GenuineVC David Beisel's Perspective on Digital Change

January 23, 2006

Yahoo and Google “are essentially competing with the venture capital community” with many of the recent company purchases really “talent acquisition.” Last week Om Malik wondered, given Yahoo’s recent modest financial quarter, if “falling stocks [will] bring [Web 2.0 company] shopping sprees to quick halt.” My own view is that I doubt that a misstep in managing the Street’s expectations will let up in the execution of this clearly thought-out acquisition strategy. The relatively small cost in acquiring innovative technologies and people into an organization like Yahoo through this method shouldn’t at all significantly be changed by a modest swing in market capitalization.

We’ll see how the story unfolds over the next month or two. According to the data on this page, Yahoo has acquired sixteen companies of this type for an undisclosed sum since July 2004. With a mere average of only 37 days between each one, a little quick calculation reveals that we should see the next one around Feb 14th. (Though the standard deviation is 24 days, so there is a little wiggle room for this rough method.) Don’t misinterpret this back-of-the-envelope math as a true prediction, but merely as an indicator that we’ll soon see if there’s any hesitation on Yahoo’s part.

Om also wonders about the future of the emerging Web 2.0 services if the pool of acquirers start shying away. In my opinion, the strategy of these businesses shouldn’t change dramatically. My suspicion is that most aren’t intentionally built to flip (or flop), and that a drying up of acquirers will merely hasten the push towards revenue as opposed to fundamentally changing the goals of these companies. Keep in mind that unlike during the bubble, there is now a better set of intfrastructure to support various monetization models for consumer web services. So while perhaps many large (venture-backed) companies won’t be built around a large number of these services, small and profitable models should emerge from this current wave of innovation.

A paraphrase of what one bootstrapping entrepreneur told me recently: “It costs us so little these days to develop and host these services. We’re just throwing a bunch against the wall to see what sticks. Some will work profitably, while others will not.”

I think that’s just exactly it – some of the current wave of innovative services will find profitable models. Others will be picked up by Google, Yahoo, or an equivalent. A few will receive venture backing and succeed on a larger scale. And many will eventually fail. It’s all part of the innovation process, and it’s up to entrepreneurs to create their own path in it.

  • Adam Marsh

    Hi David,

    Great post. I’d add that one important aspect of the “better infrastructure to support monetization for consumer web services” is advertising, and in particular AdSense, which is widely used by smaller sites. But as I detail here, I think there’s a problem with this picture: contextual targeting of ads doesn’t work that well when the page content is changing rapidly and/or not focused tightly on one topic.

    On a related note, Robert Young notes in his post here and his comments at Techdirt that MySpace seems to be getting a drastically reduced income from its ad space compared to Google. He ascribes this to the uncontrollable nature of user content, which has traditionally spooked advertisers but is now becoming more accepted due to AdSense appearing on blogs.

    This is a great point, but I’d add to this the fact that a search results page is by definition single-topic, the topic being defined by the keywords entered; in contrast, blogs and MySpace pages don’t have such tidy targeting data associated with the page. However, as noted by others in the Techdirt comments, community sites are beginning to better use the data they do have, data that describes the interests of users. After all, context is really just a proxy for what the reader is interested in — and search keywords are such good targeting data because they represent interests at that very moment.

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