The Second Boom and Bust Cycle ‘92-’02

After achieving such a negative, greed-ridden connotation in the 1980s, the private equity buyout industry returned in the 1990s, after a short dormancy, with less use of leverage and a stronger focus on the target firm’s long-term development. Despite its relative lack of growth when compared to the buyouts market in the 1980s, venture capital had begun to take center stage by the mid-1990s. The turning point for VC was largely due to the mass appeal of the information age, the low interest rates of the late 1990s, and the overtly successful IPOs of many high-tech companies that are now household names like Google, Yahoo, Ebay, and Amazon.

In the early 1990s, interest rates were incredibly low, in part to help stimulate spending and pull the United States out of a recession. When the economy began to grow rapidly with the dot-com bubble of the late 1990s, the Federal Open Market Committee responded to curb growth by increasing the Federal Funds Rate—a total of six times 1999 and 2000. In the end, the surge of interest in the Internet led to many irresponsible business strategies and irresponsible investments, almost as if anyone with a reasonably interesting idea and a dot-com address could receive VC money. Internet companies with little to no profits were going public and enjoying significant stock price increases often based solely on industry speculation. On March 10, 2000, the NASDAQ stock market dropped 83.9 points and the dot-com bubble began to burst. By April 4, 2000, the NASDAQ fell to 4369. In the two years that followed, venture capitalists unloaded many of their investments at a loss.