January 31st, 2007
Web 2.0's legacy: The startup Petri dish
The legacy of Web 2.0 is on parade in New York City–a never-ending stream of startups armed with PowerPoints, infomercials and terms like long tail, mashups and mindshare. One exec used four Web 2.0 buzzwords in a sentence.
Bottom line: It's apparent at the AlwaysOn confab that it's just too easy to go from concept to company. There are too many video sites vying for attention, too many easily replicated firms and way too many executives looking to build a network and then find a way to monetize the business.
It's Web 2.0 at work. Roughly speaking Web 2.0 allows new companies to adopt readily available technologies, smush them together into some kind of hook–a new niche or market–and try to sell out to a larger company like Google, Yahoo and News Corp. Web 2.0 is also going mainstream. The funny thing is everyone sees Web 2.0 trouble coming: Bubbles are mentioned often by executives and investors at AlwaysOn.
"You can see these curves. In 1999 we overshot on the optimism and then overshot on the way down in 2001," says Saul Berman, a partner for IBM's media and entertainment consulting services unit. "And there seems to be some risk in overshooting now."
But the bubble talk misses the big picture. Web 2.0's legacy is that new ideas can be launched and shot down in record time. Meanwhile the risks to the average bear are minimized. The difference between this startup bubble–if it is indeed one–and the one in 2000 is that these shaky companies would have gone public. Today, if a startup fades only the venture capitalist is on the hook–and those losses are part of the VC business model.
In other words the risk/reward equation has changed to the point where any idea can get tested. It's a capitalist Petri dish.
How easy is it?
Judging from the number of presentations at AlwaysOn's media conference it's ridiculously easy to be a video company these days. YouTube's success has a lot to do with that. Social search is also big (MySpace anyone?). Everyone wants to create some communal experience.
"The big difference now is that you can get to the proof of concept stage quickly," says Steven Marder, CEO of Eurekster, a San Francisco vertical community search company best known for its "swicki." "It's clear that companies can leverage the best stuff without a lot of investment."
Meanwhile, few presentations at AlwaysOn even touched on the biggest question: How will this company make money?
"What's scary for me is there are a lot of startups with no real revenue model. It's all CPM," says Ted Murphy, CEO of PayPerPost. "The biggest concern here seems to be building a network and then monetizing it."
Perhaps the biggest reason building a network got more play than profits is because there were a bunch of media companies presenting. Let's face it, you can launch a blog sell a few ads and call yourself a media company.
"There is a lot of buzz about starting a company and it does seem easier to start something that's not tech oriented," says Avichay Nissenbaum, CEO of Yedda, an Israeli firm that offers search answers in a blog format. "It's easier and faster than it used to be. In fact the hardest thing seems to be getting a good domain name."
Trouble ahead?
But if the hardest part of starting a business is getting a domain name is there any real value being created?
Avikk Ghose, vice president of Mercora, a startup that allows users to become radio broadcasters and takes care of the royalty payments on the back end, says there's a lot of value being created. Of course, some of that value is in weeding out ideas that won't work.
"It is a big Petri dish here," says Ghose. "The companies that cook up a good user interface, use flash and say presto we have a company are going to get weeded out."
Ghose argues Mercora will be different because it actually has a revenue model. On the desktop, its service is free, but ad supported. On mobile phones, Mercora's service is a $4.99 a month subscription. It plans on licensing its software.
Murphy acknowledges that the number of startups and ideas ventured are reminiscent of the dot-com bust. And in many respects the outcome will be the same–most companies will fail. "Some of these ideas are phenomenal, but it's unclear whether these are game changing concepts," says Murphy.
The big question is what happens if Web 2.0 implodes? The consensus seems to be that there won't be any dire consequences if the startup bubble pops. No economic damage. No advertising implosion. Just a bunch of entrepreneurs that will reload and build something new.
Marder says the risk profile in the big picture has changed. Many of the soon-to-fail companies aren't going public so it's not like your grandmother will get stuck with a bad investment. And VCs expect to take losses. "There will be failures," he says. "The VCs have seen this film before and will pull funding after a year or two."
Nissenbaum's mission is to not be one of the failures. "The risks are still there. If you start a company you're responsible for keeping it liquid," he says. "Believe me the risks are still there."
Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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