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. What do people mean when they say there is a "bubble" going on in the market, such ...

    A financial "bubble" refers to a situation where there is a relatively high level of trading activity on a particular asset ... Read Answer >>
Related Articles
  1. Tech

    Microsoft Finally Joins Linux Foundation (MSFT)

    Roughly 15 years after former CEO Steve Ballmer referred to Linux as a "cancer," Microsoft announced on Wednesday that it had joined the Linux Foundation.
  2. Personal Finance

    The Unique Advantages Of VA Mortgages

    Find out how being a veteran can save you money on your mortgage.
  3. Personal Finance

    How to Refinance a VA Loan: A Step-by-Step Guide

    How do you refinance a VA loan? In some cases it’s much easier than with a conventional loan. We explain.
  4. Investing

    Red Hat Stock Rises Ahead of Q1 Earnings (RHT)

    Wall Street expects the linux software specialist to deliver a year-over-year increases in both revenue and profits.
  5. Investing

    The Easiest Investments Ever Made

    It's not always easy to pick the right investment - here are just a few that generated huge returns for investors with the right timing and luck.
  6. Investing

    Is Red Hat a Good Fit For Your Portfolio in 2016? (RHT)

    At a time when its operating expenses (up 15% in FQ3) are rising at a rate slightly higher than revenue (up 14.8% in FQ3), not to mention concerns about long-term earnings growth, I wouldn't ...
  7. Investing

    Is ReWalk's Valuation Justified? (RWLK)

    Last December, ReWalk Robotics Ltd announced that the U.S. Department of Veterans Affairs had issued a national policy for the evaluation, training and procurement of ReWalk Personal exoskeleton ...
  8. Tech

    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.
  9. Investing

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  10. Personal Finance

    How to Get a No Down Payment Mortgage

    There are only a few ways to get out of making a down payment, but the requirements are strict.
RELATED TERMS
  1. VA Loan

    A mortgage loan program established by the United States Department ...
  2. Dotcom Bubble

    A rapid rise in equity markets fueled by investments in internet-based ...
  3. Tech Bubble

    A pronounced and unsustainable market rise attributed to increased ...
  4. Veterans Administration

    Now a U.S. cabinet department that provides patient care, veterans' ...
  5. Siliconaires

    Slang referring to young dotcom entrepreneurs in their 20s and ...
  6. No-Appraisal Loan

    A mortgage that does not require an appraisal of the property’s ...
Hot Definitions
  1. Profitability Index

    An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use ...
  2. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  3. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  6. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
Trading Center