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Wednesday, March 15, 2006

The Web 2.0 Investment Bubble

Tim Oren points to an excellent note on the Web 2.O investment bubble. The time and distance between an early entrant and quickly becoming an incumbent has almost near zero threshold – alarming as in the new type of me-too firms that get funded , rolled out – that includes the set that manages to get good coverage.
Peter Rip
,an early stage venture VC with Leapfrog Ventures points out ( a piece written many months back),with cheap access to investable capital, many near-identical companies get funded & the abundance of similar companies raises the capital requirements so that some can break out by outspending leading to a shakeout and crashed expectations.
He sees that the root causes are the same:
1. It is very easy to make the initial commitment (founding or funding)
2. Underestimation of how many had the same conclusion
3. Underestimation of survival requirements for the ‘too many competitors’ case

He is in my opinion spot on in sensing a parallel between this bubble and the PC software bubble of the 80’s, where several product vendors were choked to death – Sane words. Reduced barriers to entry always look attractive to the entrants. But once you enter, you are an incumbent - Ringing words particularly when you consider that that you may need millions of customers to sustain operations.

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