The tech bubble crash taught investors that despite their efforts to provide an influx of cash into a rapidly growing market, there are no guarantees. While this seems like an obvious lesson for any investor, in the early days of the internet it seemed like the dot-com industry was a truly burgeoning market that would produce big results. During this boom time, there was a lot of hope that businesses would produce impressive results despite a total lack of precedence. Investors had high hopes that they would be the first to capitalize on a developing area for growth and profit.
Pioneers of internet services and technology companies were able to create initial public offerings (IPOs) based almost entirely on ideas, without proving that there was any real market for their services or showing a track record of success. In some cases, new businesses were entering the stock market with literally nothing more than one sheet of paper representing their entire business. Investors were willing to overlook these factors for the chance to become a part of a newly emerging market.
Traditionally, companies and investors follow a very specific business valuation formula in order to determine how much money a young company is worth, what kind of profits and growth it can expect within the coming years and what return on investment (ROI) can be achieved. While valuing a business is ultimately a subjective decision, investors tend to want to see some positive indications before handing over money. However, when it came to the tech bubble, not only did venture capitalists put a significant amount of money upfront in order to facilitate rapid growth, stock market investors also quickly drove up the prices of internet and technology companies as soon as they made their IPOs.
Dot-com start-up companies quickly saw huge stock price increases despite the fact that they were still developing sites and products and not bringing in any revenue. Eventually, the dot-com bubble burst when investors realized that the companies were not going to turn a profit. Young entrepreneurs went from being millionaires to having businesses that went under because they could not produce enough revenue to stay afloat. However, some of the early dot-com businesses, such as Amazon and eBay, did survive the bursting of the market and went on to become huge successes. Investors who stuck with these companies experienced substantial profits.
Essentially, investors who lost money during the dot-com bubble were engaging in risky investments, but it was a completely new market with unlimited potential. After the bubble burst, many businesses changed the way they paid stock dividend yields, so that businesses and investors are better protected. In addition, as the internet became a more pervasive part of life, there was less of a rush for investors to capitalize on a new market. For these reasons, it is highly unlikely that markets will experience a similar dot-com bubble and collapse in the future.