The dotcom bubble, also known as the Internet bubble, grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups, and the failure of dotcoms to turn a profit. Investors poured money into Internet startups during the 1990s hoping they would one day become profitable. Many investors and venture capitalists abandoned a cautious approach for fear of not being able to cash in on the growing use of the Internet.
With capital markets throwing money at the sector, start-ups were in a race to quickly get big. Companies without any proprietary technology abandoned fiscal responsibility. They spent a fortune on marketing to establish brands that would set them apart from the competition. Some start-ups spent as much as 90% of their budget on advertising.
Record amounts of capital started flowing into the Nasdaq in 1997. By 1999, 39% of all venture capital investments were going to Internet companies. That year, most of the 457 initial public offerings (IPOs) were related to Internet companies, followed by 91 in the first quarter of 2000 alone. The high-water mark was the AOL Time Warner megamerger in January 2000, which became the biggest merger failure in history.
The bubble ultimately burst, leaving many investors facing steep losses and several Internet companies going bust. Companies that famously survived the bubble include Amazon, eBay, and Priceline.