The Dotcom Bust? Not As Bad As You Think

With Google's recent $1.65 billion purchase of YouTube and all the other hype surrounding Web 2.0, many are concerned that the online world may be on track for another bust. However, a new study suggests that the late-1990s dotcombubble did not burst quite as dramatically as many perceived.

Close to half of early Internet ventures stayed in business for at least five years, according to the study by the University of Maryland and the University of California, San Diego.

Click here to visit FOXBusiness.com's Small Business Center.

Using documents from the Business Plan Archive, a historical archive of early Internet ventures, researchers studied more than 700 companies that applied for venture-capital funding in the late 1990s. The researchers were surprised to find a five-year survival rate of 48 percent — a percentage of success comparable to those in other industries, such as the auto industry, during their fledgling phases.

In addition, the researchers found that there was no correlation between success of the business and amount of private-equity funding the business received.

"To say we were surprised at the results is an understatement," said David Kirsch, professor at the Robert H. Smith School of Business at the University of Maryland and a co-author of the study. "We started the business plan archive to study failure and expected our results to reflect a high rate of collapse in the businesses we studied. We had undergraduate research assistants coding some of the material, and when, after the first pass through the material, they came to us and said the survival rate was 45 percent, we made them do it all over again. It set us back six or eight months to have them redo everything."

Kirsch explained that as he and his colleagues explored why their expectations had been so wrong, they came to reject their initial perception that the bust was the result of the creation of too many Web-based firms during the boom. Rather, the analysis suggests that the bust was the result of some subset of start-up businesses losing money because they followed a "Get Big Fast " business strategy.

"Many investors shared a belief that for a Web-based business there was a large first mover advantage," Kirsch said. "The perception was that a business would have a sustained advantage over competitors if they could get there first, be large, grab a lot of online real estate."

For many businesses, the "Get Big Fast" strategy did not help them succeed. For example, investors poured $1 billion into Webvan, an online grocery delivery service. The business invested in a large infrastructure, hoping to build a national economy of scale. However, without a national demand at the time, Webvan failed and investors lost money.

Kirsch and his colleagues suggest that it was big-dollar investment in a few failed ventures that ultimately led to the Internet bust, rather than an abundance of 'bad' offerings.

"Back then, no one knew how to make money on the Internet," said Brent Goldfarb of University of Maryland, one of the studies co-authors. "Nevertheless, a lot of ideas on which Web startups were founded were sound. That's why so many dotcoms are still around."

Click here to visit FOXBusiness.com's Small Business Center.