What We Can Learn

A Statistical Summary of the Dot Com Shakeout

If we can't learn from our mistakes, it has been famously said, we are doomed to repeat them. One of the main objectives of the Business Plan Archive is to help entrepreneurs and researchers learn from both successful and failed strategies of the past. The dot com boom and bust have left us with a rich source of data regarding the assumptions and strategies of these companies past. The following article from Webmergers provides a statistical overview of the shakeout. In order to help stimulate discussion, we offer a related commentary that provides some initial observations about lessons we can learn from this historic business cycle.

Summary - The Internet Shakout

  • Since January, 2000 at least 835 Internet companies have shut down or declared bankruptcy.
  • The dot com shakeout peaked around the middle of last year and has been on a slow decline ever since
  • The purge started first within the cash-hungry business-to-consumer (B2C) sector and later migrated to the software and services companies in the business-to-business (B2B) sector.
  • As the shakeout tapers off, we are beginning to see signs that the marketplace is beginning to rebound from the intense aversion to the Internet that developed as a result of the painful Internet bust.

The Internet Shakeout

The rapid emergence of the Internet fueled a historic investment boom that led to an equally historic shakeout as inflated investor expectations came up against marketplace realities. The Internet shakeout began in March of 2001 after Internet stock valuations began to decline sharply. Dot com failures followed on the heels of the stock market downturn as venture investors, watching their exit opportunities dissolve, abruptly shut their doors on cash-hungry startups.

Since January of 2000, at least 835 Internet have shut down or declared bankruptcy. The number of Internet failures peaked last year and so far in 2002 has been gradually tapering off. April, 2002 marked the fifth consecutive month in which we saw the number of shutdowns decline. So far this year, 66 Internet companies have failed, less than a third of the 220 that closed in the first four months of 2001.

Jan-April Period - 2000 to 2002

  2000 2001 2002
Q1 Shutdowns 6 220 66

Source: Webmergers.com

Consumer Audiences Dominate

As the below table indicates, B2C companies dominate as a percentage of total shutdowns, even though the purge has recently moved into B2B companies, defined as those that sell software and services to business audiences.

Shutdowns by Major Audience
Between Jan., 2000 and April, 2002

 Audience Number Percent
Business 303 36%
Consumer 423 51%
General 109 13%

Source: Webmergers.com

Content and E-commerce Properties Account for the Bulk of Shutdowns

More than two thirds of all shutdowns in the past two years involved content or e-commerce properties, including entertainment sites, online news providers, e-tailers, B2B marketplaces and other commerce properties.

Internet Shutdowns by Month
January, 2000 through April, 2002

Month Shutdowns
Apr 2002 12
Mar 2002 17
Feb 2002 18
Jan 2002 19
Dec 2001 23
Nov 2001 21
Oct 2001 36
Sept 2001 33
Aug 2001 46
July 2001 40
June 2001 61
May 2001 64
Apr 2001 56
Mar 2001 49
Feb 2001 59
Jan 2001 56
Dec 2000 49
Nov 2000 50
Oct 2000 36
Sept 2000 22
Aug 2000 10
July 2000 20
June 2000 17
May 2000 13
Apr 2000 1
Mar 2000 2
Feb 2000 2
Jan 2000 1
Unknown 2
Total 835

Source: Webmergers.com

Does the Decrease in Shutdowns Mean there Are No Dot Coms Left?

It may appear on the surface that the decline in dot com shutdowns is simply a result of the fact that are no dot coms left to shut down. That is not the case, however. We conservatively estimate, based on several data sources, that between 7,000 and 10,000 Internet companies have received some sort of "formal" funding, which suggests that at most, ten percent of significant Internet companies have shut down or declared bankruptcy. It may be safer to say that the Darwinian process has left many fewer WEAK Internet companies. But to say that the decline in shutdowns is because there are no dot coms left is a bit like saying a decline in rabies rates is due to the fact that all the dogs are dead.

Tim Miller, Webmergers, Inc.

Copyright, 2002 Webmergers, Inc.