Thirty years before the Internet bubble, during the go-go era of the 1960s, rumors and tips circulated the market pushing some of the more innovative issues higher. They focused on anything related to color TV, for example. Many people worried about the newcomers who were too young to remember the crash of 1962. The boom de- stroyed the discipline necessary for good stock picking; “they’re chas- ing the fast buck, and their attitude is, ‘don’t confuse me with the facts,’” said one broker.1
“I wouldn’t invest in anything unless I thought it could potentially become a bubble . . . unless the idea was sexy enough—and that is not a trivial word,” said Tom Perkins. “Everything we have done at Kleiner Perkins has had to have that excitement, that sexy aspect to it, or we would not have touched it in the first place. We’re interested in unreasonable returns, we’re not talking about making 10 percent on an investment, we’re talking about making 10 times on an investment. Whatever you are going to invest in, it has to have the potential to be great: wow, it’s new, everybody is going to need these things, it’s going to open up whole new industries, blah blah blah blah.Fortunately, sometimes all that is true. So when you find this sexy, new frontier, and it’s a mixture of technology and markets and new ideas, it’s exciting, you can’t put numbers on it.”2
Sex appeal creates a powerful magnetic allure of the new new thing.
The people and businesses involved in the Internet became visionaries, leaders, cool, and rich. Money is a fantastic motivator. Bubbles create fabulous channels for more and more people to satisfy greedy impulses.
Sex appeal goes beyond just money however, it also confers status.
The emotional drive leads people to work harder than they ever imag- ined possible. In addition to the greedy impulse to become rich, much of the excitement was driven by many thinking that he or she were part of the vanguard of the new economy, contributing to a transformation of the world far beyond him or herself. That was all very exciting.
“This was the life of the party,” remembers Paul Johnson, a leading telecommunications analyst for Robertson Stephens. “This was living.
Not to be there—you were not living.”3
“We felt like we were going to change the world,” said Dan Es- tabrook, head of marketing for Covad, “People were living on this vision and this hope. We were a $10 billion company at one point.”4
“It was consensual insanity,” said Mark Walsh. “Everyone was so blotto from the potential of corporate growth that we said goofy shit. So then it happened, then we had the interviews on CNN, CNBC. The ex- citement, looking back, it was a great feeling. You had a lot of young people who felt that they were now part of something that was just so much bigger than them.”5
Ken Barbalato pointed out that greed is a powerful elixir, “I suspect a lot of people wanted to believe it because it was making a lot of people a lot of money.”6
COMPETITIVE CASCADE
Sex appeal and greed are obviously very powerful forces and play driving roles during bubbles. Less obvious than these incentives are the pressures compelling certain kinds of investment decisions. While many investors are enthralled participants in the frenzy, many others find themselves gradually slipping away from familiar rational investments toward more speculative endeavors. The incentives and pressures on investors to comply are intense.
A key feature of bubbles is that they create self-propagating cycles of bad investment decision-making. Bubbles create investment traps that for many seem inescapable. The system builds over time. Winners attract followers. The most innovative and adventurous initiatives break out first and take leading roles experimenting, using, and investing in new technologies. The inflated valuations they receive mean that even mod- erate successes, if not outright failures, appear extremely profitable to many investors. The leaders become bellwethers that all others aspire to become. They seem to demonstrate that huge profits are possible, if not easy, and set in place certain models for how to get there.
The competition to outperform everyone else leads to powerful pres- sures to play the game. The result is a competitive cascade of bad invest- ment decisions rippling through the entire marketplace—steamrolling more disciplined and measured approaches. In the face of protracted pres- sures, some investors become converted—they start believing the hype.
Others simply capitulate,they start joining the crowd because they can’t afford not to play. As a result of these bad investments, amid the frenzy, the seeds of its own destruction are laid. Bad companies are formed, too many good companies emerge for the market size, thus progressively weakening the long-term viability and sustainability of the market.
The most notable during the Internet bubble was Netscape, Yahoo!, and Amazon. Many more followed these leaders. Large companies faced competitive attack from start-ups building on the Internet vision. Finan- cial Services faced Charles Schwab and Wingspan, the travel industry
faced Travelocity, the music industry faced Napster, Barnes & Noble faced Amazon.com, and the list continues.
The system affects each of the key investors from those financing start-ups, to managing stock portfolios, to large companies considering acquisitions or building initiatives.