How the Birth of Venture Capitalism Powered the Dot-Com Bubble

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In this Motley Fool Answers podcast, guest and former Fool Morgan Housel leads the discussion on a topic near and dear to the hearts of online-based operations like the Fool: the dot-com bubble and the subsequent long and painful crash. But as bad as it was for investors in the stock market, it really stung the nascent venture capital industry.

A full transcript follows the video.

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This video was recorded on Oct. 17, 2017.

Alison Southwick: So when you think of the dot-com bubble, I do think of the foosball table. I think of the cool Northern California company to work for. Leadership giving everyone stock options, and we're all going to get rich while playing foosball together. Did most of those companies never go public and they just burned private investors?

Morgan Housel: The other thing that happened at the same was the birth of VC investing. VC is a pretty young industry. A good example of this: Phil Knight, who is the founder and CEO of Nike, wrote a really good memoir recently, and he was talking about running Nike in the 1970s. His only source of capital was bank loans, because there was no VC industry back then. So even as Nike was growing 100%, 200% per year, there were no VC investors to fund him.

And it wasn't until the '80s and early to mid-'90s that VC, as an industry, really got its act together and started raising enough money that they could go out and seed all these new tech companies. And I think because of that, it was just like a big hurrah among entrepreneurs and the VCs themselves that didn't have a good idea of what they were doing at this time.

Because the industry itself was so young, there wasn't a lot of generational knowledge that was passed on by their supervisors and past generations of investors. So it was just a big party of money getting thrown around at the time. You had VC investors that had a ton of money to invest but didn't really know how to deploy it very effectively.

Then you had a lot of legitimate innovation that brought in a lot of other entrepreneurs that maybe thought they were innovating but really weren't doing that much. You just had so much momentum in the industry that it collected a lot of money, which is just a long way of saying there was a lot of money-burning going on at the time.

Southwick: Well, VC also seems like such a virtuous circle. Not virtuous depending on who you are and how you feel about it. It's like, "I'm a tech entrepreneur, and now I'm going to become a VC and invest my money in other tech entrepreneurs." And it just keeps going and going.

Alison Southwick has no position in any of the stocks mentioned. Morgan Housel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.