Is The End of Web 2.0 Nigh?
By Anna Johnson on January 10th, 2009The current economic recession and the havoc it’s wreaked on the venture capital and technology sectors harks back to the post-dotcom period. Only it’s actually much worse. Does that mean the end is nigh for Web 2.0 companies? Maybe…
Quick history lesson to provide some perspective. History is the best teacher, right?
Well, back in the late 1990s, Internet companies were sprouting up everywhere. Many of them offered a myriad of free services and had business models based on ad sales and growing market share now, making money in the future. Or they were simply hoping to cash out in an initial public offering (IPO).
Then, in 2000, stock markets crashed, everyone woke up to the foolishness of investing in companies that didn’t make money, and venture capitalists stopped funding such companies.
Or so we thought.
Witness the rise of Web 2.0 and the new ‘social’ Internet, with its band of free services all having business models… based on ad sales and growing market share now, making money in the future.
Is it just me, or does this sound familiar?
Okay, so I’m being cynical. I LOVE a lot of the services that have emerged under the Web 2.0 umbrella. But I loved many of the free services offered in the dotcom days too. The problem is that, during a recession, they’re extremely vulnerable.
What’s the number one thing companies cut when sales slow down? Well, if it’s not people, it’s marketing budgets. And while all of us marketers scream that marketing should be the last thing to cut, the harsh reality is that financially strapped companies generally look for ways to make big, decisive cost cuts.
And, apart from reducing staff, what’s easier and more impactful than cutting that big, seemingly amorphous marketing budget?
Especially if the marketers in charge of the budget aren’t able to defend it – they’ve either been let go during the staff cuts (!) or they can’t point to specific returns on investment generated from that budget.
All of which means that any business reliant on ad sales is vulnerable during a recession. Especially if such a business also can’t keep advertisers, based on delivering specific ROIs.
And so, The New York Times has announced that the ‘Web 2.0 heyday is over.’ Ironic, since another ad-reliant industry on shaky ground is the newspaper industry!
Nevertheless, I tend to agree. I think that just as Amazon.com emerged through the dotcom boom and bust to become THE leading online retailer… we’ll see several Web 2.0 companies emerge as dominant forces in the years to come.
But now will also be a testing time for many of the existing Web 2.0 businesses, and a time when many startups hoping to become the ‘next big thing’ in Web 2.0 fail to get off the ground.
Sadly, this is not necessarily because they aren’t any good. Rather, it’s because funding is so scarce. So although a startup may have a great idea for a hot new technology and a team bursting with talent… if they need a lot of money to fund their idea… they may meet with a lot of closed doors among investors.
And it’s not just venture capitalists being cautious about the potential of a given startup… it’s also because many venture capital firms themselves are in dire straits.
Forget the aftermath of the 2000 dotcom crash… you’d have to go back to 1977 to see a time when they were fewer initial public offerings – a major means by which VCs exit and make money from their investments.
That’s not to say all funding has dried up. But it has become increasingly more difficult to make the case for funding an advertising based Internet business.
According to The New York Times, VC firms looking to invest in Internet companies are, instead, looking for businesses that make money in ways other than selling ads.
The are interested in businesses that sell stuff, such as subscriptions, virtual goods, open-source software, web-based software, Internet-based cloud computing and virtualization software that lets companies use less hardware to run applications.
Although, given the challenges facing retail (online and offline) right now, I’d suggest that ecommerce businesses might still face funding difficulties.
Of course, despite the apparent doom and gloom, many venture capitalists are still keeping their chins up. And startups, Internet marketers and others should do so too.
As Paul Holland, the general partner in charge of the clean tech practice at Foundation Capital notes:
“Cisco was founded two weeks before a stock market crash. Oracle was founded during the Reagan recession. In bad times, that’s when the best opportunities come up.”
