The Original Apocalypse:

5 Lessons from the Dot-Com Crash

Jeff Fluhr
Apr 29, 2020 · 8 min read

A once-in-a-generation stock market crash ushers in a period of economic turbulence and angst for founders — especially those who need to raise capital. That happened last month with COVID-19, but it also happened 20 years ago with the bursting of the dot-com bubble. For founders who didn’t experience the dot-com crash first-hand, it may be hard to imagine a reset even more severe than the current one. But the dot-com crash wiped out over 90% of the market caps of even the best internet companies and chilled tech investing for two years.

Despite that, many great companies emerged from the dot-com crash. Google, PayPal, and Salesforce all started shortly before the dot-com bubble burst, and not only survived but flourished through the 24 month dark period. Similarly, Square, Uber, and Whatsapp all started just a few months after the beginning of the Great Recession of 2008–2009. These companies all had great product-market fit, but also had the persistence and frugality to successfully navigate a downturn. They show that there’s never a bad time to start a company.

My own experience confirms this. We incorporated StubHub in March of 2000, just weeks before the dot-com bubble burst. On the surface, the timing couldn’t have been worse. And it did pose some tremendous challenges. Yet we navigated the crisis, and StubHub was acquired in February for more than $4 billion. That experience taught me five important lessons that seem newly relevant for today’s founders.

I was a first year student at Stanford Graduate School of Business (GSB) in the 1999–2000 school year: the economy was very strong and the internet boom was in full effect. In the previous 5 years, several first-generation unicorns including Netscape, Amazon, Yahoo and eBay had been born, gone public and experienced steadily rising stock prices. As Prince said, we were all partying like it was 1999!

In February, one of my classmates and I decided to start an online marketplace for event tickets. Like many founders, we were solving our own problem. I remembered the anxiety of not knowing if my ticket would be rejected at the gate when I scalped a ticket to see my college basketball team play in the NCAA tournament. And my dad, who was a Yankees season ticket holder, often had wasted tickets in his desk drawer. I noticed obvious shortfalls in both the buyer and seller experience and set out to solve these problems. We incorporated the company in March of 2000.

“the significant market need for our product mattered much more than the timing”

Everything changed the very next month. Internet stocks started to fall. Precipitously. The NASDAQ fell from a high of over 5,000 in March to 3,200 in May, a drop of 36% in three months! And the pain continued for two and a half more years — ending when the NASDAQ hit a low of 1,100 in September 2002.

Despite the crash, we knew the market need was real and we plowed forward. I convinced two buddies from college, Colin Evans and Matt Levenson, to join us on the journey. We brought on Jeff Lawson (who later founded Twilio), to build v1.0 of the marketplace and John Whelan to build the customer support and operations of the company. We found a guy in San Carlos who agreed to rent us the dining room and pantry in his house. It was awkward, but we converted it into our office and it worked.

We launched the first version of the product that fall and our gross volumes grew 3–4x annually in the first few years. This top line growth taught me that the significant market need for our product mattered much more than the timing.

After the crash, the general consensus among professional investors was that B2C companies were destined for failure because of prohibitive customer acquisition costs while B2B companies had a fighting chance of survival. Within our small team, we had an ongoing debate about which was a better strategy to pursue. Those who favored B2B saw an opportunity to partner with media companies and sports teams to build co-branded marketplaces that would be heavily promoted on these partners’ high-traffic sites. The B2C advocates thought we should ignore the conventional wisdom and build our own consumer brand. We made the decision to focus the majority of our efforts on B2B because we hadn’t found effective consumer acquisition channels and didn’t have money to spend on advertising. And even though it wasn’t our core focus, we built StubHub.com as a consumer destination site where we could showcase the technology and run experiments.

With eight employees by October, we formed revenue-sharing partnerships with a few Bay Area radio stations and newspapers and launched co-branded sites. We also launched version 1.0 of the StubHub site, which featured only Bay Area events; we wanted to prove the model in one geography before expanding into others. The first few consumers discovered us through our partners and we started to see a trickle of transactions.

Our strategy changed in 2003 when we began experimenting with paid search, an innovative new advertising channel. We quickly realized that we could drive traffic directly to StubHub.com for a CAC of $30-$50 and made $60–70 of variable profit on every transaction. Our payback was immediate! This was the most important turning point for the company.

“We zigged and zagged as conditions changed.”

We aggressively increased our spend on paid search because it allowed us to grow much faster than the B2B partnerships. More importantly, we could control our own destiny because we didn’t have to rely on signing agreements with reluctant, slow-moving partners. As the economy recovered and more people spent money on tickets to sporting events and concerts, we made the decision to focus all of our efforts on building the consumer brand. This allowed us to own consumer mindshare, which we believed would lead to more long-term value than the co-branded partnership strategy. We were riding the massive paid search wave. We also started investing in other consumer advertising channels including sports talk radio and affiliate marketing. The B2C strategy had won the horse race.

When the bubble burst in April 2000, we hadn’t yet raised a single dollar of capital. We cobbled together a seed round of $550,000, most of which came from family, friends and former coworkers. We soon learned that these relationship-driven investors had a more lenient process than professional investors who — given the market conditions — no longer wanted to invest in internet companies.

Our fundraising path and our cap table were unconventional, but that didn’t affect our performance.

For our Series A fundraise, we told investors the B2B story and explained how this would eliminate the need to spend millions on brand building, like many other failed startups had done in the late 90s. We spoke to scores of venture firms and dozens of angels, probably close to 100 investors in all. We went to meeting after meeting each time hoping we would get a different response. The senior team was deferring compensation to extend our runway. With just two months of cash and no interested investors, my optimism started to wane and I confronted the reality that we may not make it.

Just when I thought we were at the end of the line, we got the break we needed when BEA co-founder, Ed Scott, agreed to lead our Series A with a $1.5 million investment. This experience taught me that raising money is a numbers game, particularly in a down market. The more investors you talk to, the more likely you will find a good fit. To this day I give Ed a lot of credit for our survival and ultimate success. Ed joined the board and became an important advisor to me over the next six years.

In the second half of 2001, we set out to raise our Series B round. By this time, we had significant growth and big B2B partnerships: we struck a deal with Major League Baseball to build a white-labeled ticket marketplace for the Seattle Mariners and the Arizona Diamondbacks, and a partnership with MSN (Microsoft Network) to build a co-branded marketplace for their users. But despite this significant traction, we again failed at attracting a lead institutional investor. Instead we raised a $2 million “pass-the-hat” round and accepted small check sizes ranging from $25k to $500k from wealthy individuals and industry executives.

Just when I thought we were at the end of the line, we got the break we needed when BEA co-founder, Ed Scott, agreed to lead our Series A with a $1.5 million investment.

Our fundraising path and our cap table were unconventional, but that didn’t affect our performance. The company grew 3–4x year over year in those early years. The many VCs who passed on the opportunity were wrong. We continued our steep growth through the sale to eBay in 2007. Even after the acquisition, StubHub grew rapidly and had nearly $5 billion of gross ticket volume last year. When eBay sold the business earlier this year, it netted over $4 billion in cash for the sale.

When I look back on our first year, I am sometimes amazed that we survived, let alone thrived. We incorporated the company in March of 2000, just one month before the dotcom bubble burst. How did we navigate that climate? The answer comes down to three things:

  1. Frugality: We were extremely thrifty with our cash because we didn’t have much and it was very difficult to attract new capital. We deferred salaries and found teammates who were excited about the equity and willing to take reduced salaries in exchange for stock options. We found cheap office space and were always scrappy with purchases such as furniture and supplies.
  2. Flexibility: We were willing to change our model and be flexible with our assumptions. We wanted to build a consumer brand, but realized that a B2B strategy would be more financeable. When we started to see traction with paid search, we switched back to the consumer strategy and abandoned the B2B approach. We zigged and zagged as conditions changed.
  3. Persistence: We did not let the climate affect our commitment or end goal. We knew that ticket scalpers and eBay were suboptimal solutions for ticket resale. We knew we could build a 10x better mousetrap and we stayed focused on that ultimate goal. We were naive, but we had grit and kept charging ahead despite the significant obstacles.

We were forced to have these values from the earliest days and they became part of our DNA. Even as the company flourished, they remained core to our collective identity.

Conventional wisdom tells us that everything gets more challenging when the economy is suffering. And it’s true that raising capital gets harder. But many other company-building activities actually get easier. This is the reason why so many great companies are built during recessions. Recruiting great employees is easier because there are more talented people available and less competition for these people. Customer acquisition can often be easier because advertising rates drop. Fewer upstart competitors are getting funded which means there is less competition for your target customers. Real estate leases get cheaper and many other costs drop as well.

The current economic crisis reminds me of the dot-com bubble bursting almost exactly 20 years ago in April of 2000. Many startups will run into significant challenges including raising their next round. Times will be tough, the road ahead may seem uncertain and hockey stick growth may be a ways off. But there will undoubtedly be a new cohort of great companies that emerge from the 2020 recession. If you’re willing to embrace the values of frugality, flexibility, and persistence, you can be one of them.

Craft Ventures

Craft Ventures is an early-stage fund dedicated to the…

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