OnStartups

Beware The Web 2.0 Walking Dead

Posted by Dharmesh Shah on October 6, 2006 in startups web20 failure 12 Comments


Back in Bubble 1.0, um, I mean Web 1.0, when a startup failed to take off, it generally died a relatively clean and definitive death.  We all knew the company was dead because the assets were sold or auctioned, the servers shut down and the service rendered unavailable.

Now, with Web 2.0 companies, it seems that there is a risk of what I would call the “walking dead”.  Walking dead are companies that have essentially died (but have not quite been put to rest).  There is no longer effort being put into the software.  The founders have lost interest.  Support is no longer available.    In most cases, this is not a big deal.  A lot of these startups have a limited number of users anyways, or are providing a non-critical service – but not always.  Besides, one could argue that if they’re not really dead (i.e. still operating) it doesn’t really matter if the software is no longer being enhanced or supported (as long as it’s useful).  

Thoughts On The Web 2.0 Walking Dead
 
First, there are factors that increase the likelihood of the walking dead phenomenon in a Web 2.0 world:
  1. Lack of Investors:  In Web 1.0, many startups could (and did) raise outside capital – sometimes lots of it.  As a result, once it was determined that the startup was not going to “take off” as the investors expected, there was usually a reason to actually shut-down the company and write off the investment.  There was no reason for the investors to let the startup continue operating and carry the liability if there was little chance of a meaningful exit.  They were better off shutting it down.  Startups without outside capital (which represents a lot of the Web 2.0 startups today) don’t have this external pressure to have a “clean” shut-down.

  1. Lower Infrastructure Costs:  It takes a lot less money now to operate a hosted web application than it did back during Web 1.0.  Hardware, bandwidth and storage are all cheaper.  There’s an abundant supply of hosting providers (keeping competition high and prices low).  Open source has reduced the cost of systems software like operating systems, web servers, programming languages and databases down to near zero.  As such, it doesn’t take a lot of money to keep a Web 2.0 company “running” anymore (assuming there is no more human effort being expended).  Humans are still expensive (relatively speaking).

  1. Advertising Efficiency:  Now that online advertising has been made much more “efficient” by the likes of Google (and now Yahoo! and Microsoft), it is easier for startups to generate at least modest revenue through a semi-successful website.  Often, these revenues can be sufficient to cover the infrastructure costs mentioned above.  When this is the case, there is little reason for the company to actually die (it continues to exist as the “walking dead”).


There are also a couple of factors that decrease the likelihood of startups becoming the walking dead:
  1. Easier Exits:  One thing that argues the opposite of the above points is the availability of simpler exit paths for startups.  For example, I know of at least four startups that offered their assets up for auction on eBay.  By making it easier for startups to find a potential acquirer, they are more likely to do so.  Further, if they use a public vehicle (like eBay) for seeking an exit, it is likely that their users will know it.

  1. Perpetual Hope:  As the number of Internet users continues to grow and we see new “shifts” in the online advertising space (more competition, better models), startups can often have the chance to be rejuvenated.  There are enough cases where companies that to be “dead” later became alive again (with new capital, a new strategy and a new hope for exit).    Though this certainly gives these companies a chance to be reborn, this also increases the chance for the “almost dead” companies to hang-around while holding on to that hope.


I don’t think this Web 2.0 “walking dead” is a major issue.  As I mentioned, most of the startups that might be classified as “walking dead” are not providing critical functions without which their users could not continue to live productive, meaningful lives anyways.  The number of users impacted by one of these startups is almost by definition small (because if a given startup had a large number of users, they’d likely be living anyways).  I just find the concept intellectually interesting. 

What do you think?  How would you know if one of your favorite Web 2.0 applications is the walking dead?  Would you care anyways (or would you just use it while it was alive and find something else if it happened to be put to rest)?