Web 2.0 Bubble

I had an enjoyable lunch with Jeff Jarvis today catching up on a number of things and brainstorming about value in the next generation web.  During the conversation I vented a little frustration at the use of buzz words and bubble-like mentality with terms like Web 2.0.  I am starting to get extremely tired and frustrated about every pitch that I see now where a company claims they are a Web 2.0 company and lists their principal reasons for being Web 2.0.  It reminds me of the mid-90s when everyone said they were an Internet company and sprinkled their pitch with wild growth expectations from Jupiter Communications.  Or when everyone said they were a Java company when Java was the cool buzzword.  Frankly I do not care if you are Web 2.0, Web 1.0, etc.  All I care about is what your service or product does, why it is valuable to the end user, why it is uniquely different from the competition, what the barriers to entry are, and how you plan on reaching your customers and how you will ultimately make money.  Don't start your pitch with Web 2.0 ecochamber talk.  In fact as Jeff and I discussed several companies and ideas, we concluded that most of them were just features and not companies.  And as Jeff states, when small is the new big, then it poses problems for VCs as well.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features.  As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people.  Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing.  I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient.  It is no wonder why VCs are quite excited about next generation web companies.  All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble.  As you see from Tim's map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money.  Start talking about how you are going to create a defensible barrier to entry.  Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage.  Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues.  While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s.  We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble.  But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs).  What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash.  Let's focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.

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This post was written by who has written 358 posts on BeyondVC.

21 Responses to “Web 2.0 Bubble”

  1. Don Dodge Oct 19, 2005 at 7:09 pm #

    Silicon Valley gets so wound up about technology and buzz words that they lose sight of the problem they are solving and the value to the customer. It is great to see that there are still some VCs that are focused on business fundamentals.

    I wrote a blog about “first mover” technology leaders, that were eclipsed by “fast followers”. It is amazing how often it happens. AltaVista lost to Google. Napster lost to iTunes. Visicalc lost to Lotus 123 who lost to Excel. Here is a link to the full story. link to dondodge.typepad.com

  2. Jonny Oct 20, 2005 at 1:37 am #

    I was directed here by Jeff Jarvis, whose blog I read almost every day.

    Do you have any specific examples of what is a “feature” and what is a “company”?

    I’m currently reading “enterprise and venture capital” by Chris Golis. I bought the book on Amazon for about $20 AUS (including shipping). It was $50 at Dymocks. The funny thing is the book is published in Australia, so it gets shipped to California and then back to Australia, and that makes it cheaper!

  3. Ruchit Oct 20, 2005 at 3:02 am #

    We cant escape from buzzwords aka mainstream words similar to Mainstream Applications & Services..Check out this story..link to siliconverse.com

  4. Matt Oct 20, 2005 at 4:33 am #

    A big part of Web 2.0 is having learned the lessons about what went wrong during the Web 1.0 bubble. But anyone spouting it off as a buzzword during a pitch to VCs clearly hasn’t.

  5. mark evans Oct 20, 2005 at 2:44 pm #

    ed,
    couldn’t agree more with your take on web 2.0. the more people focus on building businesses, the better off we’ll all be.

  6. Charles Jolley Oct 20, 2005 at 3:49 pm #

    Great post. I wrote about this on my blog but the trackback is not working. From the post:

    We’ve been talking a lot about this new Web 2.0 thing lately. But Ed Sims at BeyondVC makes a good point: there are certain timeless elements that make new ventures successful, no matter what technology you are using. For example, before you go start a new company based on your Web 2.0 idea, I think everyone needs to identify…

    link to sproutit.com

  7. Chunia Oct 21, 2005 at 4:15 am #

    I am an entrepreneur and software architect who reads your blog every day. Yes, in today’s world, one can start a business for 30K. For a seasoned programmer, writing a huge web-application in a matter of months is not very difficult. A few Dell computers, Linux, some other open source software, and a T1 line is enough to set-up a website. There is no barrier to entry here. Investors come in to take it on from here and help the entrepreneur build a brand image and business. So, as always, you have to identify and trust the right people.

    Look at the products a company with lots of money, namely Google, has – Gmail, Google Talk, Google Reader, Google Desktop..Do you really think there is any barrier for entry into these products? I can tell you that I myself can single-handedly write these applications in 6 months timeframe. B
    ut I will need your money and advise to build business out of them.

  8. Ross Mayfield Oct 21, 2005 at 9:29 am #

    Well put, Ed.

    Calling your company a Web 2.0 play is like saying your business plan is 75% water.

  9. Anon Oct 22, 2005 at 1:04 am #

    I’m tired of hearing how web 2.0 is overhyped, now its cool to hype hyping. They are just buzz words because thats what people want to hear! If people are sucked in by a product that doesn’t make any sense, well its there money eh?

Trackbacks/Pingbacks

  1. web2.wsj2.com - Oct 20, 2005

    Being Disruptive With Web 2.0

    I think Richard MacManus is definitely onto something with his search for highly disruptive Web 2.0 startups. However, I do think some of the mystery of why there are few disruptive startups in this cycle (yet) can be largely explained. My humble

  2. web2.wsj2.com - Oct 20, 2005

    Being Disruptive With Web 2.0

    I think Richard MacManus is definitely onto something with his search for highly disruptive Web 2.0 startups. However, I do think some of the mystery of why there are few disruptive startups in this cycle (yet) can be largely explained. My humble

  3. web2.wsj2.com - Oct 20, 2005

    Being Disruptive With Web 2.0

    I think Richard MacManus is definitely onto something with his search for highly disruptive Web 2.0 startups. However, I do think some of the mystery of why there are few disruptive startups in this cycle (yet) can be largely explained. My humble

  4. Mark Evans - Oct 20, 2005

    Web 2.0 – Stop the Insanity

    Has the high-tech community lost it mind over Web 2.0? The growing
    roar within the blogosphere is getting louder over what Web 2.0 represents, whether it’s good or bad, whether
    new companies are being created just to be flippled, etc.

  5. Millionaire Socialite - Oct 20, 2005

    Backlash 2.0

    I have a hard time keeping track of where everyone is, Web 2.0-wise. Theres probably a bubble. Or maybe its already over?

    Frankly I do not care if you are Web 2.0, Web 1.0, etc. All I care about is what your service or product …

  6. Alex Barnett blog - Oct 21, 2005

    WTF is Web 2.0? Web 2.0 = Bubble

    Robert Margel email me ealier this week.

    He asked me a question, something along the lines of “so…

  7. Like It Matters - Oct 21, 2005

    Each Adam Names His Animals

    Wow, what is more tedious — the handwringing over the question ‘What is Web 2.0?’ leading up to the conference or the bubble backlash postings since? [Note, I am not referring to thorough attempts to really map out what…

  8. 渡辺聡・情報化社会の航海図 - Oct 22, 2005

    2.0時代の経営戦略

    先日、ウノウの山田社長と石川副社長を訪問して意見交換させて頂く機会があった。内容は別途として、以前から考え続けていたことをひとつテーマとしてお持ちしてやりとりするうちに少し考えがまとまったのでここでシェアしたい。

  9. 渡辺聡・情報化社会の航海図 - Oct 24, 2005

    2.0時代の経営戦略

    先日、ウノウの山田社長と石川副社長を訪問して意見交換させて頂く機会があった。内容は別途として、以前から考え続けていたことをひとつテーマとしてお持ちしてやりとりするうちに少し考えがまとまったのでここでシェアしたい。

  10. 渡辺聡・情報化社会の航海図 - Oct 24, 2005

    2.0時代の経営戦略

    先日、ウノウの山田社長と石川副社長を訪問して意見交換させて頂く機会があった。内容は別途として、以前から考え続けていたことをひとつテーマとしてお持ちしてやりとりするうちに少し考えがまとまったのでここでシェアしたい。

  11. ZetaVu - Oct 26, 2005

    Bubble 2.0

    Il mondo dei Venture Capitalist comincia ad averne abbastanza del ronzio sul web 2.0 e della bolla che se ne sta generando.Ecco due testimonianze: David Hornik su VentureBlogEd Sim su BeyondVCHo provato a raccontare queste posizioni in un pezzo su

  12. ZetaVu - Oct 26, 2005

    Bubble 2.0

    Il mondo dei Venture Capitalist comincia ad averne abbastanza del ronzio sul web 2.0 e della bolla che se ne sta generando.Ecco due testimonianze: David Hornik su VentureBlogEd Sim su BeyondVCHo provato a raccontare queste posizioni in un pezzo su

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