Monday, January 08, 2007

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.


At 5:33 PM , Anonymous Anonymous said...

More insight here:

At 5:43 PM , Anonymous Anonymous said...

you are dead on my friend. i have been through web 1.0 (successfully) as both an entrepreneur and investor and i see alot of the same echo chamber investing that went on during the first bubble. granted you do not have overinflated ipo market to exit to, but alot of the same BS is running around. "network effect", "eyballs", etc, makes me shiver. i have just started pitching my software company (mobile telecom) for its first round of outside capital. After making a few pitches to some of the big boys I actually had one partner say to me: "we are looking for long tail opportunities with no barriers to entrance and an exit of no less than 400-500 million." I kid you not. acting impressed i asked which portfolio company had recently exited at that valuation. well none yet. thank you very much.

At 12:11 AM , Anonymous Anonymous said...

No barriers to entrance - amazaing. Web 2.0 is real it has just gotta grow up and start realizing that revenue is everything. Users have got to start paying for usage. Freemium has got to go away for good. It has got to become a commodity. However if you look at AOL they recently went free. That's because they have the user base to charge for ads and the like. A lot is going to happen in the next year.

At 12:59 AM , Anonymous Anonymous said...

I followed a link here from an article on GigaOm about how executives are starting to leave Wallop. I think you are right in that companies are going to have to get real smart about long term planning or a new downsizing wave is in the future.

At 1:21 AM , Anonymous Anonymous said...

Web 2.0 ... sure there are some cool interesting things that exist... but really now what generates profits in the end.

This again is "fools gold" wrapped up in yet another wrapper.


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