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Wednesday, December 27, 2006

Web 2.0 : Far Too Many Players & Too Few Chairs

Venture one estimates show that in the first nine months of 2006, VCs sunk $455 million into Web 2.0 companies & this is thrice as much money as such startups received in the same period last year.
WSJ has an interesting discussion on whether Web 2.0 is another bubble, featuring Todd Dagres, a founder and general partner with Spark Capital, and David Hornik, a general partner with August Capital.

Todd Dagres makes very interesting points. He starts by saying that Web 2.0 is a bubble for 3 reasons:

1) There is far too much money chasing Web 2.0 deals. Too much money means too many companies getting funded at higher valuations.
2) There are virtually no barriers to entry in Web 2.0 and therefore the ability to develop a unique solution and sustain a competitive advantage is virtually nil. Therefore, it's difficult for Web 2.0 companies to build long term value.
3) There is very little liquidity in the market for Web 2.0 companies.

The argument against the web 2.0 hype is centered on the fact that the hype is sustained as private markets are far less efficient than public markets and without the regulations that bind listed companies, the private companies need not be so transparent and they are inherently illiquid and risky. Strange things happen this way - Private Web 2.0 companies with negative cash flow and little revenue valued above public companies with stronger operating results and predicts that web 2.0 space will have a higher mortality rate than other segments of the overall media and technology industries.

David Hornik puts a weak defence in favour of Web 2.0 business but he points out that even assuming that the vast majority of the Web 2.0 companies fail, the amount of capital that is going into all of them combined is a pittance compared to the Web 1.0 bubble & this is a relatively small portion of the overall capital being invested by the VC community on an annualized basis. The key to note he argues is that they are innovating around things that matter to consumers today & are being appropriately valued, not just by potential acquirers but by the consumers themselves.

I agree with the view that gifted entrepreneurs shall start disruptive companies that look for what will be hot rather than what is hot. So the best of the entrepreneurs may not necessarily be looking at Web 2.0 ideas in its classical sense, but today any idea can be stretched to be called a Web 2.0 business.As I wrote here, I am not so unduly optimistic about the Web 2.0 movement – I had been calling for a reality check for some time. But the enthusiasm shown in building this movement is indeed amazing and some of applications show promise of success. I do know that this web 2.0 is managing to attract a new bunch of entrepreneurs who are generally well regarded for their capabilities and enterprise. Sure the list in the Web 2.0 hall of shame will be longer than the Web 2.0 hall of fame, but still the movement needs some positive consideration. The concern should,in my view, should revolve around excessive media hype about Web 2.0, as in the overall equation, a few good success stories are sure to bubble up and purposeful enterprise at any time needs to be looked positively, given that the financial flow is not much - this is not to support/cover up mindless wannabe and dreamy eyes millionaires chasing ordinary web 2.0 ideas.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
"All views expressed are my personal views are not related in any way to my employer"