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Web 2.0 gets a Pied Piper in a cheerleader’s uniform

Entrepreneurs must not heed Michael Arrington’s call for disregarding revenues and profits and focus on building upon network effects. Although I agree with Arrington’s call to go slow on detailed, 5-year business planning

January often seems to the month for setting the agenda for the rest of the year. In January 2006, we read a lot about the viability and future of Blog Networks. In January 2007, Web 2.0 startups are on the line. Latest news stories point towards trouble brewing ahead. CEOs are leaving (example: Backfence); companies are downsizing and so forth.

Ironically, Techcruch also has a deadpool with lists of companies shutting down.


Entrepreneurs must wake up and smell the coffee. First, forgive this silly analogy.

1. Arrington’s ‘Everything is Fine’ call is similar to the times before the stock market implosion in 1929, before the Dotcom collapse in 2000. He has a lot running on Web 2.0 , on all those startups sponsoring Techcruch parties and web sites.

Remember, Techcruch is one of the few media startups actually making money from the Web 2.0 boom.

2. Arrington says, “Network Effect is still the most powerful force driving Internet success today.”

Duh? Bob Metcalfe’s idea has influenced startups in the earlier Dotcom boom. Remember the unending procession of free email providers? The Latest portal? The Dog food delivery site?

Things are not much different now. Just because we can all share links does not mean anything, in business terms. There is only one company making big money from links, a company by the name of Google.

Social networks are the portals of today. How many social networks do you remember apart from Orkut, Facebook, Myspace and Beebo? There are more than 300 of them and counting.

3. Arrington says, “I disagree that Web 2.0 companies cannot become sustainable businesses”.

But how? How much advertising money is floating around? There is too much inventory to go around. While Techcrunch is thriving at brand-related advertising money, others have to work real hard for the important shopping advertising money.

Classified advertising brings in good money but it seems Craigslist has a first call on that.

How long can companies hope to go on free user-generated content?

4. Building to Flip is no answer. The Guys at Google, Yahoo and Microsoft are not that dumb, you know. They now what applications they can built and launch on their own and what they are going to buy. Google knew its Video offering sucked and so it bought Youtube.

5. Arrington says, “a failure by companies to drive earnings enough to keep up with stock prices” was the main reason for the “Web 1.0 implosion.”

That is not all. There was too much VC money chasing too many stupid, me-too ideas. The only reason this current Web 1.0 boom persists is that startup costs have hit the bottom.

The only other costs startups have to pay are sponsor costs for Techcrunch type blogs so that they get favorable mention.

This is a weak Viral strategy. Users of your service do not read Techcrunch, they are over at the likes of Orkut and Facebook.

6. There is a big difference in being a cheerleader of entrepreneurs and being the Pied Piper.

Isn’t it funny that the same Web site that seemingly disavows profits makes tones of money itself.
Upside, Red Herring and The Standard said the same before the Web 1.0 debacle.

I wish I had some answers for Web 2.0 entrepreneurs. All I can say is keep your costs and expectations down and hunker in for a long run. Focus on your users’ needs rather than PR needs.

Web 2.0 companies are not some form of Islamic banking which abhors profits and interest. The founder of Matsushita Electronics (Panasonic) used to say that when you start a company using borrowed money, you are using society’s resources - you must make something worthwhile.

Related analysis here.

posted by Pramit Singh @ 3:01 PM