Tech Bubble? Investing Like It’s 1999

“The investment pools that we did back in 2000 did extremely poorly, because many of those companies went from filing an I.P.O. to bankruptcy courts in a matter of months,” said Mr. Weisel, whose firm was acquired by Stifel Financial last year.

In 1998, Goldman Sachs Capital Partners, the bank’s private equity arm, began a new, $2.8 billion fund largely geared toward Internet stocks. Before that fund, the group had made fewer than three dozen investments in the technology and communications sectors from 1992 to mid-1998, according to Goldman Sachs documents about the fund.

But between 1999 and 2000, the new fund made 56 technology-related investments, of about $27 million on average. In aggregate, the fund made $1.7 billion in technology investments — and lost about 40 percent of that after the bubble burst. (The group, which manages the money of pensions, sovereign wealth funds and other prominent clients, declined the opportunity to invest in Facebook early this year.)

Philip A. Cooper, who in 1999 was head of a separate Goldman Sachs group that managed fund of funds and other investments, recalled that investors were clamoring, “We want more tech, we want more.” Bowing to pressure, he created a $900 million technology-centric fund in 1999, and within eight weeks he had nearly $2 billion in orders. Despite the frenzy, he kept the cap at $900 million.

“There was a lot of demand, but we couldn’t see any way we could prudently put that much capital to work,” said Mr. Cooper, who has since left Goldman.

Other Wall Street firms, including JPMorgan Chase and Morgan Stanley, also made a number of small to midsize investments during the period. In 1999, for instance, Morgan Stanley joined Goldman Sachs and others in a $280 million investment in CarsDirect.com, which scrapped its initial plans to go public when the market deteriorated.

“We thought we were going to double our money in just a couple of weeks,” said Howard Lindzon, a hedge fund manager of Lindzon Capital Partners and former CarsDirect.com investor. “No one did any due diligence.” Mr. Lindzon lost more than $200,000 on his investment.

Also in 1999, Chase Capital Partners (which would later become part of JPMorgan Chase) invested in Kozmo.com — an online delivery service that raised hundreds of millions in venture funding. JPMorgan Chase, which just recently raised $1.2 billion for a new technology fund, at the time called Kozmo.com “an essential resource to consumers.” At its height, the company’s sprawling network of orange bike messengers employed more than a thousand people. Less than two years later, it ceased operations.

An online grocer, Webvan, was one of the most highly anticipated I.P.O.’s of the dot-com era. The business had raised nearly $1 billion in start-up capital from institutions like Softbank of Japan, Sequoia Capital and Goldman Sachs. Goldman, its lead underwriter, invested about $100 million.

On its first day, investors cheered as Webvan’s market value soared, rising 65 percent to about $8 billion at the close. Less than two years later, Webvan was bankrupt.

About the same time, Internet-centric mutual funds burst onto the scene. From just a handful in early 1999, there were more than 40 by the following year. One fund, the Merrill Lynch Internet Strategies fund, made its debut in late March 2000 — near the market’s peak — with $1.1 billion in assets. About one year later, the fund, with returns down about 70 percent, was closed and folded into another fund.

“We all piled into things that were considered hot and sexy,” said Paul Meeks, who was the fund’s portfolio manager. Mr. Meeks started six tech funds for Merrill Lynch from 1998 to 2000.

Today, the collective amount of money that Wall Street banks are pumping into Internet start-ups, on top of the surging cash piles from venture capital groups, hedge funds and private equity, is a major concern for some investors.

Over the last five months, many venture capital players have raised giant amounts of capital. One Facebook investor, Accel Partners, is about to raise $2 billion for investments in China and the United States, while Bessemer Venture Partners is said to be closing in on $1.5 billion for a new fund. Greylock Partners, Sequoia Capital, Andreessen Horowitz and Kleiner Perkins Caufield & Byers have collectively raised more than $3 billion in the last six months.

Mr. Weisel, who has also been tracking hedge fund activity, finds the numbers dizzying. Countless hedge funds are investing in private placements — “dozens and dozens of hedge funds are doing the same thing,” he said.

As cash continues to pile up, the fear is that all this money cannot be put to work responsibly. With only a few perceived “winners,” some investors must be choosing losers or paying too much, Mr. Meeks said.

“When you see the valuations being bandied about — I do think, boy, these better be really special companies.”

— Peter Lattman contributed reporting.