We swore we’d learn from the meltdown of 2000, but we haven’t. In many ways it’s almost worse this time, because we know how the story ends. Here are my Top 5 reasons for believing we’re in a Web 2.0 bubble.
5. Too Much Money
While it is a bit harder to get financial backing these days, the companies that do get funded often get over funded. Venture firms today have a lot of money to put to work and they are handing out cash even to companies that shouldn’t need much capital or that lack an established business model. Web 2.0 companies should have relatively few major capital expenses. In fact, the most popular Web 2.0 sites raised their money after their user bases outgrew their capacity and infrastructure. When companies get over funded, they are forced to get big fast—often at the expense of profitability. If you raise $10M, you need to become at least a $30-$50M company for the common shareholder’s equity (i.e. founders and management) to be meaningful. When growing your top line becomes your primary objective, often at the expense of a viable business model, you are starting to gamble with your business.
4. One-way Exit
The IPO market is virtually dead. Companies are being built to sell at auction courtesy of Google, Yahoo and Microsoft. However, if these acquisitions don’t pan out and the open checkbooks start to close, a business model with a lot of users and no way to make money will suddenly seem a lot less attractive.
3. Web 2.0 for X
It’s hard to meet someone these days who’s not starting a Web 2.0 company for toddlers, grannies, people who love red shoes, etc. Haven’t we seen this one before as well—the Portal for X fever of the late 1990s? After most Web 2.0 presentations that I have seen, someone has to ask the question “So what’s your revenue/business model?” The answer, if any, always seems to be targeted advertising. But how many individualized communities can we each join before our economy goes into the toilet? If all these companies get the users they claim, no one in this country will be working. Our appetite for communities has limits; the hours in a day
2. We Can’t Charge for Our Product
Okay, this is really an extension of Number 3, but I am not a fan of companies that plan to support their product or service offering with advertising. Why not charge for it? If you have something of value, people will pay for it. If you can’t charge for it, people just don’t value it that much. Advertising is a great revenue mechanism for content, but if the only people who will pay for your company’s products are advertisers, you have a problem. Among other things, the consumers of ad-supported products can expect pretty poor customer support. After all, they aren’t the real customers, the advertisers are (see Web 1.0 & NetZero).
1. Portals for Web 2.0
If there is one telltale sign of a Web 2.0 bubble, it’s that websites are popping up to track or index Web 2.0 companies. (I have learned of about six in the last few months). A portal war for Web 2.0 is almost too good to be true—it combines two bubbles into one. In every unrecognized bubble, there is always a sign that tells me we are at or near the top. For Web 1.0, it was the E*Trade Super Bowl commercial that made fun of having just wasted $2M on the dancing monkey ad. For real estate, it came two years ago when I saw home-loan carts next to jewelry carts in a mall in San Francisco. Mark my words, Web 2.0 portals are the beginning of the downturn.
To be fair, there are many things that I love about Web 2.0, and I do work with many of these companies in my consulting business. However, what I really love about Web 2.0 is that companies can bootstrap and develop profitable niches at the expense of larger, more established players. These companies are successful because they are able to find an unmet need and reach customers in a cost-effective manner using the web; they don’t necessarily have the best features. Features and user interface design are important, but they do not make a business successful. Compare any two companies. If one has millions of users and a clunky UI (see Myspace) and the other has a very fancy AJAX interface, but hardly any users, I would always bet on the former. It’s a lot easier to hire designers than it is to find millions of users.