I started this blog, mostly for the fun of being a contrarian, about a month ago after watching a lot of hype/crazy talk about this so-called Web 2.0. I do agree with most who say the term is generally a bad one, but I haven’t seen anything else come along, and it’s fairly convenient to use to generically group together a series of Web technology plays.  To me, it has a lot to do with the concept of “technology for technology’s sake,” namely things that are easy to build with the current foundation of the Internet, regardless of any clear need.  As opposed to “Web 1.0″ which was more of a zany quest to bring every single “real world” business into the Internet, regardless of how appropriate the fit.

Now we seem to be reaching a new stage of Web 2.0, one that is getting more and more money in play.  Tom Foremski put together a great summary earlier this week in which he points out the $6.35 buh-illion dollars VCs shelled out last quarter, of which PriceWaterhouseCoopers pointed out that about $870 million (only) was for 2.0 companies (although as the Merc observes, their “2.0 list” seems to be any company less than 24 months old, but hey, it’s pretty good for accountants, right?).  Now quite a few folks have immediately jumped all over the topic of the validity of said list (see here and here), but I decided it was time to do a little of that fancy ‘ol investigative journalism.

I read a great piece by Brad Feld on the VC economics of Web 2.0 in which he discusses some of the issues faced by both the startup and the investor.  As many of you have noticed, there seems to be a lot more “sprinkling around” of money, say $1-6 million at a time, and a lot fewer $30-$300 million dollar ventures (or say the billion-odd that got flushed down the Webvan toilet, but they did have som ebitchin’ trucks).  One interesting upside I see is this: as opposed to the 1.0 climb and slide, my hunch is a lot fewer 2.0 firms will receive a second round if they haven’t made something happen with the first one.  It could be wishful thinking, but I would assume that everyone will know how Site9 is doing (just raised ~1.1M) in time to either fund a big expansion, or close the doors and sell off the desks.

But we also have some mega-funding starting to rear it’s ugly head.  I asked Fred Wilson (yes, I really did put some effort into this one!) for his thoughts on some 2.0 funding, and he said his ”experience with large financing rounds is they almost always come back to haunt the entrepreneur.” I wonder, then, what anyone is thinking by giving Jobster a sum of almost $50 million dollars (and I am not the only one here).  I really liked the opening bit of Matt Marshall’s column on Jobster last week, but I think he let them off the hook by the end.  My perspective?  A crowded space and an extremely highly valued startup taking on thoroughly established players is not where I’d bet my money.

And Jobster is just one of several starting to climb up the over-valuation ladder, as we saw Zillow pick up another $25 million recently (total valuation? over $50mil!).  Granted they are doing well with traffic (and, as Brad Feld comically pointed out to me in an email “I do think it’s entertaining that they are both in Seattle.”), but with over 100 employees to feed every month, that cash is getting spent! I can’t help but feel that it’s the push to the higher valuations (which are probably caused in part by the MySpace acquisition and FaceBook’s ridiculous decision to turn down ~$800 million, a.k.a, the last offer they will probably get) that will accelerate Mark Evans’ prediction for the coming bust 2.0. 

In fact, when I asked Nick Douglas at Valleywag his thoughts, he said “I want a VC who also approaches me with a business plan i can follow, a PR firm squared away, and my golden parachute in place. Plug-and-play capital.” And adding to that you get a better sense of Nick’s humor (which I love), “In eighteen months, I’m out on my ass and ready for the next ride.”  All too true.

Now I must admit, I tend to believe that 80% or so of VCs out there are heavily influencible by either personal bias, emotional reaction/decision-making, or mob effect (”herd mentality”).  Fundamentally I’d really like to see more VCs pushing their 2.0 companies into sound business principles, and getting deep and dirty with understanding how to monetize things like social networks and podcasts.  If they can’t do that much, they shouldn’t be investing. 

Sure I’ve read some interesting accounts of clear VC thought-process and I think Andrew’s list of 65 VC bloggers (psst, Andrew, it’s spelled “Mobius”) is a good way to see both the good and the bad of VC mentality. Also, I appreciate seeing the VCs actually spend the money, it’s good for them, it’s good for the entrepreneurs, heck, it’s good for me (in that Reaganomics trickle-down view of the world). 

There are also some factors in play that the ‘outside world’ doesn’t necessarily see.  I exchanged emails with Paul Kedrosky (who blogs about a myriad of topics), who has an interesting perspective,

As I’ve said many times, the venture business is a bubble biz: it needs periodic enthusiasms, including over-funding of hot-hot areas, to justify its existence. Always has, always will.

It is, frankly the only way to justify being locked into a seven-year illiquid fund full of infrequently-priced equities. While that doesn’t mean we shouldn’t worry about  bubbles and over-funding, the reverse — some notional steady-state, bubble-free venture market — would be more disastrous. 

See?  I told you they have interesting things to say!  I would also point you to some of Fred Wilson’s thoughts on the first Internet bubble (although his site is acting a little funky as of the time of writing - I think he’s got a few too many Web 2.0 plugins and they aren’t playing nice with each other). I actually thought it was a bit ironic when I read his post about more efficient markets in which he states:

MBAs with a spreadsheet are a dime a dozen. But the kid who knows how to mashup 1000 rss feeds, tag them on the fly, and cross index them with the crawler he hacked the other night at three in the morning is in high demand.And if that kid wants to give up his fat hedge fund paycheck and build a company around those skills, I am all ears.  

The oddity here is Fred seems like a fairly sane guy, yet the kid he’s describing seems to be the same kid who needs to perform some serious acrobatics to pick the exact right mashup, with the exact right business model, and the exact right marketing strategy to jump through the very narrow window of opportunity he really has.  Then again, it’s still just Fred’s blog, where he should be allowed to freely write whatever he’d like!

So let’s circle the wagon back to where we started.  There’s a lot of folks out there with nifty ideas.  Most of them will fail (due to viability, leadership, market positioning, bad weather, etc).  There’s a few folks out there who have a lot of money that they must invest sooner or later.  There’s a lot of momentum, hype, and energy going into an area that the decision-makers generically as a whole do not seem to fully understand. And how could they?  It’s too much, too fast. 

I don’t know anyone personally at Sequoia, but I know them by reputation, and they funded Meebo.  Yup, Meebo, a service I like as a user, but seems likely to never ever make money (or not enough to make the decision-maker at Sequoia be able to justify it in the long run).  Every single board meeting should be focused on (1) how Meebo makes money and (2) when Meebo makes money.  No more ‘traffic reports’, and licensing to another Web 2.0 company should be part of the marketing report, not the sales or business development update.

But then again, per Paul’s point above, that’s what the bubbles are here for, and, as Fred Wilson shared with me in an email…

Back in 1996 I got a business plan for a website for “doctors who scuba dive“

There’s nothing new going on.

Same old sh-t

 

ps - thanks to the prominent VCs and bloggers for taking the time to exchange emails with me on this topic, I enjoyed the dialogue.

pps - extra special thanks to the Sand Hill Slave for inspiring the title of the post!