Research Sheds New Light on Dot-com Bust

College Park, MD November 8, 2006 New research on the dot-com era from the University of Marylands Robert H. Smith School of Business reveals despite significant losses suffered by investors, nearly 50 percent of 1990s dot-com startups survived at least five years. This success rate is better than or on par with other emerging industries, contradicting the traditional view that the majority of Internet companies landed belly up.

The high survival rate we observed is both remarkable in its own right and interesting for what it implies about the rate of firm formation during this period, said David A. Kirsch, Smith School assistant professor of management and organization and co-author of the study. Despite public perception that there were too many dot-coms and too many failures, seen in this broader light, there may have been too few dot-com companies.

The findings are to be published in an article, Was there too little entry during the Dot Com Era? in a forthcoming issue of the Journal of Financial Economics, by Kirsch, fellow Smith management and organization assistant professor Brent Goldfarb and co-researcher David A. Miller of the University of California, San Diego. The team conducted an analysis of the boom of Web-based startups in the late 1990s and the Internet industrys financial collapse between 2000 and 2002 using documents from theBusiness Plan Archive, a historical archive of early Internet ventures supported by the Library of Congress and the Alfred P. Sloan Foundation.

The research also shows that survival is not related to venture capital and other private-equity financing, which was often secured in pursuit of a Get Big Fast business strategy that, by and large, did not work.

What made the dot-com era appear such a failure was not a proliferation of bad offerings but the belief in an unsustainable business model, said Kirsch. The Get Big Fast strategy had businesses and venture capitalists sinking large sums of money into dot-coms that had yet to turn a profit. They believed that these investments would preempt competitors.

Back then, no one knew how to make money on the Internet, so everyone did what the other guy was doing: grab as much Internet real-estate as quickly as possible, Goldfarb said. Eventually, investors started focusing on bottom-line growth rather than top-line growth and thats when the market crashed. Nevertheless, a lot of ideas on which Web startups were founded were sound. Thats why so many dot-coms are still around.

Highlighted research findings:

• According to analysis of business news sources, belief in the Get Big Fast strategy was widespread until early 2000
• Boom and bust were strongest among dot-com and IT firms, where Get Big Fast ruled.
• Five-year survival rates of dot-com firms sampled were 48 percent, comparatively better or on par with four other emerging industries: automobiles, tires, televisions and penicillin.
• Survival of dot-com firms is unrelated to the receipt or amount of private equity funding.

About the Business Plan Archive
Since 2002, Kirsch has been collecting business plans and documents from the early history of the dot-com era and compiling them in a digital database as part of a larger project called the Digital Archive of the Birth of the Dot Com Era. The archive preserves a record of business and cultural history based on business plans, marketing plans, technical plans, venture presentations, and other business documents as well as personal narratives from more than 2,000 failed and successful Internet startups. The Business Plan Archive is supported by the Library of Congress through the National Digital Information Infrastructure and Preservation Program, the Alfred P. Sloan Foundation and contributions from the projects other partners.

About the Library of Congress
With more than 128 million items, the Library of Congress is the worlds largest repository of knowledge and information. In 1994 the library formally launched its National Digital Library Program. In 2000, the U.S. Congress mandated that the library lead a National Digital Information Infrastructure and Preservation Program to collect and preserve at-risk digital materials of cultural and historical importance to the nation. NDIIPP is working with partners from both the public and private sectors to form a national network of institutions and organizations that collect and preserve digital content.

About the Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research for the digital economy. One of 13 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, Executive MBA, Executive MS, PhD, and non-degree executive education programs, as well as outreach services to the corporate community. The school offers its programs in learning locations on four continents including North America, Europe, Africa and Asia.