The Web 2.0 Myth
Last year, more than 1,500 Web 2.0 companies were started in Silicon Valley, according to the January 22 edition of The Guidewire Report.
We believe the number: We see a lot of Web 2.0 pitches from young entrepreneurs. The basic pitch: for an investment of $2 to $5 million, they can build a company that Google, Yahoo or Microsoft will buy. And, in under two years, we can get 5-10 times our money back. How could you not like that?!
We don’t. We always decline to participate in deals like that. We think this is a kind of disease, often caught by these youngsters in business school. They are looking to cash in on Web 2.0 fever and flip their companies quickly for a nice tidy sum.
These entrepreneurs confuse a feature for a company. Often these ideas depend on a platform controlled by the large company that they want to sell their company to. But they can’t get traction without permission from the large company. Examples include on-deck mobile phone features, new enhancement for a CRM service, or a cool feature for search engines. When someone else controls the platform, someone else controls the market — and the exit.
If Guidewire is right, we can assume some of those 1500 companies are doing more than features (including the three companies in our portfolio that would be classified as Web 2.0). But we know a lot of those companies are following exactly this trajectory, and they’re chasing the same markets with only minor variants to the theme. These deals are not only over priced but tend to lead to dysfunctional behavior among the competitors.
How can you tell a feature company? They let the competition define their product or service. You can see it in their Powerpoint presentations. On a slide, often one that appears before the product is defined, they list a half dozen new start ups that nobody outside of the blogosphere and venture capital have heard of. None of the “competitors” have gain market traction and most enterprises or consumers have never heard of them. These entrepreneurs mistake venture-based valuations for market validation.
Great companies are built by entrepreneurs who want to change the world. They have a basic belief that they will be rewarded for either defining a new market or redefining an old one. They do not want to be bought by Google or Yahoo!, they want to be the next Google or Yahoo!. My parents used to tell me two things about starting businesses, “if it’s easy, everyone would be doing it” and “easy money seldom is easy.” Most Web 2.0 entrepreneurs never learned those lessons. If Web 2.0 is to have legs, then we need find a new generation of entrepreneurs who are willing to build their companies to last rather than to flip.
February 13th, 2007 at 5:48 pm
Your post reminds me a of a favorite quote of mine from part V of Spinoza’s Ethics: “But all things excellent are as difficult as they are rare.” Indeed, entrepreneurship is not for the faint of heart or those looking for quick payday.
February 14th, 2007 at 3:36 pm
Great post! Great perspective. To add, I am sure there were more then 1500 startups out there as well, these are just the ones that we are aware of.
I imagine the ‘deal flow’ is near an all time high right now for something fitting the loose ‘web 2.0′ definition.
I thus can only imagine how much fun it must be to weed through all the paper that crosses in front of you guys!
Again, great post, thanks for the view from that side of things.
February 14th, 2007 at 6:23 pm
Interesting perspective. As one of the web 2.0 entrepreneurs here let me chime in:
1) Your comment about business school kids launching web 2.0 company and getting funding is incorrect. All the Valley startups that have gotten some sorrt of traction that I know of save Meebo which was founded by Stanford GSB dropout are companies founded by engineers or ex-Yahoo, Intuit, PayPal, etc. folks. Either they are engineers or if they have business backgrounds then they spent some time in business roles.
2) Confusing feature for a company is an interesting concept cos everything can be construed into a feature. Just this past month Om Malik wrote a post about social networks being features. Going for long shot ideas or thinking about the next Google is cool and sexy but let me tell you those are few and far in between. Instead, companies like MyBlogLog, Jumpcut etc. which are features are getting the traction to exist as part of people’s internet life. Facebook was just a directory of students with their profiles. But given enough time it morphed from a feature to a real company - a utility without which students cant imagine their lives anymore. So what you see as a feature could morph into something substantial.
3) Your entire perspective is spoken from a VC point of view. Its definitely not in line with an entrepreneurs. Imagine telling a first time entrepreneur that a $30 million offer is not enough cos you are just a feature. Instead, you need to think BIG and go for the $2 billion exit. Of course, Jonathan Abraham is a great example of how he missed the boat on making money out of Friendster. I would give fellow entrepreneurs another perspective - if this is your first time in launching a company a $10-30 million dollar exit in a couple of years is not bad. Now if you are one of the YouTube or PayPal founders, you would obviously not be going for that paltry exit instead you will be thinking of Changing the World.
Heres my 2 cents.
February 15th, 2007 at 12:48 pm
I agree that a feature does not make a company but I think the pursuit of creating these features is legitimiate but just requires a different mechanism…perhaps, dare I say, an incubator. obvious.com?
February 15th, 2007 at 8:10 pm
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February 18th, 2007 at 11:37 pm
[…] Great to see Gilman Louie (Stewert Alsop’s partner in a new boutique fund) blogging about the Web 2.0 Myth. […]
February 19th, 2007 at 7:42 pm
I get so tired of hearing some nascent Web 2.0 new biz developer touting their mashup as ” the next big thing” Truth bed told of the 20 or so mashups I’ve seen, the only ones that make any sense are verticals aimed at underserved, non-glamorous, markets. The big problem I’ve n otice is that everyone thinks the successses and gold grabs of the early 1990’s and 1980’s are repeatable. Of course, thast isn’t really the case since the market and the user community are much more sophisticated today than they were 10 or 20 years ago.
What I think is lacking in the Valley today is leadership.The Biz schools teach how to get tickets for the big rides, not how to lead people or companies to the next level. Oh and just attending some leadership-titled event doesn’t make onea true leader. Leadership is earned, it’s not granted or minted at a conference center.
Great post, by the way.
Jim Forbes ( from my agrarian mountaintop home in rural San Diego County)
February 20th, 2007 at 4:11 pm
“They do not want to be bought by Google or Yahoo!, they want to be the next Google or Yahoo!” - Amen!
Great post.
February 21st, 2007 at 2:58 am
What a releif to read this post! I’m curious to see what happens to not only all these Web 2.0 start-up but also much of the open source companies after a couple of years passes. In my experience successful entrepreneurs require an unusual amount of endurance, and my guess is many of these companies will go by the way-side as their owners get older, get bored, and start to wan’t to earn money by providing value.
On the other hand, if Sequoia Capital wants to take a look at my on-demand e-commerce platform please call an ask for Chris!
March 23rd, 2007 at 10:41 am
I agree with this post 100% However Neal does have a point: Very often a good, even grand business idea starts out very modest and later (through luck or divine intervention… whatever you wanna call it) became the next big thing. So the driving force is not “grand idea”, but a persistent passion for whatever you want to do.
An interesting idea was presented here and particularly strikes a chord with me: “When someone else controls the platform, someone else controls the market — and the exit.”
That is true - In fact I would contend that it is ALWAYS true in this day and age. As technology and our world becomes more layered and interconnected, tt is almost impossible to come out with a radically different idea with no external dependency. Simply put, no matter how radically and different your idea is - there will always be an incumbent that is in a better position to do it better then you - If they are smart enough and nimble enough to act on it - You’re only a market distrupter if the market is dominated by a bunch of big, sluggish, risk-adverse players.
Here is an idea I’ve been toying with for a while… with all the fight going on between RIAA and the way market is going in the music industry… why isn’t there a “music 2.0″ wave?
April 9th, 2007 at 3:21 pm
I completely agree with your comment about teams of startups trying to build a company from a feature technology. However, I find it offensive to categorize the experience levels of entrepreneurs by age. There are plenty of forty year old engineers that are “young” (first time) entrepreneurs. Instead of focusing on the negative and naive aspects of the presentations, you might consider pointing your readers to the FAQ page on your website. “We care a whole lot more about customers than service providers, incumbents, pundits, journalists, and anyone else involved in supporting the evolution of new companies.” I believe your advice to entrepreneurs is to substantiate their value with customers before they present for investment.
Can you really blame entrepreneurs for the false dreams of building something cool and flipping it for a nice tidy sum? Especially when you have companies like Myspace and Youtube being acquired for $525m and $1.65B… Honestly Gilman, these might not be the Yahoo’s or Google’s of the world but you would not be complaining if you had either of these companies in your portfolio.
How do you define entrepreneur? I personally would not define the founders of Yahoo and Google as entrepreneurs. They are inventors. The entrepreneurs are the gentlemen in blue blazers at KP and Sequoia. How many companies have the Yahoo and Google founders started? One, and they will probably run these companies until retirement. Also, if I recall, these two world changing companies were founded by four youngsters who were still in school and under twenty-seven years of age. To me examples of entrepreneurs include: Tony Hsieh now CEO of Zappos, Bill Trenchard CEO of LiveOps, and Philip J. Kaplan former CEO of AdBrite. All of which have tried, failed, and or succeeded more than once.