-napkin business models ... Read Answer >>
  6. How can average investors get involved in an IPO?

    An initial public offering, or IPO, is the first sale of stock by a new company, usually a private company trying to go public. ... Read Answer >>
Related Articles
  1. Home & Auto

    VA Loans

    The U.S. Department of Veterans Affairs (VA) guarantees VA loans.
  2. Home & Auto

    How to Buy a House With a VA Loan

    Discover the process, requirements and eligibility for securing financing for a home purchase with a Veteran's Administration (VA) mortgage.
  3. Professionals

    Standard V-A: Diligence And Reasonable Basis

    CFA Level 1 - Standard V: Investment Analysis, Recommendations and Action, Standard V-A: Diligence And Reasonable Basis
  4. Investing Basics

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  5. Retirement

    IPO Basics: Introduction

    The term initial public offering (IPO) slipped into everyday speech during the tech bull market of the late 1990s. Back then, it seemed you couldn't go a day without hearing about a dozen new ...
  6. Home & Auto

    How to Get A No-Down-Payment Mortgage

    There are many programs offering no-down-payment home loans to qualified homebuyers.
  7. Stock Analysis

    The Top 5 Large-Cap Software Stocks for 2016

    Discover the top five large-cap software stocks for 2016, with a summary of each company and what will make the stock appreciate in the upcoming year.
  8. Retirement

    IPO Basics: Conclusion

    Let's review the basics of an IPO: An initial public offering (IPO) is the first sale of stock by a company to the public. Broadly speaking, companies are either private or public. Going public ...
  9. Budgeting

    Market Crashes: The Dotcom Crash

    By Andrew BeattieWhen: March 11, 2000 to October 9, 2002 Where: Silicon Valley (for the most part)Percentage Lost From Peak to Bottom: The Nasdaq Composite lost 78% of its value as it fell from ...
  10. Investing Basics

    How An IPO Is Valued

    The process of determining a company’s initial share price includes quantitative and qualitative components.
RELATED TERMS
  1. VA Loan

    A mortgage loan program established by the United States Department ...
  2. Interest Rate Reduction Refinance Loan (IRRRL)

    A mortgage refinancing program offered by the U.S. Department ...
  3. Dotcom Bubble

    An rapid rise in equity markets fueled by investments in internet-based ...
  4. Dotcom

    A company that embraces the internet as the key component in ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  6. Hot Issue

    An issue that sells at a premium over the public offering price ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center