Crash Of The Web 2.0 Titans

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Crash Of The Web 2.0 Titans


This article has been inspired by a post by Erik Peterson in the OnStartups Forums titled simply “Crash 2.0?” (Erik has a talent for title brevity that I clearly lack).  With Erik’s permission, I thought it might be interesting to dig into this “Crash 2.0” concept a little deeper.   [Shameless plug:  If you’ve not yet registered for the OnStartups forums, it’s free and easy.  The group is now 300+ members strong and there have been about 480 posts, a lot of them quite interesting].
For purposes of this article, I’m using the word “titan” in the dictionary sense (defined loosely as “a person of exceptional importance and reputation”).  You’re probably going to argue that very few of the current Web 2.0 startups are “important” – and you’d be right.  However, to really get a good “crash”, it’s helpful to be big and important (i.e. a “titan”).  Besides, “Crumble of the Web 2.0 Titans” as an article title just wasn’t as catchy.
In any case, in the forum post, Erik made the following comments (edited slightly): 
I've become slightly worried as of late with the amount of venture capital pouring in to some really bad ideas, or decent ideas put into overly crowded market niches. I can't really see more then 5-10 feed service companies surviving for the long haul- I can think of about 15 off the top of my head.
So in the next year, we're inevitably going to be hearing about dozens of web 2.0 startups that fail for one of the following reasons:

1) Bad execution
2) Bad idea
3) Bad market

When the first set of web 2.0 companies start to go sour- will people start to panic?   There are some things that lead me to believe that a second crash would be a lot less severe than the last, mostly the lack of IPO's- Venture Capitalists are a lot less susceptible to panic than Wall Street, and their holdings in private companies are a lot less liquid than some shares of publicly traded stock.
I mostly agree with what Erik has to say.  The world only needs so many companies in a given product category (I’d argue 3 or 4) and as a result, many of the “me too” companies will likely fail and shut-down for one of the reasons he has cited (and a fourth, which same later in his post:  “bad revenue strategy”).  For the record, a non-existent revenue strategy qualifies as a bad one.
But, I don’t think we’re going to see a Crash 2.0.  With the lack of a robust IPO market, VCs have little incentive to fund Web 2.0 startups at exceptionally high valuations and with large blocks of money.  As a result, the amount of capital being invested in these new Internet startups is nowhere near the levels we saw during the last bubble.  Further, the current generation of startups are simply not consuming capital at the rate that we saw last time.  Gone are the Super Bowl ads, the fancy offices and startup founders focused more on throwing launch parties than actually launching a product.  This time around, it seems that the “geeks are back” and people are working hard and actually creating something.  Of course, the question still remains as to whether they’re creating anything of value, but that’s a different problem.  In reality, though we’ll probably see a few of the current individual titans “crash”, most of the Web 2.0 startups will simply crumble and fade into oblivion.  
I think the Web 2.0 startups most likely to shut-down are the venture-backed ones.  The reason is that though it is much cheaper to run a Web startup today than it was in the first bubble, investors still have a limited time horizon within which to achieve liquidity.  As a result, though the founders could conceivably run the company “indefinitely” (while sustaining themselves on minimal cash), there’s little reason for VCs to stay involved.  They’d rather just “exit” at whatever they can get and move on with their lives.  I think we’ll see a fair amount of this in the next few years as the early rounds of capital start to get depleted and revenues don’t catch-up to meet expenses. Some of the better startups will probably get some follow-on capital (assuming there’s some hope for profit or exit someday), but most won’t.   I’m not saying anything brilliant here, that’s just the way it is.
I personally tend to be mostly an optimist – and on bad days, a realist.   As such, I don’t usually short stocks.  But, there are times that I wish the private equity markets (particularly in the venture world) allowed me to short-sell some of these current venture-backed Web 2.0 startups.  I simply do not see how they will ever create a return for their investors.  My best guess is that some of these VCs are applying some sort of warped “portfolio optimization” theory and attempting to diversify away some risk by sprinkling in one or two Web 2.0 startups into their lineup.  They don’t want to be left out of the game should this become really, really big.  However, as has been the case in the past, the money will likely be made by the same VCs that always seem to make the money (the top quartile) and the rest will be writing off most of their investments without a “high flier” in the bunch to compensate. 
Summary of my point:  Clearly many of today’s Web 2.0 startups lack the revenue models and paths to profitability that would allow them to become “real” businesses someday – and even well-funded ones have a limited lifespan.  However, we’re likely not going to see a real “crash” like we did last time, because there’s no real bubble to burst with one single prick of reality.

Posted by Dharmesh Shah on Mon, Jun 05, 2006


The dot com scenario was a real crash that affected both good and bad investments.

The Web 2.0 scenario is merely a gold rush. There will be winners and losers. Winners wil not be affected by the losers.



posted on Monday, June 05, 2006 at 3:29 AM by

Does anybody even know what Web 2.0 means? It's a trivial marketing buzzword. AJAX... whatever.

posted on Monday, June 05, 2006 at 10:04 AM by zonk

You make several good points, but I'm not so optimistic.

I think a 'crash' in my mind would be viewed as a scare where venture capitalists cut off investments to the sector. Such a scare would starve companies that have recieved a first round of investing but need a 2nd- meaning the seed investors would get burned. This would be really damaging because after being burned twice (~2001 and ~2007), they would be very unlikely to start investing in Internet companies for a long time to come.

But I suppose it's not all that bad- a good investment in this environment has a really good chance of earning a good return. The bad investments will earn poor returns. The only thing that bothers me about the current situation is that there seems to be quite a few 'bad investments' getting quite a bit of money.

posted on Monday, June 05, 2006 at 10:29 AM by

Think about web 2.0 as a lamb of sacrifice. As well, as burned dot companies changed the face of the industries (not essence but flavour, atleast).

Garland of burning little projects showed to Sun and other companies where the exits possible to be of the hi-tech blind alley.

Think about web2.0 as tugboats of industries. They should be numerous, be alike, small, quite powerful, deft and ugly. They are useless in absence of ocean liners, but they are very helpful to pass obstacles of the time.

I'm watching for births and deaths in web market for long webyears, from puny homepages to shining monsters. Sometimes I think that all the money VCs throw in web just to give me insight in attempts to show to me, ME! - something amazing and spectacular.

Thank all the investors who brought the current state of the Web. Thank too all who opposed them.

posted on Monday, June 05, 2006 at 11:42 AM by alexey petrovsky

Commentor Marc got it right.
"The Web 2.0 scenario is merely a gold rush. There will be winners and losers. Winners wil not be affected by the losers."

My problem is with the idea that "there is only room for 3 or 4 companies..." I have heard this said about so many industries that I question it whenever I hear it. You might be tempted to say there is only room for 3 or 4 search engines. I would agree (actually why do you need any more than Google?) but I cannot explain why there are HUNDREDS of web search engines.

Or, in the security space it is often said there is only room for three or four x companies. Yet there are over 80 firewall vendors, and over 20 anti-virus companies.

My explanation is that this is the "long tail" effect. There are enough reasons for differentiation based on demographics, regionality, language, etc that there is room for dozens of players even in those spaces that could be addressed by one or two.


posted on Monday, June 05, 2006 at 12:51 PM by Stiennon

As noted by Stiennon, "There are enough reasons for differentiation based on demographics, regionality, language, etc that there is room for dozens of players even in those spaces that could be addressed by one or two."

A very simple explanation is that those metrics people use (as in "there is only room for 3 or 4 companies..." or whatever the number is for whatever industry it is) are meant for the US MARKET. They are not meant for the GLOBAL market, which is what the Web is. The Web has about 2 billion customers. US industries, even the multi-nationals, can never have 2 billion customers. I would say the "there is only room for 3 or 4 companies..." type figures need to be upgraded by a factor of 10.



posted on Monday, June 05, 2006 at 3:52 PM by

It's 1999 all over again ...

Yes, it might be cheaper to instigate a startup now than it was 7 years ago, but (imho) these companies are still making the biggest most fundamental mistake any company can ...

And if you don't know what that is, you shouldn't be in business ...

My 2 cents

posted on Tuesday, June 06, 2006 at 6:04 AM by Nick The Geek

There is no Web 2.0. There is no boom. There will be no bust. This entire scenario is a fiction created in the minds of reality disconnected bloggers.

posted on Tuesday, June 06, 2006 at 6:44 AM by just tired

No boom? Do you remember the heady days of 1999-2000? Online commerce was expected to hit $20 billion/year! Now it is over $130 Billion. ecommerce is 6 times greater than it was than.

We are still in the Internet boom. Look at these charts:

posted on Tuesday, June 06, 2006 at 7:40 AM by Stiennon

> I think the Web 2.0 startups most likely to shut-down
> are the venture-backed ones.

The article's a bit lite on factoids, innit? Be bold, tell us who you mean - who will survive and who won't. That's real forecasting.

posted on Tuesday, June 06, 2006 at 10:34 AM by Jerry Bakewell

Yeah, I think your notion of only having 3 or 4 companies is right on for the most part. You can really only have 1 company for a specific function, but there can be a small number of similar types, each slightly differentiated to hit various niches. Taken on a global scale, this will mean more than just a few.

What doesn't make sense is many companies (such as the feed services you mention) that do basically the same thing and target the same market. Or another example is all the myspace clones that don't really offer anything different that myspace.

Thanks for the article.

posted on Tuesday, June 06, 2006 at 1:28 PM by Rey Marques established a larger user base in Europe than MySpace with just one round of funding.

Any company can pull the rug from underneath any other company. It's the new entrants who are often thre innovators.

posted on Tuesday, June 06, 2006 at 1:47 PM by Marc

" established a larger user base in Europe than MySpace with just one round of funding."

How can have a larger user base than MySpace if Myspace is the second most used site on the web (Yahoo is first, Google is third)?

posted on Wednesday, June 21, 2006 at 10:07 AM by Hermann Klinke

thx for the great info!

posted on Sunday, November 25, 2007 at 5:10 PM by Joel

Comments have been closed for this article.