Internet Boom Essay

Internet Boom Essay-12
Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money.So they invested in new startups that promised to be the next Yahoo.And as soon as these startups got the money, what did they do with it?

Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money.So they invested in new startups that promised to be the next Yahoo.And as soon as these startups got the money, what did they do with it?

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September 2004(This essay is derived from an invited talk at ICFP 2004.)I had a front row seat for the Internet Bubble, because I worked at Yahoo during 19. He tried to sound indignant, but he didn't quite manage it. The finance guys seemed scrupulous about reporting earnings.

One day, when the stock was trading around $200, I sat down and calculated what I thought the price should be. I went to the next cubicle and told my friend Trevor. He knew as well as I did that our valuation was crazy. It was not just our price to earnings ratio that was bogus. What made our earnings bogus was that Yahoo was, in effect, the center of a Ponzi scheme.

Recognizing an important trend turns out to be easier than figuring out how to profit from it.

The mistake investors always seem to make is to take the trend too literally. In fact most of the money to be made from big trends is made indirectly.

But just as the market will learn how to value startups, startups will learn how to minimize the damage of going public.2. That was one reason even smart people were fooled by the Bubble. Enough of an effect to triple the value of Nasdaq companies in two years? What drove them was the invention of organized public finance (the South Sea Company, despite its name, was really a competitor of the Bank of England).

And that did turn out to be a big deal, in the long run.Even at the morning-after valuations of March and April 2001, the people at Yahoo had managed to create a company worth about billion in just six years.The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth.You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in.(Isaac Newton and Jonathan Swift both lost money in the South Sea Bubble of 1720.)Now the pendulum has swung the other way.The stock of a company that doesn't yet have earnings is worth something.It may take a while for the market to learn how to value such companies, just as it had to learn to value common stocks in the early 20th century.The specific argument, or one of them, is the Internet gives us more choices.In the "old" economy, the high cost of presenting information to people meant they had only a narrow range of options to choose from.But there is nothing intrinsically wrong with that idea.Taking a company public at an early stage is simply retail VC: instead of going to venture capital firms for the last round of funding, you go to the public markets.

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