Why Did Pets.com Crash So Drastically?

The craze that led to the dot-com bubble and the flood of capital that came with it resulted in many "back-of-the-napkin" business models becoming publicly traded companies almost overnight. Dot-com companies like Amazon.com Inc. (AMZN) and eBay Inc. (EBAY) adapted on the fly and survived the bust, but many others went under within months of their initial public offerings (IPOs). One of the quickest journeys from IPO to insolvency was Pets.com.

Key Takeaways

  • Pets.com attracted big-name investors, such as Amazon, despite the red flags in its business model.
  • The company raised $82.5 million in a February 2000 IPO but filed for bankruptcy nine months later.
  • Pets.com appeared to have a flawed business model from the start, which included competition with pet stores and having difficulty shipping large ideas, such as dog food bags.

The Rise

Pets.com was based on an Amazon-style internet purchasing system where users ordered pet supplies from the website and the company arranged the delivery. During the dot-com bubble, Pets.com was one of five online pet stores that popped up during this time.

Pets.com stood out thanks to its stock puppet mascot and catchy slogan. The Pets.com's sock puppet was so popular that it was a balloon in the 1999 Macy's Thanksgiving Day Parade.

Pets.com completed an IPO despite the issues or red flags with its business model, including how to economically ship large dog food bags. Still, it garnered investor's attention, including Amazon, who owned about 50% of the company.

The company raised $82.5 million in its February 2000 IPO. The shares debuted at $11. However, the company failed to earn revenue and by the end of October, Amazon's share had dropped to 30%. In November, the company declared bankruptcy and closed its doors, with its stock trading at $0.22 a share the day of its bankruptcy announcement.

Business Model Filled With Holes

The problem with the company's business plan was that pet supplies of all types—food, toys, clothing, and so on—could be found easily at the nearest grocery or pet store. Given the choice between ordering online and waiting for delivery or walking into the nearest store to buy the product and take it home immediately, the majority of people preferred the latter. Granted, Amazon has made a gigantic business of doing just that today. Pets.com was perhaps a bit too early on this idea.

Nine months of straight losses convinced the company to fold and sell its assets before more losses were incurred. To Pets.com's credit, it used the funds raised by the fire sale to pay back investors what they could. Although Pets.com tried to do the right thing in the end, questions remained about how they ended up conducting an IPO with a questionable business plan.

Behind the fall of Pets.com, the darker story of underwriting banks and their analysts loomed during the internet boom. Even as Pets.com posted losses and the stock price dropped, the issuing firm's analyst, Merrill Lynch's Henry Blodget, did not change his buy rating until the summer.

Keeping Pets.com in business for as long as possible was in Merrill Lynch's best interest, as the bank was collecting millions in investment banking fees, regardless of the company's condition. This is an example of where the investment bank and equity sides of a bank can play favorites and protect each other. Granted, the idea of a Chinese Wall, which is meant to limit this type of collusion, has grown since the dot-com bubble.

Article Sources
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  2. Amazon. "Amazon.com Announces Investment in Pets.com."

  3. New York Times. "Pets.com Gets Lukewarm Reception on Wall Street."

  4. New York Times. "Technology; Pets.com, Sock Puppet's Home, Will Close."

  5. New York Times. "Technology Briefing: E-Commerce; Pets.com Holders Approve Liquidation."

  6. New York Times. "'Buy!' Was Cry, as Stock Bubble Burst."

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