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Early Internet Investors Recall Heady Promise of Dot-Com Bubble and Post-9/11 Bust

The era of irrational exuberance was already running on fumes by the time the Twin Towers fell.

The 9/11 terrorist attacks marked the end of the first frenzied wave of investment and hype about dot-com ventures that brought Silicon Valley, Wall Street and Hollywood together in the pursuit of riches, innovation and creativity. Not always in that order.

During the half-dozen years that stretched from the first internet-era IPO to grab investors’ attention — the August 1995 debut of web browser Netscape — through the attacks of Sept. 11, 2001, myriad startups were hatched with the ambitious goal of bringing original content to computer screens.

Most of the ventures flamed out with not much to show for them. But some of the investors, entrepreneurs and creatives who were active in that period say the rush of investment, technical R&D and the explosion of empire-building ambition in this fin de siecle moment laid the groundwork for the radical transformation wrought by streaming that has shaken the industry to its core over the past 15 years.

“The fact that money poured in advanced the state of the internet. It made it wildly successful and important for society,” says Bill Gross, entrepreneur and investor who was among the most high-flying of his ilk in the late 1990s.

In 1998, Gross was a co-founder of Z.com, a short-form content venture born through Gross’ Pasadena-based Idealab dot-com business incubation banner. Suddenly he was flying to New York to woo Chris Rock and Adam Sandler for a production pact.

Gross at the time was basking in the glow of his association as an investor with startup phenoms that would ultimately become emblematic of the era’s excess: EToys, which was valued at $7 billion in its IPO — until it wasn’t. CitySearch was an early internet data and navigation experiment that merged with TicketMaster.

Z.com counted Steven Spielberg, Brad Grey, Jerry Bruckheimer, 3 Arts Entertainment and Guy Oseary among its industry backers. Former Walt Disney Imagineering executive Joe DiNunzio was recruited as CEO.

“We were dealing with a great thing that was too far ahead of its time,” says Gross. “We launched it and people loved it but we had like seven users.” We struggled to last until the world changed.”

The all-important leap-forward for video via the internet came in 2005 when software giant Adobe added crucial updates to its ubiquitous Flash Player that made it much easier for the average user to watch video directly in a web page. Before that, some users needed special plug-ins and codes just to play herky-jerky video on their desktop and laptop monitors. It’s no accident that YouTube was founded the same year Abode unleashed the momentous Flash update.

Pop.com, backed by DreamWorks SKG and Imagine Entertainment, was a famous dot-bomb that never got off the ground, despite a reported $50 million bankroll from Microsoft co-founder Paul Allen. Pop.com also recruited a Walt Disney Imagineering alumnus, Kent Wong, as CEO. AtomFilms was a pioneering digital short film venture from entrepreneur Mika Salmi. It merged with gaming firm Shockwave and was sold to Viacom for about $200 million in 2006.

In between those two extremes of longevity were the birth, boom (for some) and bust stories of digital media banners that included Icebox.com, Z.com, Digital Entertainment Network, iFilm, Urban Entertainment, Heavy.com, iCast, TheRomp.com, MediaTrip.com, JoeCartoon.com, Nibblebox.com, Screenblast.com, Eruptor.com and Time Warner’s Entertaindom. From executives to creatives, numerous industry insiders who were destined for bigger profiles got crucial breaks in an anything-goes era that, of course, proved too good to last.

John Ridley, a future Oscar winner for “12 Years a Slave,” saw his career as a screenwriter blossom in the late 1990s after he produced a handful of animated “Undercover Brother” shorts for the Urban Entertainment platform launched by former 20th Century Fox and Fox Searchlight feature executive Michael Jenkinson.

At the time, Ridley recalls that he and other struggling writer friends had some of the gold-dust fever of the era. He recalls many hours in coffee shops brainstorming ideas internet domain names to register and squat on in the hopes of auctioning them off in the future (Think “MyCoffeeShop.com” and “SweetDreams.com.” “There was gold in them thar hills,” Ridley recalls).

With the benefit of hindsight, Ridley remembers that period as one fueled by ambition, excess and largess, but there was also a spirit of creativity and innovation even with the limited production values of the time. He compares it to the famous land rush among Oklahoma settlers in the late 19th century.

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More than a year before the dot-com bubble burst, former CNN correspondent Charles Molineaux delivers a live broadcast from the Nasdaq MarketSite in Times Square, showing the Nasdaq composite index soaring to its first close above 5,000 AP

“We were the Sooners,” Ridley says. “There were a lot of people lined up at the border. At some point the U.S. military fired its guns and everybody was crossing the line to stake their claim in the new territory. I remember that it was a time when anybody with a good idea and a great presentation was selling for a lot of money.”

The “Undercover Brother” animated shorts eventually became the basis of a live-action movie for Imagine and Universal that was released in 2002, making it one of the first digital-native concepts to make the leap to the big screen.

“It was just so heady,” Ridley recalls of making the original “Undercover Brother” shorts. “I wrote a bunch of them, I had some unemployed writer friends working on them. It was just one of those pure-play experiences where someone says, ‘Hey you want to do something?’ and then you just did it.”

Moreover, the first pixelated stirrings of digital video services coincided with the growing investments in high-end original series made by HBO, Showtime, FX, TNT and USA Network, among other established cable brands. When HBO’s “The Sopranos” hit pop culture like a meteor in early 1999, there was a feeling that traditional boundaries for content were falling fast.

Salmi was inspired to launch AtomFilms — after pitching the idea to more than 85 prospective investors — when he got hold of the original short that became “South Park” and the fan-created “Star Wars”-meets-“Cops” mashup “Troops.” Both of those shorts generated huge buzz as underground VHS tapes and were traded like NFTs.

But after the shock of 9/11, the money that greased the wheels of the creative experimentation online dried up almost overnight. AtomFilms Shockwave, one of the most established of the bunch, went from 330 employees to 30 in what seemed like an instant.

“I feel like it was just a bit too early with what I was doing,” says Salmi, who is now based in Zurich and managing partner of Lakestar venture capital fund.

From the start, the goal of many early digital media ventures was to nurture ideas that could be translated to more lucrative formats as TV series and movies. For Salmi, the constant focus on the gold rush became wearying.

“We wanted to experiment and actually make some money over time,” Salmi says. He recalls director David Lynch asking him point blank while they working together on a project, “When do we make oodles and oodles of money?”

Ridley also remembers the moment of transition when the no-holds-barred creative environment gave way to agita about funding and the focus on a big score. As the industry dug out of the trench after 9/11, the action in digital content became more closely aligned with traditional Hollywood brands.

“What I loved about dot-com 1.0 was what I’m missing now — that space between people shooting on iPhones and doing things that they want to pursue because they think they’re funny or great,” Ridley says. “It was great before the corporatization of things.”

Gross’ Idealab struggled publicly in the wake of 9/11. The company in early 2002 was hit with a lawsuit from institutional investors charging Gross, his wife and business partner Marcia Goodstein and others with breach of fiduciary duty, self-dealing and financial mismanagement. The suit was dismissed by a Los Angeles Superior Court judge in 2003 and Idealab reached a settlement with the plaintiffs in 2005 after much legal wrangling.

Today, Gross’ focus is on green technologies and businesses aimed at addressing climate change. He has taken many lessons from the first dot-com era and specifically from the digital entertainment ventures.

For one, he learned the hard way that a business leaders need to make sure that overall market conditions for their product are ripe for mainstream users. At the time Z.com, AtomFilms et al were trying to gain a toehold, only a small percentage of the U.S. had anything close to high-speed internet.

“We had a great product but we couldn’t control broadband adoption. We couldn’t control what web browsers people were using,” Gross says.

To that end, Gross gives Netflix credit for seeing its future consumer base before the streaming picture came into clear focus. Reed Hastings and Ted Sarandos had the discipline to wait until the market was ready to embrace streaming before they shifted from mailing DVDs in red envelopes to streaming high-end original content.

“They came up with a way to make money until the technology was ready to stream movies,” Gross says. “They played this beautifully.”

More than 20 years on, Gross does not remember what became of Z.com’s content library. The domain name, he recalls, was ultimately sold to Nissan as a promotional platform for the automaker’s sporty Z model. But he does retain his optimism that Z.com could have been a contender, if other stars had aligned in the moment.

Still, Gross reinforces that the first dot-com wave fueled innovations that laid the groundwork for the tech standards that power the high-resolution streams served up by Netflix, Amazon, Disney Plus, HBO Max and other global players.

“It led to a connected world,” Gross says. “I don’t think it would have happened if people hadn’t rushed to it so fast” in the late 1990s.

Z.com began to wind down by 2003. Gross still has the entrepreneur’s faith that the idea behind the venture was solid, but the execution was weak, for reasons largely out of their control.

“Basically if we had stayed around a year longer we would have been around when the (streaming) revolution happened,” he says.