DotCom bubble burst is a term that refers to the period from the end of the 1990s to the beginning of the 2000s, when many Internet companies (so-called dot-com companies) grew rapidly in value, often without sustainable business models. Many investors invested in these companies expecting that the Internet would revolutionize the economy, but these estimates turned out to be too optimistic.
The thing is that many companies were actually inflating the value of what they were doing, smearing the eyes of investors, when in fact they did not have a business plan or were doing anything useful. In other words, they were useless flapdoodles, Potemkin villages.
However, let's face it – these investors weren't that naive. This is the type of investors and investments that we call venture capitalism, – high riskc – high gain something like gambling, knowing full well that you can lose. Venture capitalism is, therefore, a form of private investment in which investors, known as venture capitalists (VCs), invest capital in the early stages of the development of companies that have a high potential for growth.
These companies are usually start-ups in the technology sector, biotechnology, green technologies, or other innovative industries.
Also, venture investors offer start-ups not only money, but also advice, mentoring, and their network of contacts. That is why they sometimes enter the role of the so-called angel investors, investor-angel patrons, but it is not free – in return they demand equality in decision-making.
DotCom bubble burst:
- Rise (1995-2000) : With the advent of the Internet, numerous startups were founded with the aim of taking advantage of the new opportunities. Venture capitalists (investors who invest in risky projects with the potential for high returns) have invested huge sums of money in these companies, often without concrete evidence of their profitability. In the late nineties, especially in 1998-1999, low interest rates made it possible to increase the number of newly founded companies.
- Bubble burst (2000-2002) : As investors became aware that many of these companies were not generating revenue or showing signs of sustainability, stock prices began to fall. Many companies failed, and the market experienced a serious decline and shock. Even companies that survived the bursting of this overinflated bubble, such as Amazon and Cisco, experienced heavy losses. Cisco lost 80% of its stock value.
Who survived the crash?
Many companies were forced to restructure their operations, reduce the number of employees, or consolidate with other companies in order to survive. This period also led to the creation of stronger and more stable companies that survived the crisis. But the bursting of the bubble gave birth to today's force of technology companies – those that brighten and dress Silicon Valley.
These are Amazon (okay, not Silicon, but Seattle), eBay, Google, Apple, Microsoft (Seattle again), Cisco, and today's faltering Yahoo!. These companies managed to survive the dotcom bubble crash because of their strong business models, ability to adapt to market changes, and sometimes a little luck. The famous Ericsson made it through this massive event.
There is another thing that needs to be understood from the perspective of the history of technology: namely, the dotcom crash caused the collapse of WEB-1.0 and led to massive layoffs from the ICT sector, so they had to do something, pull a new card out of their sleeve. And these were social networks, above all the now archeological artifact called MySpace. The MySpace style of social networking will be adopted by the team that founded Facebook and others. From there everything is history, probably the history of the downfall of the human race, cognitive functions and intelligence, but this is not a story about that.
Combined with the bankruptcy of Enron in 2001 and the attacks on September 11, the DotCom bubble crash literally changed the course of history, not only of technology, but also of humanity, something like the Sarajevo Assassination in 1914.
The connection between the Dotcom bubble burst and venture capitalism:
Venture capitalism plays a key role in the development of startup companies, including those from the dot-com era. Venture capitalists invested in these companies with the hope that at least some of them would become hugely successful. However, due to over-optimism and a lack of careful risk assessments, many of these investments ended up failing when the bubble burst.
The DotCom bubble burst had a major impact on venture capitalism because it forced investors to become more cautious and to analyze potential investments more carefully, looking for solid business models and realistic growth estimates. But partially. Venture capitalists are reluctantly investing again in the children and adopted children of companies that survived the DotCom bubble burst, as if they had forgotten the lessons of the past. Or it is simply not in their interest, but they want to take a risk, so something will work.
Today, investments are made in companies such as Open AI, which was adopted by Microsoft and a number of other AI and GAI (generative artificial intelligence) companies, especially Nvidia, which is important for AI technology, because of its GPUs (graphics processing units) that have architectures particularly suitable for parallel computing and processing large amounts of data. We should not forget companies from the social network sector such as Meta, X and TikTok, which also develop AI, and are global dictators and kingmakers.
AI companies: a new bubble burst in sight?
Investments in the AI sector could potentially lead to the creation of a new bubble effect, with the possibility of bursting similar to what happened during the dotcom bubble burst. But there are some differences here, that is, if there is a drop in shares due to the failure to fulfill promises and inflated company values, there is less chance that the companies will fail.
Those who manage AI companies promise deliverables that they can't deliver on the given timelines, and often say that their models do something they don't actually do. We have already seen this with Open AI.
Then, completely unnecessary AI applications are presented as a great advance in technology, which are a waste of huge resources, while real progress – especially AI in the health, pharmacy, astronomy sector, needs much more time and resources. Then there is the problem of limited resources for the development of generative artificial intelligence. Models need “reading to learn”, and human, not already generated by AI, because otherwise the model collapses.
Then, AI servers could use up to a quarter of global energy by 2030, which is unsustainable. In addition, they use a huge amount of water to cool the server. Just one chat on ChatGPT needs a half-liter bottle of water.
One analysis last year estimated that it cost OpenAI $700,000 a day to run ChatGPT. And the more ChatGPT and other LLMs are used, the more these costs increase.
Many AI companies still do not have clear or sustainable business models. If it turns out that these companies cannot make a profit or justify the high expectations of investors, this could lead to a decline in their values. Considering that many companies are entering the AI sector, competition is high, which can lead to market fragmentation.
If too many companies fail to achieve the expected growth, this could lead to a decline in share prices across the sector. If there is a disruption in the sector, there will also be a global recession (which is quite a realistic scenario even without the burst of this sector).
AI technologies face a number of ethical, legal and regulatory challenges. If regulators become stricter or if scandals arise related to the use of AI, this could significantly shake investor confidence. It is clear that now the market is somewhat more mature and that such bursts are predicted and tried to be amortized. But if it hadn't been for the DotCom bubble burst, this new wave wouldn't have happened either. The DotCom boom of the 1990s actually developed the venture capitalism model of investment, and now we are just looking for a new golden cock for such games. From AI to green energy.
AI boom and AI startup fever remind many experts of the dotcom situation, especially if we know about the so-called overvaluation of AI companies, which is more than obvious. But unlike the dotcom bubble, the companies that create the bubble are not fake, they are real and have real assets, in fact they have so many assets that they could withstand and survive significant losses. They just play because they can. This is also the case with companies that run social networks: thanks to a psychopathic business model that thrives on content that encourages low emotions, these companies have such revenue that they can bear significant losses.
