Web 2.0 Bubble

With memories of the dot-com bust still fresh in investor minds, talk about the “Web 2.0 Bubble” is inevitable. Certainly, if you look at the plethora of me-too ventures in the pure social networking space, melt down seems inevitable. Most copy cat options are likely to end up in an internet graveyard, with a few broad based winners, and some niche contenders.

There are three significant factors why the “Bubble 2.0” hype seems overrated - I’ll cover the first one here, and take the others later.

The efficiencies in cost structure that drive Web 2.0 ventures :

Jeff Jarvis talks about this in Small Is The New Big – where it’s now possible for small to succeed. The cost of starting and running business has declined; the revenue you need to be successful is also lower, and the likelihood of generating this level of revenue so much more, to the point where you don’t necessarily need to have economies of scale. Jeff’s examples of blogging and Ebay point to the rise of the “economies of the small”.

Consequently, the era of big ticket venture finance and therefore the pressure on ventures to go IPO or get acquired, are far less. Yes, you will find the YouTube style acquisition happening, but that’s just the tip of the iceberg.

Ed Sim highlights this, and in fact points to the real Web 2.0 bubble – where everyone claims to be Web 2.0 and starts their pitch with all the reasons why they should be considered Web 2.0. The business model is key to getting any kind of VC interest; while lower investment levels per venture and differential risk profiles do complicate a VC’s job, it has a positive side effect in that many more ventures can cross the bar.

Couple this with a positive cash flow activity even at small scale, and the interest will be higher. The challenges will be more around making it scale commensurate with the level of investment, rather than on justifying the investment itself.