Saturday, October 13, 2007

The Sustainability of Web 2.0

Since the inception of the term "Web 2.0", something about it has made me cringe. Even after reading numerous definitions and opinions over the past 2 years, I never seemed to be able to describe exactly what bothered me about it so much (beyond its ambiguity), until now.

Perhaps unintentionally, "Web 2.0" has come to represent the general category of recent tech startups. Beyond the media hype/Dilbert/geek-culture ("Lunch 2.0") references, the term has been tossed around as a business category in every recent discussion I've had with friends in the finance world. It's even being used as a category in an official capacity on paper: I recently had lunch with a partner in an investment fund with a few million dollars earmarked specifically for "Web 2.0 companies" (as labeled in SEC filings).

I think it's time to accept that, just as the many failed (and few successful) tech startups from the late 90s came to be known as "dot coms" (a once flattering name), this round has been categorically labeled as "Web 2.0s".

But what makes me cringe when I hear "Web 2.0" is not the way it has been interpreted or categorically applied. Rather, something bothers me about the category of companies that the term now represents. It's the same cringe I felt when I was working for a tech startup in Silicon Valley back in 2001 and I would *shudder* when people would use the word "dot com" because at the time, something was fishy about the whole "dot com" category, and in the same way, something feels fishy to me about the "Web 2.0" category today.

At the root of the fishiness is the question of whether or not this category of web 2.0 companies are sustainable.

Two years ago, Paul Graham wrote:

The reason this won't turn into a second Bubble is that the IPO market is gone. Venture investors are driven by exit strategies. The reason they were funding all those laughable startups during the late 90s was that they hoped to sell them to gullible retail investors; they hoped to be laughing all the way to the bank. Now that route is closed. Now the default exit strategy is to get bought, and acquirers are less prone to irrational exuberance than IPO investors. The closest you'll get to Bubble valuations is Rupert Murdoch paying $580 million for Myspace. That's only off by a factor of 10 or so.

Well, there have since been a few more bubble-like developments like a potential $10 billion valuation on Facebook, but even putting those aside, I still don't see the current situation as sustainable for long. It seems to me that with the IPO market gone and venture investors driven by acquisition exits, founders of web 2.0 companies are often not focusing on building sustainable businesses that could ultimately be successful without being acquired. I run through the hundreds if not thousands of web 2.0 companies, and see mostly potential Bloggers, Bloglines's, and's (all successful acquisitions), but very few Amazons or Ebays, let alone Apples.

While founders are doing things significantly cheaper than in the late '90s, VC investment is still at an all-time high since 2001. I suspect that a lot of money is riding on large numbers of web 2.0 companies hoping to be acquired, but statistically I imagine that a relatively small percentage are actually being acquired, and the rest are silently burning through their cash. It's only been 2 years since "Web 2.0" was coined, and less time since the term has come into the mainstream as a category, and so there probably couldn't have been too many stories of web 2.0 startup death yet (the TechCrunch deadpool is growing, but thankfully it's no circa 2001).

I can only hope that I'm simply wrong to shudder at the label "Web 2.0", in the same way that we all came to shudder at "dot com", while most people around me seem to be using the term happily as a category in everyday speech. But I certainly question the sustainability of so many "web 2.0 companies", and coming from the perspective of someone currently in the process of doing a consumer tech startup, I'm certainly concerned about all of the recent bubble talk, and what its impact might be on our ability to raise money in the future should web 2.0 begin to tank.


Jill said...

Hey Adam, have you read this?

Dharmesh Shah said...

Great article.

I share your concerns. Though the IPO market is certainly not what it was during the dot-com days, there's still a significant lack of companies with real business models.

I like the creativity and cash-efficiency in many of the "Web 2.0" businesses, but am a little worried that we've gotten ahead of ourselves again.

I don't think the VC funding climate will be as good next year as it was this year.

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