Above the Crowd
Picking Up the Pieces

With the bubble burst, investors and tech executives will have to learn some new habits.

By J. William Gurley
February 5, 2001

I've been wondering if all the things I've seen
Were ever real, were ever really happening ...
—Sheryl Crow, "Every Day Is a Winding Road"

This won't make you feel better about your deflating portfolio, but we should note that the financial markets of the past five years will surely earn a special place in history. They were historic in their ascent, in their stamina and strength, in their widespread impact, and in the speed and severity of their correction.

The markets' engine was clearly jump-started by the rise of the Internet. The sudden arrival of the long-anticipated information superhighway created uncertainty and opportunity in almost every industry. No one was safe, and many markets were thought to be up for grabs, creating an awkward prisoner's dilemma for corporate execs—commit major dollars to this risky new world or risk being left behind.

So who is responsible for the bubble? It seems that everyone is to blame. The fund managers blame the investment bankers, the VCs blame the "markets," the bankers blame the day traders, and the media blame everyone. But no one should cast stones, for everyone's house is made of glass. Valuation bubbles occur when everyone accepts the new reality. We all reached the point at which we truly expected the Nasdaq to steadily deliver average annual returns of 42%.

But, optimism aside, markets are inherently self-correcting. Excess capital naturally led to excess capacity—too many players competing in markets that just weren't big enough. VCs increased their fund sizes, successful entrepreneurs evolved into "angels," and major corporations launched both venture funds and Internet joint ventures—all in record numbers.

To make matters worse, just as the upmarket coincided with a strong overall economy, this downmarket appears to be dancing hand in hand with a deteriorating one. The breadth of industries with strong third-quarter numbers only followed by widespread disappointment in the fourth is alarming and seemingly unprecedented. This contraction is causing corporations to slice their 2001 capital expenditures, directly affecting the tech companies that supply the infrastructure of the new economy.

Down at ground level a transition has begun. Investors and executives alike are unlearning their bad habits. Without unlimited access to capital, the late-'90s "growth at all costs" mentality must fade away. In the late '80s and early '90s, the average startup grew for five to seven years before an IPO. Recently, it's moved closer to 18 to 36 months. Readjusting will take some getting used to. Transforming a company that was built for speed to one built for efficiency is no easy task. There's a magnitude of change involved in simply adjusting corporate cultures to deal with a slower-moving, more demanding market. It is likely that some companies will fail simply as a result of fate and timing. The shift is simply too dramatic.

Ultimately this will be a healthier market for building lasting companies. A return to sound business fundamentals is unmistakably constructive, and the potential opportunities for innovation are still quite numerous. The only real problem is transitioning internal expectations quickly and surviving as the markets self-correct. We embraced the bubble; we can accept this. Patience is, once again, a virtue.