An inherent difficulty—though it certainly wasn't always perceived as such—for dot-coms was that most relied overwhelmingly, if not exclusively, on investor dollars to stay afloat. That is, they often had little viable means of self-sustaining income and were thus dependent on the whims of the stock market and the attractiveness of their ideas in the venture capital markets. According to some analysts, this exacerbated the shakeout when it finally came, due to herd-like investment behavior.
On the financing side of the equation, in addition to the stock markets, dot-coms had been overwhelmingly propped up with copious amounts of venture capital. The mid-and late 1990s saw venture capital spending skyrocket largely so as to take advantage of the new crop of promising technology and Internet-based firms. With the economy strong and plenty of cash to go around, venture capitalists were quick to throw money at many different dot-coms at a time, the logic holding that one big success would easily pay for all the failures. As a result, scores of dot-coms hit the market with little preparation but plenty of seed money. Since simply announcing oneself as a new dot-com was often enough to secure significant financial backing, the Internet was bursting at the seams with e-commerce firms, many of which didn't even have a viable product, much less a plan for long-term profitability.
Since capital flowed so freely to e-commerce players in the late 1990s, they were able to engage in extremely unorthodox pricing practices, undercutting competitors by wide margins in order to draw in customers but without actually making money on their sales, and frequently even selling their products below cost. As long as investors remained confident in the possibilities of e-commerce, companies could get away with this. Investors who continued to put money behind companies engaged in this strategy were convinced that, given the uniqueness of e-commerce, the financial shortcomings of such plans would pay off in the long run by the hegemony of the e-commerce model. When that failed to materialize, investors rushed out of the market.
In addition, the strategy followed by many dotcoms called for rapid growth at all costs in order to stake a claim on the market; they felt they needed to grab the market's attention first, and then institute a viable market plan. As a result, companies spent vast sums of money on television advertising and other means of getting their names in the public spotlight. The shakeout stopped this trend in its tracks, as companies had to overhaul their strategies completely and show investors they actually knew how to make money. The bulk of dot-coms, however, were unable to accomplish this to investors' satisfaction, and soon perished.
For workers, dot-coms offered a work environment markedly different from that in most traditional corporate offices. Casual, flexible, and on the cutting edge of business practices at the time, dot-coms lured many skilled information-technology workers looking to circumvent the standard corporate profile. And, of course, workers were drawn to the stock options, one of the main vehicles by which dot-coms attracted workers. In the midst of the booming stock markets, largely fueled by e-commerce companies, stock options often displaced salary and benefits packages as the chief priorities for prospective workers. When the stock market ultimately proved still beholden to the traditional business cycle in the early 2000s, stock options were no longer seen as the optimal path to employee wealth, and IT workers again placed their priorities on more tangible and predictable means of compensation.
Without their own inventories, warehouses, or distribution centers, dot-coms ran into a great deal of trouble with regard to fulfillment and delivery, about which they received no shortage of complaints. One major firm that did manage to survive the shakeout was Amazon.com, which spent a great deal on its own warehouses in the late 1990s and earned high marks for customer service, generating tremendous repeat business. As a result, the company demonstrated it could make money and remained attractive to investors. A 2000 study by Jupiter Communications found that only 41 percent of individuals who made a purchase online were satisfied with the service they received from dot-coms.
Meanwhile, as more traditional bricks-and-mortar companies began catching up to the dot-coms in establishing their own online storefronts and other Internet operations, their more stable capital flows and economies of scale forced the comparative attractiveness of e-commerce start-ups to diminish rapidly. The shakeout was postponed slightly simply because traditional retailers were reluctant to delve too deeply into e-commerce without a clear strategy for integrating it into their existing operations. In other words, bricks-and-mortar firms were wary of cannibalizing their own operations. Once those companies began to wake up from the shock inflicted by their dot-com rivals and develop their own brick-and-click strategies, it was only a matter of time before their greater leverage and long-term growth strategies starved out their online competition. When the brick-and-click sites became operational, there was a strong tendency for consumers to maintain their loyalty to conventional brands online.
Other warning signs were certainly in place. In 1999 Jupiter Communications reported that only 6 percent of all e-commerce sales represented new business, meaning that most of the online shopping was performed at the expense of catalogs and retail stores. In other words, e-commerce didn't represent so much a boon for new business as a medium for increased channel conflict. As the tension between this factor and the unsound e-commerce business plans increased, the cracks in the e-commerce facade began to show. By the end of that year, e-commerce players were pouring money into fancy advertisement schemes designed to push themselves ahead of the competition over the crucial holiday season, sensing that their fields weren't strong enough to support four or more companies striving for the same few dollars.
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