New York Times Article on Web 2.0

The New York Times had an article on Web 2.0 and the Web 2.0 Summit today, entitled: Silicon Valley Start-Ups Awash in Dollars, Again.

Here are some excerpts:

Internet companies with funny names, little revenue and few customers are commanding high prices … Consider Facebook, … which is reportedly being valued by investors at up to $15 billion. … nearly half the value of Yahoo, a company with 38 times the number of employees and … 32 times the revenue.

The trend is described as a return to madness (by skeptics) or as a rational approach to unlimited opportunities presented by the Internet (by true believers) …

“There’s definitely a lot of betting going on, and it’s not rational,” said Tim O’Reilly, a technology conference promoter and book publisher.

Mr. O’Reilly is credited with coining the phrase “Web 2.0,” which refers to a new generation of Web sites that encourage users to contribute material. His Web 2.0 conference, which begins Wednesday in San Francisco, has become a nexus for the optimism around the latest set of society-changing online tools.

But that has not stopped Mr. O’Reilly from worrying that the industry is minting too many copycat companies, half-baked business plans and overpriced buyouts.

The article is a must read.

My own rather cynical take is that Web 2.0 is like the Web 1.0 without the exits. Which, from a venture capital perspective, is akin to saying that it’s like beer but without the alcohol. Or hockey without the fighting. Or as Woody Allen once said, sex without the love.

Yes, there are a few amazing deals (e.g., the VMware IPO, the YouTube and Skype acquisitions). And even more amazing are the valuations/employee — e.g., YouTube was $1.6B for what I’m told was 30 people — or an amazing $53M per head. Zuckerberg today said that Facebook had 300 people, so if Microsoft is investing at a $15B valuation, then that equates to a equally amazing $50M per head. Those are the truly stunning numbers in my opinion.

But, for the most part, these “Internet companies with funny names” aren’t going public or getting acquired as far as I can tell.

Perhaps I’m not seeing it because the IPO bar has been raised and perhaps there really is a bubble in M&A valuations and maybe more of these little companies are getting bought than I think. But what I think is happening is that a few companies are getting sold at stellar valuations and making big headlines and for every one of those there are 100 other ones living on the VC dole, with 30 guys, a few servers, and a lot of hope.

One of the nice things about Web 2.0 is the barriers to entry are pretty low. That means lots of companies. Which in turn means lots of carnage down the road. This site, for example, tracks over 2,500 web 2.0 companies in 172 categories.

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