The late 1990s were a heady time for internet companies. Venture capitalists were falling over themselves to throw money at any business with a “.com” in their name. The promise of the World Wide Web was captivating – it seemed like anyone could build a billion-dollar business with just a website and a dream.
No company encapsulated this irrational exuberance more than pets.com. Launched in 1998, pets.com aimed to be the “online leader in pet supplies.” Within two years, the company had raised over $300 million in funding and spent lavishly on advertising. Their mascot, a sock puppet dog, became ubiquitous thanks to an expensive Super Bowl ad campaign.
Yet by November 2000, pets.com was bankrupt. One of the most hyped internet companies of its era collapsed after just 268 days as a public company. So what went wrong? Why did pets.com fail so spectacularly?
In this post, we’ll analyze the rise and fall of pets.com. The company’s struggles provide valuable lessons for internet entrepreneurs today on topics like:
- Managing cash burn rates
- Building sustainable business models
- Avoiding premature scaling
Pets.com is a classic example of failing fast during the dot-com bubble – its mistakes are just as relevant now as they were 20 years ago.
The promise and hype of pets.com
When it launched in 1998, the premise of pets.com seemed solid on paper. Pet supplies is a massive market, worth over $35 billion per year in the US alone. As the first nationwide online pet store, pets.com aimed to capitalize on the convenience of internet shopping and the low overhead of not needing physical retail space.
The company’s founder, Greg McLemore, believed that the pet industry was ripe for an Amazon-like disruptor. He coined the term “category killer” to describe pets.com’s ambitions of dominating the online pet supplies space.
This compelling origin story helped pets.com raise $50 million during its first year in business. By the time it went public in 2000, the company had raised over $300 million in funding.
Pets.com set out to build its brand through aggressive advertising and marketing campaigns. The company spent over $11 million on Super Bowl ads featuring its sock puppet mascot. This became one of the first viral internet sensations – the pets.com sock puppet appeared on shows like Good Morning America and Live with Regis and Kathie Lee.
The hype reached a fever pitch when pets.com went public in February 2000. Shares spiked from the IPO price of $11 per share to trade as high as $14 on the first day. The successful IPO added hundreds of millions to the company’s war chest.
For a brief moment, it appeared that pets.com could justify its massive valuation. The sock puppet ads had won the public’s imagination, and the company was gearing up for rapid growth. But cracks soon emerged in the business model.
The precarious business model
In hindsight, it’s easy to point out the flaws in pets.com’s business model. But even at the time, there were warning signs that the company would struggle to turn hype into reality.
A core issue was the economics of shipping pet supplies. As a web-only retailer, pets.com had to bear the high costs of fulfillment and last-mile delivery. Chewy, which has succeeded where pets.com failed, spends heavily on logistics but can offset it with scale and optimized operations.
In contrast, pets.com hemorrhaged cash on shipping. The company offered free delivery on orders, but the average order size was just $55. Losing money on such small order values meant pets.com had no path to profitability. The free delivery model might have worked with enough order volume, but pets.com never reached that point.
Competitor Petsmart.com offered a compelling contrast here. As an established brand with physical retail locations, Petsmart.com could utilize its brick-and-mortar outlets to facilitate pay-at-store pickup. Customers could place online orders and then conveniently pick them up at nearby store locations.
This “click and collect” model provided a hybrid approach that worked well for the pet supplies category. But as a pure-play online retailer, pets.com lacked this flexibility.
Raising hundreds of millions in venture capital allowed pets.com to ignore these structural issues in its business model for some time. But the mounting losses inevitably caught up with them.
Spectacular crash after IPO
Pets.com entered the public markets just as internet stocks were hitting all-time highs. By March 2000, the tech-heavy Nasdaq index had nearly doubled in value over the prior year. Investors were desperate to get exposure to hot internet companies – profitability mattered less than growth potential.
But the tide soon started to turn. With fears of a bubble looming, investors began questioning whether cash burn rates were sustainable for these unprofitable dot-com companies.
Pets.com felt these effects acutely. After debuting at $11 per share, the stock steadily declined over the course of 2000. First, it dipped below its IPO price. By that summer, it had fallen below $5. And by October, the stock slumped under $1 per share.
This plunging stock price reflected worsening financials. Pets.com had lost $61.8 million in the second quarter of 2000. The third quarter saw losses balloon to $83.5 million.
The company’s high cash burn rate quickly depleted its IPO war chest. As losses mounted, pets.com scrambled to find additional sources of funding.
First, it took out loans from its lead underwriters, Merrill Lynch and Goldman Sachs. It also obtained debt financing from lenders. But these short-term cash infusions could only stave off bankruptcy for so long.
In October 2000, pets.com began laying off employees in a desperate bid to cut costs. But it was too late to right the sinking ship. By November 7, just 268 days after going public, pets.com announced it was shutting down.
The spectacular rise and fall of pets.com came to symbolize the excess of the dot-com bubble. In just over two years of existence, the company had burned through roughly $300 million in investor capital. The dream of being the “online leader in pet supplies” failed to survive first contact with reality.
Key takeaways from the failure
Pets.com was far from the only internet company to crash and burn in the early 2000s. But there are important business lessons to take from its rapid demise:
Focus on gross margins, not just top-line growth. Pets.com got blinded by visions of unmatched scale. But its economics made no sense. Neglecting cost realities in favor of hypergrowth is a recipe for disaster.
Beware premature scaling. Pets.com scaled aggressively before nailing down its business model. The lavish spending on marketing and inventory came back to bite them.
Don’t ignore cash flow. Revenue growth without cash flow is hollow. The pets.com puppet generated buzz but couldn’t stop the cash bleed. Companies need capital efficiency to survive.
Differentiation matters. Pets.com failed to offer meaningful advantages over the competition. Its convenience couldn’t outweigh the overhead-free models of big-box pet stores. Unique value props are non-negotiable.
Founder experience counts. Greg McLemore had success starting Pets.com’s parent company, but he lacked experience in direct retail. Founders with proven industry expertise are likelier to navigate challenges.
Pets.com offers a fascinating case study from the dot-com era. The company captured the zeitgeist and public imagination. But ultimately, building a sustainable business requires more than hype. Pets.com provides a cautionary tale of what happens when entrepreneurs neglect fundamentals in favor of rapid growth at all costs.
The story continues
The lessons from pets.com still resonate today. During the 2020s, we are living through a period of similarly inflated valuations and cash burn among technology startups.
Companies like WeWork and Peloton have already stumbled in recent years after reckless expansion plans backfired. Pets.com demonstrates how quickly market sentiment can turn for money-losing upstarts.
However, the underlying model that pets.com helped pioneer has been vindicated since its failure. The rise of e-commerce titans like Amazon and Chewy has shown that online retail can work at scale under the right conditions.
Perhaps if it had launched a few years later, pets.com would have stood a chance. The infrastructure and logistics networks required to enable profitable online commerce simply did not exist in the late 1990s. Pets.com was ahead of its time in many respects.
So while we should learn from the specific missteps that led to pets.com’s failure, we shouldn’t necessarily view its model as invalid. Instead, the pets.com story highlights the importance of timing and fine-tuning the business economics.
The next generation of digital disruptors would be wise to study this period of exuberance and excess. The internet continues to enable incredible business model innovations. But those built on hype alone, without true product-market fit, are destined to fail fast.