Part III: Common Sense Gives Way to Irrational Exuberance

see also:

Part I: Changing the World

Part II: Dot.com Era Gives Work Culture a Makeover

The term “irrational exuberance”, made famous by Alan Greenspan in a 1996 speech given to the American Enterprise Institute, is often used to describe the dot.com era of the late 1990s before the tech bubble popped in 2000.  As a tech entrepreneur inside the bubble, I couldn’t agree more with the term.  Those were good times, but indeed irrational. 

The exuberance is now a familiar story.  Venture capital money was flowing into companies at record pace.  Stock markets were going crazy.  IPO watch lists became a regular reading even for the most novice investors.  It seemed no one was immune from the optimism.  It affected everybody the same:  the young, and the old; the inexperienced and the experienced; the wealthy and the not so wealthy.   

Being inside the bubble and developing an Internet business in Northern Virginia during that era was unreal.  At least a third to a half of my time in those early days was spent at networking events, Internet conferences, venture capital fairs and partnership meetings.   It is no wonder we all worked 18 hours a day. It was as if we were all playing a game, except the stakes were real and big.

Although I played the game, I was always a bit uncomfortable the rules of engagement.   I much preferred to be working on the product in my small office with my partner, but felt that I needed to be out there because that is what everyone else was doing.

The constant need to raise money meant there was a competition to be in the local and national tech headlines.  The demand for PR firms skyrocketed.  Since there was little revenue and certainly no profits in sight for these startups, the focus was on PR.  The more mentions in the news, the more visibility with potential funders.  It was about building excitement to attract funding, not necessarily executing a solid business plan.  I spent significant money on PR consultants and firms in those days just like everyone else.  If only I could have that money back now.

One of the prevailing business strategies of the era was to give away your product or service.  Get market share fast.  It didn’t matter if you were generating revenue; the key was customer acquisition.  First to market wins, profits will come later was the attitude pushed by the venture capitalists, and thus adopted by the entrepreneurs.  Again, like everybody else in the game, I would acquire customers without regard to profitability.  Just get another client on board and issue the press release.   The idea of going to another tech event and seeing the same people without a new round of big news was something I dreaded.

Round after round of venture money would prop up companies, giving them a false sense of success.   I recall several conversations I had at Internet conferences and venture capital fairs where the entrepreneurs or funders would brag about their burn rates as if it was a measure of success.  Others would brag about their employee count or latest round of funding.  Seldom did you ever hear someone talking about real revenue, and almost never did the conversation venture into the world of profit.

The book Burn Rate by Michael Wolff was one of the tech reads at the time.  I recall reading it and recognizing that I attended some of the very same conferences Wolff was writing about.   It was at this point that I began to realize the irrational behavior that was taking place.

As the son of a traditional banker, I was raised to be fiscally conservative.  As an economics major, I learned every market has cycles and is supported by rational expectations.  The valuations that companies were fetching and using to go public were supported by exuberance, and not solid business and financial fundamentals.  The day of reckoning would come.

The bubble popped in March of 2000 and the era began to deflate.  Funding dried up for many companies.  Internet firms moved to slash their burn rates as quickly as possible.  Visions of employees becoming millionaires from their stock options began to dissolve.

Fortunately, for me and those of us at ApplyYourself, this was not the end, but rather our turning point.  It was our time to refocus and get down to real business, the business we should have been doing from the beginning.