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The IPO That Started a Bubble: Netscape, August 1995

Zusammenfassung

Netscape Communications Corporation went public on August 9, 1995. The company was 16 months old, had never reported a profit, and had only one product — a web browser. Its stock was priced at $14, revised upward to $28 before trading opened, shot to $75 intraday, and closed at $58.25. The company was valued at $2.9 billion on its first trading day. The Netscape IPO is considered the starting gun of the dot-com bubble — the first demonstration that internet companies could achieve enormous valuations before generating any earnings, setting expectations that led directly to the crash of 2000.

Netscape and the Early Web

Marc Andreessen was an undergraduate at the University of Illinois when he co-wrote Mosaic in 1993 — the first web browser with inline images and a graphical interface that ran on multiple operating systems. Mosaic made the World Wide Web usable for non-technical users. In 1994, Andreessen dropped out of a graduate program at University of Illinois to join SGI’s co-founder Jim Clark in founding Mosaic Communications Corporation, which became Netscape Communications.

Netscape’s primary product was Netscape Navigator — a faster, more capable browser than Mosaic, distributed free to individuals and licensed to companies. The strategy was similar to the “give away the razor, sell the blades” model: by dominating browser usage, Netscape intended to sell server software to companies that wanted to conduct business on the web. Navigator achieved approximately 90% browser market share by mid-1995.

The full story of Andreessen’s role in the web’s commercialization is covered in Marc Andreessen and Netscape.

The IPO Numbers

By normal investment banking standards of 1995, Netscape was not ready to go public. The criteria for an IPO typically included:

  • Multiple profitable quarters.
  • A sustainable business model.
  • Management experience operating a public company.
  • At least three years of operating history.

Netscape met none of these. It had been founded in April 1994 — 16 months before the IPO. Its revenues were $16.6 million in the first half of 1995; it had posted a net loss of $4.3 million in the same period. It had one product. Navigator was being given away free.

The underwriters — Morgan Stanley and Hambrecht & Quist — originally planned to price the IPO at $14 per share. They revised this to $28 the night before trading, based on investor demand. When NASDAQ opened on August 9, Netscape shares could not be immediately sold — so many buy orders had been placed that the opening price had to be negotiated between market makers for over two hours before trading began. The stock opened at approximately $71 before settling to close at $58.25. Market capitalization on the first day: $2.9 billion for a company with $16.6 million in first-half revenue and no profits.

The Dot-com Consequence

The Netscape IPO demonstrated to Silicon Valley, Wall Street, and every entrepreneur with an internet idea that:

  1. Internet companies could achieve enormous valuations without profitability.
  2. Investors would pay for future potential, not current earnings.
  3. Being first to a market mattered more than being sustainable.

The five years following the Netscape IPO produced the dot-com boom: hundreds of companies were funded and taken public on similar logic. Pets.com, Webvan, Kozmo, eToys — businesses with enormous capital consumption and no clear path to profit attracted hundreds of millions of dollars. The NASDAQ Composite index rose from approximately 1,000 in early 1995 to 5,048 on March 10, 2000, then collapsed to 1,114 by October 2002 — a 78% decline. The full story is covered in The Dot-com Bubble.

Netscape’s Fate

Netscape Navigator was eventually defeated by Microsoft’s Internet Explorer, which was bundled with Windows 95 and distributed free, undercutting the commercial server licensing strategy. Microsoft’s browser bundling was the central issue in the antitrust case United States v. Microsoft Corporation (2001), which found Microsoft had engaged in anticompetitive behavior. By the time the antitrust case concluded, Netscape had been acquired by AOL (1998, for $4.2 billion in AOL stock) and Navigator’s market share had fallen below 5%.

AOL open-sourced the Navigator codebase as Mozilla in 1998. The Mozilla project eventually produced Firefox (2004), which is covered in Mitchell Baker and Mozilla. The browser that started a bubble became the foundation for the browser that checked Microsoft’s dominance — after an eight-year detour through bankruptcy and acquisition.

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