Is Web 2.0 Joining the Deadpool?
Posted by Nick O'Neill on May 27th, 2008 10:23 AMThe Financial Times had an interesting article this morning which suggests that Web 2.0 has substantial problems with generating revenue. I’m not sure that this news is much of a shocker given the increased discussion recently about revenue generating businesses. Another highlight of the article is the discussion about ridiculous valuations being given to some of these companies.
One of the most infamous investment which produced a sky-high valuation is Slide who was able to obtain a $500 million valuation. According to some insiders though, the investors in Slide are not sure why they produced such a crazy valuation. RockYou, a competitor to Slide, has also been facing difficulty in raising a new round of funding and instead opted to raise $1 million while continuing their search for favorable terms.
Regardless of valuations, social features will continue the trend toward ubiquity as the new social data “portability” services begin to launch in the coming months. Nobody has yet to develop a large scale sustainable model of monetization and given the current economic environment, it is likely that the trend continues. This trend leads to the question of: what are web 2.0 entrepreneurs expecting out of their investments?
I think that most of these companies were hoping for future acquisitions by Google, Microsoft or Yahoo! Others were intending to generate revenue from advertising but unfortunately I don’t see that as a long-term sustainable model since inventory is practically infinite at this point. Do you think we’ll begin to see more legitimate business models or do web 2.0 companies not need substantial revenue?
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Many Web 1.0 managed to gain revenue traction. Web 2.0 will also.
The differences today though are worth noting. In 2000 the web was essentially a medium for communications and information exchange. Transactions were just emerging.
Today, we have an enhanced capability as a communications platform (FB, MySpace), transactions are evolving towards services and we can now overlay content distribution and creation. It is a much broader set of addressable opportunities.
Secondly, the quality of consumer technology is now at a standard similiar to or better than enterprise level. So, cost of deployment is far less.
I think the future is pretty bright. The Valley is usually early and in this case probably right.
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Great discussion. My personal take is that we will see a "flight to quality" in the Web 2.0 space. I believe we're already seeing that in fact, with VCs starting to let some companies fail.
There are some fundamental differences from the late 90's:
- Cost of Web 2.0 is quite a bit cheaper than Web 1.0. With the free LAMP stack (do you know any startups that are buying Sun hardware, Oracle databases, or iplanet web servers?), the cost of software infrastructure has come down by an order of magnitude.
- With offshoring, the cost of software development has come down by 50%.
- With the rise of standards on the web and many free web services, the cost of development a useful item, whether it's a product or a feature, has also dropped substantially.
- At the same time, there are many more ways to see if a prototype can quickly get to scale. You have the likes of facebook, myspace, and other platforms that let companies develop a prototype for hundreds of thousands of dollars or less and see if it can gain millions of users.
As a result of all of this, VCs can de-risk a venture investment in a lot less time and for a lot less money than in the Web 1.0 cycle. This means a broader portfolio of investments and more experimentation, with the ability to focus Series B/C/D investments on the ones that show real traction, promise, and revenue.
- Rajeev Goel
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