Every quarter, the Cowboy Ventures team gets together to compare notes on industry trends in areas like AI, security, dev tools, fintech and vertical SaaS.

Given how many in tech today have never lived through a downturn, we recently revisited the dot com era to see how the past might inform the future.

The walk down memory lane illuminated many parallels, uncanny visuals and lessons — read on for more (TLDR we’re working with startups to “plan for the worst, but hope for the best”).

Imagine the year is 1999 and things are booming

‍After double digit rates in the 80s, interest rates are considered low (~4.7%) and the tech ecosystem is flush with cash from 3x YoY growth in VC fundraising. The NASDAQ is up 86%, and “get big fast” and “party like it’s 1999” are common tech slogans. Founders, employees, infrastructure sellers like real estate, chip, server and router companies, and investors (including consumers making bank by day trading tech stocks) are having a fine ol’ time.

Sample headlines from leading magazines in 1999 and 2000.

Tech companies are spending lots on schwag, employee perks, and parties for teams, prospective hires and customers. You can go to a tech-sponsored party almost every night of the week. EDM, micro dosing and all the flavors of nut milk are not yet a thing, but you get the drift.

There’s a huge crop of fast growing VC-backed startups offering new functionality, access, lower prices and convenience. Many raise big rounds at unusually high multiples, setting new benchmarks. Tech IPOs are making people rich. Yahoo buys website building platform GeoCities for $3.6B. B2B life sciences supplies marketplace Chemdex IPOs at a $800M valuation with <$1M in revenue. Internet-native Netbank is worth $2B with just 50,000 accounts. Amazon also invests in Kozmo.com, offering same-day delivery (they raise $250M in ~2 years). Sound familiar?

A prescient few predict a coming bust. But, not this infamous article about how Amazon will fail (Jeff Bezos revisited it in a recent tweet or X, if that’s what it’s called now).

Time dedicates an entire issue to the post 2000 future. Topics include self-driving cars, more powerful chips, robotics and AI, video game domination, virtual reality, the promise of genetically modified food, the rise of cyber crimes, Microsoft antitrust, and seemingly unstoppable tech monopolies. Eerily familiar, yet ~25 years ago. Swap Amazon for AOL and a certain former President’s name, and the issue could probably run again next week!

In 2000, four companies drive the Nasdaq to an all time high — Intel, Dell, Microsoft and Cisco. These “Four Horsemen” of the internet have massive market caps and dominant market power.

Valuations for the “Four Horsemen” and new category leaders rise to unprecedented multiples (compare 1999 vs. 2022 above).

People call the 2000 Superbowl the “Dot-Com Super Bowl” because of all the startup ads ($2.2M per spot!).

In March 2000, markets start to fall. The music slows, the lights go on — the party is busted up.

The Fed raises rates, news of a recession in Japan spreads, and a wave of fear takes over, triggering tech sell-offs. Over the next 2.5 years, the Nasdaq loses almost 80% in value (also, NSync’s “Bye Bye Bye” hits #1 on the Billboard Charts, and a show called Survivor premieres to top ratings. Apropos).

Public tech company valuations fall back to earth (Amazon stock falls 90%, to ~1x revenue). The Four Horsemen lose 30–80% of their value.

The frothy, somewhat circular tech economy deflates, forcing drastic cuts everywhere. Investors work in the trenches with portfolio companies to figure out how to extend runway, refocus and re-forecast. Perks go out the window, replaced by relentless bottoms-up scenario planning, ruthless cash management, layoffs (which can hurt more if not done deeply enough), re-negotiating contracts, walking away from leases and refinancing debt obligations, and when possible, raising painful down rounds and recaps.

Despite best efforts, half of ~14,000 VC-backed startups run out of money and shutter by 2004. Of the 14 tech companies who ran Super Bowl ads in January 2000, only 2 survive (sound familiar?).

Kozmo.com shuts abruptly in 2001. Some find out by showing up to work and finding the doors padlocked.

Recovery of IT spending is accurately predicted to be very slow. It feels like winter in IT for years (note the buckets of spend at the time: Telecom, IT services, hardware and software, in descending order of $).

VCs triage portfolio cos at the expense of new investments for years to come.

LOL the above quote from a CRV presentation on the VC Industry in June 2002.

Venture returns for 1999 and almost a decade following are sub-par. It’s confounding, and a good topic for a separate analysis.

Between portfolio company triage, write downs, depressed public markets with low liquidity in sight, “techlash”, fear, and new rationality — VCs stretch out time between funds, raise smaller funds, and many fold.

VC and tech company cuts force many to find new careers. A common joke is“B2C now stands for ‘Back to Consulting’ and B2B for ‘Back to Banking.’”

Wow, lots of echos of dot com in recent times, like:

Images above from the 2022 Superbowl aka “The Crypto Bowl,” you know why. (Perhaps appropriately, 2023’s game was dominated by alcohol ads.)

Instead of the Four Horsemen, we now have the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) mega-caps. They comprise >55% of the NASDAQ’s value and drove 75% of the S&P’s improvement this year — distracting from the struggles of less resourced tech companies.

Many experienced investors forecast the carnage will take time to play out and increase in 2024, as many companies are living off Covid-boom war chests, but will be unable to refinance or save their way out.

A summary of some parallels between dot com and now: (what are we going to call this period of time? The Covid era? The Crypto/Cloud Craze and Crush?)

• The promise of exciting new technology innovation (and of riches) attracted lots of talent to found, join and invest in startups
• Relatively low interest rates made potential tech returns attractive relative to other asset classes
• Media attention and consumer adoption accelerated momentum for tech companies
• Unprecedented dollars flocked to VC. This drove up valuations, causing “irrational exuberance” — over capitalization and speculative investing.
• An arms race ensued, chasing hyper growth over capital efficiency or margins, to “get big fast”. Spending was flush, chasing talent, speed and customer acquisition.
• A macro factor triggered a sell off in public markets (change in interest rates, global risk, recessionary concern)
• To survive the long winter, companies figured out how to do more with less. They got back to basics (the new “B2B”?) — carefully managing burn rates, cash, revenue quality, customer retention and margins, becoming more capital efficient
• Layoffs, bankruptcies, scandals and lawsuits unfolded over years, not all at once
• Public markets adjusted more quickly than VC-backed private markets

Will history repeat itself in a slow, painful recovery?

This chart offers one prediction. Are recent public markets the “return to normal” bump before “fear” and “capitulation,” or have we already been there?

Unfortunately we don’t have a magic crystal ball, only a magic 8 ball. When we asked, “will the tech downturn last longer than 5 years?” it responded “all signs point to yes.” We hope not.

BUT. Having lived in the trenches with startups through the dot com bust and the Great Recession, it seems prudent to plan for years of sobriety after the massive, years-long party we just held in VC-backed tech. Remember, it took the Nasdaq 15 years to get back to 2000 levels, and VC funds 17 years to deliver 1999 levels of returns. Some additional thoughts:

• Don’t expect the bubbalicious valuation metrics and lush spending of 2021 to return anytime soon (young AI-native companies may already be defying this one). Those multiples were an extreme anomaly.
• Do expect and plan for next level budget scrutiny from enterprise customers as they look to reduce software vendor sprawl, contain spend, and delay projects
• Do expect more reorgs and layoffs, causing champions to depart and orphaned projects; and for more companies to ‘hit the wall’ in coming years, sometimes unexpectedly.
• Do expect multi-stage VCs to help triage existing portfolio companies (at least they should be)
• Do expect a dynamic environment in VC, given many firms invested and hired aggressively in recent years

The dot com downturn lasted a long time, and studies suggest that over-optimists who ignore the “brutal facts” don’t tend to survive.

That Said, A Plug for Informed Optimism

AND ALSO. The tech ecosystem is very different now. Dot com was the dawn of the internet — it was all about getting people and companies connected to the web, mostly in the US, with unproven ROI. Twenty years later, tech has disrupted industries and fueled accessibility, productivity and economic gains. The genie is out of the bottle — software is mission critical, and global. This bodes for a faster, different recovery than the dot com bust (also, people didn’t go back to horses after the Edsel flopped).

Enterprise tech companies may never again be valued like they were in 2021, but demand for products with ROI will continue. Software was a $74B category in 2001; today it’s $900B, and global IT spend is $4.6T.

AND ALSO. We are enthusiastic about how AI will drive a next wave of newly capable, high impact software (read our thoughts on the new generative AI stack here). The early innings have already attracted a lot of capital to very young companies at eye-popping valuations. We’re really excited about AI-driven software, especially when designed for specific industries and job functions. We know well and will hope to help companies avoid the sins that can come with rapid growth in attention, valuation and capital.

AND FINALLY. You’ve likely heard mantras like “constraints breed creativity,” “the strongest steel is forged in fire,” and “culture eats strategy for breakfast.” Myriad studies show that constraints like budget, staffing and time — in addition to having a diverse team, are the drivers of better results. And the tough times will deepen bonds and trust among teammates, building a stronger culture and long term outcomes.

This may be why downturns have historically forged breakout companies. Competition thins, decisions are more critical, teams are leaner and more productive. There’s over a century of data showing that category creating, industry leading companies were born and forged in downturns. Nearly HALF of the fortune 500 was founded during a recession or bear market. And most of the “Magnificent Seven” struggled through and survived the dot com bust.

Thanks for falling down the historical rabbit hole with us! Wrapping things up…

There are a lot of parallels between the dot com era and the now.

Economies run in cycles. They expand and contract, and then repeat. We just lived through an exceptional tech boom and we’re in a contraction phase, with higher interest rates, lower valuations, and many “over their skis” from prior investments. The repercussions have not yet worked their way through the VC ecosystem and will continue in the coming years. But the promise of AI and the leverage technology provides will likely help avoid the prolonged downturn of the 2000s.

A downturn is a proven time for companies and teams to get stronger, and a proven time to found and build a new company. And of course — if you are working on a big tech-driven idea going after a large unaddressed market, and hope to partner with a patient, thoughtful and experienced early stage-focused team who will be with you through thick and thin — give us a holler at Cowboy Ventures.

‍