The Wall Street Journal reports on some researchers who have found the dot com failure rate was not out of line with other industries in their formative years.
A recent paper suggests that rather than having too many entrants, the period of the Web bubble may have had too few; at least, too few of the right kind. And while most people recall the colossal flops of the period (Webvan, pets.com, etoys and the rest) the survival rates of the era's companies turns out to be on a par, if not slightly higher, than those in several other major industries in their formative years.
The paper is being published in a coming issue of the Journal of Financial Economics. As noteworthy as the findings are, even more interesting is the process that led to them. The work is an outgrowth of the Business Plan Archive at the University of Maryland. Its goal is to become a kind of Smithsonian Institution of the Internet bubble, saving for posterity every business plan, PowerPoint presentation and venture-capital term sheet -- the more frothy and half-baked, the better -- that it can get its hands on.
Perhaps then the venture capitalists have not increased the availability of capital to the extent that we are led to believe. If they really had increased the availability of capital then as a result I'd expect a higher rate of new business failures. Though another interpretation is that the VCs increased the availability of management talent so that the amount of capital invested could increase without higher rates of business failures.
Quite a few of the start-ups still exist but are smaller firms.
The study suggests, though, that the dimensions of that crash might be misunderstood. Nearly half of the companies they studied were still in business in 2004. Prof. Kirsch says that most people believe just a few percent made it through.
The study found that the attrition rate for dot-com companies was roughly 20% a year, which is no different from what occurred during many other industries, such as automobiles, during their early boom periods.
So the dot com boom was just a typical period of irrational exuberance. Nothing out of the ordinary.
|Share |||By Randall Parker at 2006 December 07 05:58 PM Economics Industry|