Digital Matters - Issue 37

There's no question that what happened on Wall Street on April 14 was a major event. Some called it a "dislocation," others called it a "correction," but it was bigger and more important than what either word suggests. It was the end of the dotcom era -- and the beginning of a financial shakeout that continues to roil the markets today.

More than $1 trillion in market capitalization was lost in a wild six-and-a-half-hour stretch. Dotcom stocks of every description crashed. Companies good and bad lost half, two-thirds, or three-quarters of their value -- just like that. Great companies like Cisco Systems, JDS Uniphase Corp., Microsoft, and Sun Microsystems got caught in the avalanche of selling and saw their market caps shaved by tens of billions of dollars.

For a while, it appeared as if the dotcom crash might cascade down a mountain of margin debt, crushing both the NASDAQ and the New York Stock Exchange. That didn't happen. But most people acknowledged a scary truth: The dotcom crash was like a shark attack. It brought fear to the marrow of your bones. And it changed the way that everyone looked at the horizon.

The most immediate change could be summed up in what I call the "four strikes of Internet investing" rule. Before April 14, it was possible to get financing for a business-to-consumer Web site. It was possible to get financing for a dotcom company even if that company lacked a seasoned management team. It was possible to get financing for a company that was "all about content." And it was even possible to get financing for a company whose leaders were unclear about when -- or if -- the company would ever be profitable.

On April 15, all of those things ceased to be possible. Journalists and analysts saw this shift in almost comic terms. The day after the crash, dotcom companies sent out reams of advisories and press releases purporting to show that "previous estimates" had "incorrectly" assessed their "timelines" to profitability. Actually, the companies said, we'll be turning a profit much sooner than previously stated. That was nonsense, of course. Nothing had changed, except the balance of power. But, oh, what a difference that change made.

It's hard to believe, but investment bankers, venture capitalists, and merchant bankers have been suffering from low self-esteem over the past few years. They've been feeling unloved and underappreciated. In their mind's eye, they had done yeoman's work and had made all of these arrogant net-heads rich, and despite their hard work, they were almost universally regarded as parasites and greed-heads, beyond help and beneath contempt. "Suckfish" was Netscape founder Jim Clark's famous moniker for people in the investment community, and it stuck to them like chewing gum.

All of that changed. On April 15, no one called them "suckfish" anymore. And that, more than anything else, is what the dotcom crash meant. Simply stated, the financial community was back on top. The bosses who had become errand boys became bosses again. And they immediately laid down the law.

If some dotcom executive had a "vision" that he or she could scratch out on the back of a cocktail napkin -- a vision that would "change the face" of some business sector but that had no realistic business plan -- well, that was nice, but it was no longer good enough. Bring the investment boys (they were virtually all male) a business-to-consumer Internet play, and they wouldn't even offer you a cup of coffee. One strike, and you were on the margin. "No management team with proven experience" now meant "No meeting at all." Two strikes, and you were out. With three strikes ("all about content") or four strikes (no sign of profitability), you didn't even get your phone calls returned.

This change in the business pecking order was so swift and so sharp that most of the mainstream media missed it. But you could see it all over the pages of business magazines and newspapers. There were stories about incubators that would no longer consider startups, about IPOs cancelled because of "uncertain" market conditions, about dotcom outfits that had once positioned themselves as titans of disintermediation but were now describing themselves as a "good fit" inside a larger suite of services. Indeed, the most immediate impact was a resurgence of activity in the mergers-and-acquisitions departments of major financial-services firms. Dotcom companies that had only recently promised to reinvent entire business categories were suddenly being appraised as prime takeover targets -- at well below book value.

With this change came a return to value investing. Truth be told, Wall Street was never very comfortable with momentum investing, or with so-called concept stocks. Analysts understood that the digital revolution would create enormous value and change virtually everything in its path, and they believed as strongly as any Webbie that the Internet was an unstoppable force. But they still liked to see the money -- the black numbers in the earnings report. Most of all, they liked to see customers who paid every month. And, on April 15, they loved those customers as never before.