Why Venture Capitalists are Conflicted with Web 2.0 Startups
Web 2.0 is the hottest word nowadays, just add it to your company description and you are almost there. New Web 2.0 startups (or at least new web applications) emerge daily and become part of one of todays' most popular groups. When you take a naive look at this Web 2.0 market emergence, you would expect to have the VC community to be the fuel that keeps its engines alive and kicking. Well, it is not the case and most VCs play a neutral role of viewers glancing at the "prodigy" with "admiring eyes".
Instead of just blaming sides, and people I have contemplated on why the order of "creation" is a little bit reversed in the Web 2.0 scenario and a picture with many "flaws" is revealed in Web 2.0.
I want to state several common denominators among all Web 2.0 "creations" before I go to the VC aspect:
1) Exceptionally short time to market at all stages of company development – The rapid evolvement of rich web application development resources, enough bandwidth and low cost basic infrastructure created a situation where the time frame between the moment an idea pops to the moment it is up running is shrinking dramatically. New features are rolled daily, and sometimes rolled back:), user feedback is immediate and a true dialog between developers and customers is becoming reality.
2) Small teams – One, two or five professionals are enough to do anything that exists today in the Web 2.0 world technically. Maybe not that scalable and not that smooth UI but still it will work.
4) Low setup costs – Low cost to free infrastructure and development tools.
5) Raw material – The content that is generated by blogging and bloggers creates a growing pool of "raw material" for innovation. Users' level of interactivity with the web is growing and creates another pool of "raw material" to work with for entrepreneurs.
These very exciting conditions for creating a web 2.0 startup present a double edged sword and are the root for the conflict VCs have.
If I was a VC (I am not) then I would probably think in this line of thought about a Web 2.0 investment opportunity:
Bad side of the sword:
1) Barriers to entry – As much as it is exciting that my future to be portfolio company does things fast, they do not hold any unique barrier that will prevent their next door neighbours to do it faster.
2) Business model – How the hell do you make money of it. In an enterprise software/product play I know the path of getting first customers, market validation and then the big money from all the Fortune 2000 list. In the Web 2.0 movement we have a poor track record of low priced exists; even our generation "heroes" such as Del.icio.us sold for low prices and if they are doing that what would be on me and my little investment.
4) Domain Knowledge – I do not have years of experience and my consultants are not very acquainted with the domain (except for humming the "hot" words), which leaves me quite ignorant about my decision.
Good side of the sword:
1) Market emergence – Web 2.0 startups and blogging as the social aspect of the market is growing and emerging and it "hides" somewhere an opportunity. I just don't know where it is.
2) Good people – Many professionals are moving towards Web 2.0 environments and I'd like as a VC to have my money on them.
Enough with taking as a VC:)
If we are to consider the general conditions of the strong forces in the web, then we can rationalize some of the attributes Web 2.0 startups share; and maybe the world has changed from 1999 and we are the ones that have not changed yet. Let's take Google for example with their innovative corporate culture. They have set new rules for the game that everyone has to follow (Microsoft is finding out now and painfully how much it is true). Google created a new barrier to entry with their shortened product lifecycle as well as high level of interactivity with their customers. As I see it, Web 2.0 startups are just trying to catch up.
I had to write this post after reading this post about Digg , it got me into the paranoia of another low priced exit:)