“The strangest and least economically rational technology bubble I’ve ever seen.”
Those are Paul Kedrosky’s words, discussing what now nearly everyone agrees is, well, some kind of bubble in the Web 2.0 space. I’m hearing it everywhere, and even more to the point, I feel it as well, in some odd and uncomfortable way.
Hold on, Battelle! Aren’t you the guy who wrote an Op Ed in the New York Times claiming we’re NOT in a bubble? Yeah, that’d be me, and I still hold to my arguments in that piece. We don’t have a bubble in IPO markets, and despite a few questionable deals, the major companies aren’t on a nutty buying spree either, so there’s no bubble in M&A exits infecting large company stock prices. The only folks who might lose thanks to the current Web 2 funding rush are the VCs – and, well, they can afford it.
And yet….as I think about this a bit more, I realize that perhaps we are losing in a way – all of us in this Internet/Web 2.0-related market. We may be losing the lessons a healthy market teaches us when companies fail quickly. Allow me to explain.
First, I am noticing an uptick in the kind of behavior that got us into trouble last time – specifically, spending untethered to value by companies with unproven models. Also, I’m noticing companies out there that have the veneer of success, but to my mind are riding a wave of short-term infatuation buoyed by easy money and near-term enthusiasm, rather than long-term value creation bolstered by valuable customer relationships. As Paul noted, we have a bubble in company creation – there are far too many companies with very similar models and market niches. Now, at first blush should not be a problem. After all, I’ve argued that one of the really cool things about Web 2 is that you can keep making new companies, see if they work, then disassemble them and try again.
Only, that won’t happen if the companies are kept falsely alive by a preponderance of venture capital and VC-related spending. And it doubly won’t work if those companies have an average burn rate of a million or less a year. A million bucks is nothing to most VCs. A VC pal recently told me that there were more than 200 funded companies in the video search space, for example.
In short, we don’t have a company creation crisis. But we might have a company destruction crisis. Something is off in our ecosystem – there’s simply not enough failure out there right now. For an ecosystem to be truly healthy, bad ideas (or good ideas poorly executed) need to fail, so we can all learn from the failure, incorporate the lessons, and move on.
This failure to fail can’t last forever. VCs, even the ones that funded video startup #200 and 201, won’t keep funding non-performing companies over and over again (wait, well, maybe they will). But at some point, reason will creep back into the ecosystem. Right?
This problem (if it is a problem) is all Skype and MySpace’s fault. Those acquisitions were like a huge bucket of ice water dumped on the VC community. I think some were caught sleeping and they are scrambling to make up for it. True, a lot of companies are leaner and meaner now, but many still lack good business models. When I think of a bubble I think of the companies coming into power with no way to make money and then going out in a blaze of glory. If Youtube, Facebook, and others can pull it off without an acquisition, turning themselves into companies with revenues to justify their huge valuations, then it isn’t a bubble. The problem is, if they can’t then all the VC’s will freeze their investing and many of the companies that were counting on raising another round will be euthanized.
Very nice articulation of this complex topic. I’d suggest this highly experimental approach by VCs is a functional way for them to fund companies in this unstable environment. However those of us who *feed our kids* via online efforts are best advised to look for workable rather than VC fundable solutions.
The primary difference: we’re not in a speculative bubble producing more speculation. There’s not wild speculation in News Corp’s valuation because they bought MySpace, even though MySpace provides Google with a chunk of traffic.
In your NYT essay, you nailed the ecosystem problem. AdSense is keeping the hope of future revenue streams alive. Web 1.0 died because ad revenues dried up. Web 2 will become more Darwinian when advertisers realize there’s a very small cap on contextual advertising revenue, no matter how targeted the text/banner/video ads.
VC’s and their Web 2 companies would do well to look outside their bubble world at The National Research Exchange: http://www.nationalresearchexchange.com. Sure it’s based on old school notion: Analysts who cover stocks create more liquidity.
If your bulletproof Web 2 business plan can’t stand up to the scrutiny of an independent analyst, how can you call it a business?
Don’t you think it’s somewhat ironic that the post immediately preceding this one, you callout for companies to launch at Web 2.0?
Just had a chuckle with that.
Maybe the Web2.0 conference should have a “TrashCan” to go along with the “LaunchPad”?
Yes I agree, there is some kind of a bubble in the web 2.0, but this time the investing people act more conservative. I guess the dot-com-2000 bubble is not repeatable anyway.
Thank you for sharing your thoughts with me !
John, I think pert of the problem here is that many of these companies shouldn’t even *be* venture funded, because while they might be solid lifestyle businesses, they can’t really give VCs the return they need.
Remember when Web Design was the new Desktop Publishing? There arwen’t any fewer web designers now than during the dotcom boom, but the massive consulting houses (Some VC-backed) are all but dead and gone.
Web2.0 is (currently) the new Web Design, and I predict that we’ll see some roll-ups next.
Eventually, I think, after a certain period of normalization (maybe a couple of years), we’ll see a new crop of VC-backed companies that tackle harder problems again, and that assume an environment of ubiquitous and pervasive Web2.0 lifestyle businesses and open source projects.
No doubt, 90% of the companies founded in the last year will not exist ten years from now. but that does not mean I want them to fail now.
Fair enough, but I challenge your anecdotal example supporting the bubble (“more than 200 funded companies in the video search space”). While there may be an abundance of video companies, particularly in the area of video hosting, video search is a hard problem that few are equipped to solve. Since online video today is taking off the way the text web was 10 years ago, and since search is in fact a proven model, I think video search companies have a huge opportunity for “long-term value creation bolstered by valuable customer relationships.”
In a moderate to good economy, this problem will always persist as there are few good VCs and many not-so-good. The latter category will help fund the mini-bubbles of the day.
The Bubble Zoo.
Imagine a bubble as big as a house. You are a puppet, and I am the puppet master. I put you inside the bubble, and when you’re inside, the bubble becomes your world. Everything you do, you do in the bubble – eat, sleep, work. In an instant, your strings are pulling you upward, and now you are outside the bubble. From this vantage point the bubble is nothing more than a beautiful, iridescent orb. It looks harmless, and even peaceful inside. A booming voice from above suddenly asks the question, “At the Bubble Zoo, would you rather be an exhibit or patron?”
John Battelle says that we may be heading for another bust, but, of course, I disagree. He cites “an uptick in the kind of behavior that got us into trouble last time – specifically, spending untethered to value by companies with unproven models.” He’s referring to big companies, with tons of money swooping in and buying what they think may be the next billion dollar idea. He’s saying this is bad, or following my Bubble Zoo analogy, “Don’t feed the monkeys.”
But I don’t see the harm in an idea languishing. When a mediocre idea gets acquired, who is really losing? It isn’t the ecosystem, or even the creator of the idea, it’s the big company that made a compulsive, opportunistic decision. In the 2.0 space, every day is an education, and the more ideas struggling to stay alive, the more chances we have to learn from their experience. Some might say that it is unnatural to have so many similar ideas roaming around, but maybe we are still too early in the game, and natural selection hasn’t happened, yet.
This movement is only a few years old, let’s give it a few more years before you start tearing it apart. I’m having a blast, learning a ton, and believe that all of this investment is going to lead somewhere. In the Bubble Zoo, I’m happy to be an exhibit because the zoo feeds me, shelters me and protects others like me.
Great article. What amazes me is how folks refuse to look at history.
The Bubble (circa 2000) was hardly the first big bubble, and absolutely will not be the last. Gold-rush, anyone? As long as there have been markets that can be overhyped, there has been the potential for a bubble.
But bubbles aren’t all bad — once the nastiness is over, new interesting companies and markets survive and the game changes again. For example, online sales really have exceeded most of the wild web 1.0 projections at this point.
Bottom line, watch the turd-o-meter. The turd-o-meter is driven by BS and there are four kinds of BS that score highest:
* When VCs etc are paying big money for an also-ran e.g. video startup #199
* When everyone cites the same exit model (get bought by google)
* When everyone cites the same revenue model (free with advertising)
* When thousands of companies suddenly spring up offering products “interesting, but why would I want that?”
Web 2.0 is definitely a bubble. The turd-o-meter is firmly in the red.
To me, the issue in part is driven by the fact that the search engines have the business model figured/scaled out with paid search monetization, and have an intense appetite to 1) share this model “unevenly” (take my ad revenue, please!), and 2) voraciously acquire/assemble up everything that seems to give added inflection to their appetite.
So, the theory that drives “this v. that” bubble is that the business model is outsourced.(there goes the hard part!).
So, how long can this go on, and what will web 3.0 bring? That’s the real question. If all I have to do is solve a consumer need by creatively gap filling with mash-ups + PR 2.0 (CEO blogs, podcasts, hip 2.0 conferences) + smart pedigreed noveau dot-commers, well, pffft, there’s gold in them hills. If I had to really convince advertisers or consumers or businesses to spend real money – with scale, now THAT is a gamble that adds material risk and expense into the equation – watch the VC sphincters tighten faster than you can tag a flickr image…
Hope this viewpoint helps. At least there is a lot less black garb everywhere, we have to admit that’s refreshing!
JD
We do live in a bubble. The Bubble Web 2.0 that is.
Not only that there is no such thing as this
artificially created thing – there in fact is
not really something new going on.
All of these elements attributed to Web 2.0
have been around for a long time.
What has changed is the way people access the
internet – and with the newfound speed there are
options that could not be followed up upon
during Dial Up times.
Glassy and glossy buttons, Gradients as style
elements and must have for every new Site claiming to
be an essential Web 2.0 element ? Please –
old news as well.
What’s new (and even that is not entirely new) is
that experienced professionals fall for the
artificial hype created by a greedy company,
that uses this term as their namesake uses his
spin on TV. Lots of words but no substance.
Instead of pointing out the King’s new clothes
and exposing them, instead of cutting through the
hype and revealing it as such – even you Mr.
Battelle, who really should know better – jump
on the bandwagon and contribute to the Hype.
You’re punishment for this lapse in judgement?
From now on all your communications will be delivered
in form of Tag Clouds. Lots of gradients, shiny things,
candycolors and badges included of course.
Web2.0 is a lot of deeper subject than you suggest. There is no only technical dimension, but also social and different.
The most often exchanged aspects web2.0:
“The Web As Platform”, Point of Presence, Microcontent-based, Second order content or metacontent, Metaweb.
They are also peoples which approach to subject more on room also how on side from
The Create the your the own of Web 2.0 Company, throw open the simple generating mechanism “sexy” the name of firms (how np. the google :))) which the za only name as well as the “tagline” from “proper” (in context web2.0) the technologies, different VC can calculate on gracious wallet :))). Generate, found, web2.0 use!
Web 2.0 is great, there is no errors
There is not only technical dimension, but also social and different when we’re talking about web 2.0…
Hmm, or not. Still hard to read, though. 🙂
Ja! Netz 2.0 ist nicht über änderungen in den technischen Prozessen, aber auch über änderungen in den Verhältnissen gerecht, die errichtet werden um, wie Systeme entwickelt und benutzt werden.
Yes! Web 2.0 is not just about changes in technical processes, but also about changes in the relationships that are built around how systems are developed and used.
yes, it’s good article
Good article and site. Congratulations
Great work ! I really enjoyed browsing through this site. I will recommend it to my friends. Greetings
Very interesting article.
Nice, thanks for writing this!
Web 2.0 is great, there is no errors. Web2.0 is the new Web Design, and I predict that we’ll see some roll-ups next.
Yes I agree, there is some kind of a bubble in the web 2.0, but this time the investing people act more conservative. I guess the dot-com-2000 bubble is not repeatable anyway.
Thank you for sharing your thoughts with me !
Thanks for very interesting article. btw. I really enjoyed reading all of your posts. It’s interesting to read ideas, and observations from someone else’s point of view makes you think more. So please keep up the great work. Greetings.
Thanks for this very good article … Can i translate this and insert on my site in Poland? … Thanks and Greetings
Great work ! I really enjoyed browsing through this site. I will recommend it to my friends. Greetings
This article is very interesting and written by some clever guy.:) Thank you!
There is not only technical dimension, but also social and different when we’re talking about web 2.0…
There is not only technical dimension, but also social and different when we’re talking about web 2.0…
http://www.szookanko.pl
Very good article, and very informative!
Good work!
I have noticed that the current term sheets valuations are too high. This is a big problem for investors.
This article is very interesting and written by some clever guy.:) Thank you!
Great work ! I really enjoyed browsing through this site. I will recommend it to my friends. Greetings
“The Web As Platform”, Point of Presence, Microcontent-based, Second order content or metacontent, Metaweb.
Web2.0 is a lot of deeper subject than you suggest. There is no only technical dimension, but also social and different.
I know what you mean but unfortunatelly it is not usefull for me