This morning I was reading this week’s issue of Chris Shipley’s Guidewire report which addressed a popular topic du jour, asking whether or not we’re in a bubble for web-based businesses. The paper argues that “compared to the Dot Com boom of the late 90’s very little money has been invested Web 2.0 companies. Indeed, these companies required little or no investment in order to explore early concepts and put beta sites into the market.” While it’s true that the absolute dollars put to work is in fact lower, that doesn’t seem like automatic cause for dismissal for an environment that feels frothy.
But further on in the introductory analysis of this report is a line that I can really agree with, “While the low capital requirements remove a significant roadblock to starting a web-based company, they mask the real economics of business building.”
It rhymes very much with Fred Wilson’s post from a month ago “Web 2.0 is A Gift, Not a Threat, to VCs” in which he plots in a great chart the capital requirements for startups over their development, and further says that “It may take only two or three great developers to build and launch a web service. But it still takes a bunch more to maintain it, develop it from there, deal with scalability, deal with feature enhancements, take the service in new directions, respond to competitive threats, etc, etc.”
And entrepreneurs are feeling the same way. These sentiments rang familiar a conversation I had with a serial web entrepreneur in NYC last week, who commented to me that while “the bar for launching a service is lower, but the bar for success is higher.” In other words, web companies who are attempting to leverage network effects to drive sustainable long term value are having difficulty because of the volume of companies launching places a strain on the available pool of “true” early adopters willing to try a service. The loud echo-chamber marketplace makes it extremely difficult now (vs. two years ago) to rise about the noise to spread the word in the blogosphere or other natural communications forums applicable to the target market.
As a consequence, consumer web services are being forced to attract customers outside this ecosystem. While I’ve seen some entrepreneurs with successes in utilizing offline marketing to incite behavior online, my experience has shown that the best way to get people do something online is while their online – after all, they’re already there. I think that as some Web 2.0 shakeout emerges over the coming months, we’ll see a trend that the ones which endure beyond the initial flash are those which have incorporated the marketing of the service directly into the service itself.
Nisan Gabbay hit the nail on the head in his guest post on Masheable last month when he said that for a company to be an internet success story “it must either be a true viral marketing candidate (likely a communication service at its core) or it must be a strong candidate for leveraging natural search traffic.” If a service is truly viral (i.e. the act of referring another user is deeply ingrained into service itself) or directly leverages natural search, then it possesses a more predicable sustainable way to continue to build traffic (and leverage network effects over time).
The title to the aforementioned Guidewire report is spot on – “Web2.0 is Dead, Long Live Web 2.0.” We’ll continue to see experimentation with the launch of new services and companies, but we’ll also increasingly see those which haven’t generated traction fall away. And many of those with the potential to create an enduring company will need additional capital. It may be easier to start something these days, but it’s still difficult to make it last.