Like Sheep to the Slaughter

The full story is a bit more complicated than this, of course, but the fundamentals do not change. Entrepreneurs were often not unwilling adopters of the get-big-fast strategy. As a group, entrepreneurs are optimistic and in a hurry. So when their financial backers and potential underwriters urged them to go for it fast, many entrepreneurs were happy to do exactly that.

After Amazon.com got an 18-month lead on its old economy competitors, VCs and entrepreneurs were alerted to a potential opportunity in every other product category.

This was the game, and entrepreneurs quickly perceived it. The bubble had created perverse incentives. For example, when online retailers spent many times the amount of their bricks and mortar competitor, the financial market rewarded them. An additional dollar of sales to the online retailer (even if purchased for $100 to acquire the customer) was worth $300 to them in the valuation of their firm on the public market. So while it made no economic sense to spend that much to acquire a customer, it made short-term financial valuation sense. Of course, when the bubble burst and the online retailer was left with high costs and little revenue, it soon went under and the financial value of the firm went to zero.

Further, for an entrepreneur, the biggest question about a get-big-fast strategy is whether or not he or she can get it funded. Lots of capital is required. In normal times, the capital markets are reluctant to put large sums behind a novel idea, no matter how attractive the idea and the entrepreneurs who are sponsoring it. But during the bubble, money was readily available, so numerous entrepreneurs who wouldn't have considered the strategy because they couldn't finance it, suddenly saw money available and pursued the strategy.

But nothing that entrepreneurs did changes in any way the fundamental point—that in the rush to get to the public market, VCs and bankers pressed on entrepreneurs an inappropriate strategy, which in the end doomed the companies and their late stage investors to financial disaster.