Web 2.0 Didn’t Invent the Wheel
by
on January 28, 2008,
Are you reading The Drama 2.0 Show? If not, you should be.
One of the hard parts of blogging about Web 2.0 is trying to maintain a balanced view of the latest and greatest in web technology as a whole. Note that I don't say each news item or review, because there will always be good and bad. The Drama 2.0 Show, which I assume most people interested in Web 2.0 are already reading, doesn't take that tack. Instead, it focuses on debunking much of the Pollyanne-esque commentary that I think every blog about Web 2.0 sees. We all know the flag bearers for every “new” app: the Wikia zealots, the Scoble fan-boys… this blog flogs them all with equal relish (except for TechCrunch's Duncan Riley, who seems to hold an exalted status on the blog).
There was one particularly vitriolic response to the blog, however, which I reacted to first with uproarious laughter, then anger, then actual shock as the post sat with me for a bit. There is a divide in tech at the moment between a large faction of the 20-something 2.0 “innovators” and some of the old guard who are 30-somethings with more of a been-there, done-that mentality.
I've been alternately called out by commenters here at Profy as either “too young to know better” or “too old to understand.” For the record, I'm in the “too old” camp. I was a web developer during the Web 1.0 bubble, and worked at companies who were just as clueless as some of the Web 2.0 companies I see today. I worked on coding and doing QA for apps that were little more than features. My husband actually worked for a start-up rather than a more established company, and we have the pile of worthless stock options to prove it.
Web 2.0 has built upon the foundation laid by Web 1.0, but trying to claim that there isn't a bubble right now is just plain silly. The blogger in question claims that 20-something entrepreneurs are out there making money while “your day has come and gone.” Is this really the mentality of the current wave of “innovators?” Getting millions in funding does not equal making millions of dollars. Building an app that rakes in VC while having no way to make money (and ergo, eventually PAY EMPLOYEES) is not the way to ensure that a company has longevity.
Here's a clue: the companies who survived the 1.0 bubble are the companies who MADE MONEY. There were tons of 1.0 companies (many of which you young whippersnappers who were still in diapers for the first bubble probably never heard of) who were doing amazing things. But when investors woke up and realized that in order to receive a return on their investment, the companies had to be MAKING MONEY, suddenly that investment money dried up. eToys was once far from the KB Toys web site that it is now. It had innovative products, owned the BabyCenter.com site (see, 1.0 had social networking as well!), and cool commercials. Anyone remember Napster? We are still seeing companies (Qtrax, anyone?) try to find a business model to do what Napster did in spades. Look at Pets.com! They had a cool sock puppet! How come they vanished?
At the culmination of the bubble burst, F*ckedcompany.com was posting upwards of 15-20 companies closing a day. Many employees found out they were losing their jobs when they showed up to work and found places closed. Many of these companies even had business plans (something many Web 2.0 companies seem to find irrelevant) but their burn rate was much higher than their ability to bring money in.
Businesses can't exist in a vacuum. Investors will not continue to throw money at great ideas that make no money. The fact that Facebook has Google-perks without the Google cash train is a nearly identical successor to the mentality of Web 1.0 before the bubble burst. You can't spend money like crazy unless you are also making money like crazy. And the people who are still in this industry after living through loss of jobs (and worthless stock options) are only too willing to share lessons learned. The trouble is, people like this blogger think that it can't happen again, because adding the word “social” or “widget” in front of the same old “feature, not an app” idea makes it somehow more valuable.
Without substance, or the ability to make money, many of the companies we cover right here on Profy may make their way over to the F*ckedCompany Hall of Fame. And they won't have invented the crash and burn, either.
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Oliver
Lynn Burnett
Bettina Davenport
Opensource 
Michael Fidler 
I think your claims miss a few key issues.
1) you assume you are smarter than venture capitalists, and that they won’t consider the value of their multi-million dollar investments with even greater skepticism and research than you do yourself. and thus that they would repeatedly invest in worthless companies (even after having seen the web 1.0 bubble). i think it’s a mistake to assume such stupidity of the VC’s.
2) You mention the amazing “google perks” that facebook currently has, but forget that Google had those perks for quite some time BEFORE they themselves were wildly profitable…thus, not every company must be wildly profitable before they have such perks, and giving out those perks ahead of time is not a clear sign of future-failure.
3) Q-Trax is so different technologically from Napster that other than the fact that they both let you download music I think it’s blatantly misrepresented to even hint they are similar. Napster never did that in spades…they never had any deal with music industry..they just let people steal music before the RIAA got their act together…
I won’t try to do the research to come up with aggregate numbers, but I think that overall this round of investments has a profitability potential and dynamic that makes it quite different from web1.0. there may be a bit of a “bubble” right now, but it’s nothing like the old one….and whatever gains may be lost in 2008 will definitely be recouped in the coming years…
Justin,
I don’t assume. VCs have money to spend. They have a known percentage of companies in their portfolios that they know will fail. You assume that just because a VC company invests in something, they are sure it’s going to succeed. They expect that of every ten companies they invest in, TWO will succeed to the point that will pay for the time and energy given to the other 8. I’m well aware of how VCs operate. The mistake is in assuming that they only invest in winners.
As for Google, comparing Facebook to them is painful. Google always had a business plan. They still have a business plan. Their ad revenue funds every single experiment that they conduct. If Android fails? No problem. They have enough money. And yes, they had their perks before they were profitiable. See 1.0 stupidity, listed above. At least they had a business plan, however. They didn’t continue to follow the Mud-Throwing Theory of Usability, tossing out potential monetization methods just to see what the userbase will tolerate. Or have we already forgotten Beacon?
QTrax, unless you’ve missed today’s news plastered all over the Internet, did NOT have contracts signed with the major labels. Last week they claimed they would launch with 75% of the major labels’ music available for free download. Every single label has denied that they have bought into this. A cursory examination of the RIAA’s activities over the past year would have had anyone doubting their buy-in. They want guaranteed money for every single download in amounts that I personally can’t see being covered by any sort of ad revenue stream. People are already downloading music (most illegally) using services like BitTorrent. What ad placement would be non-intrusive enough to sway users over to Qtrax while still being worthwhile for the advertisers to pay for it? We can talk about technological differences (I’m going to go out on a limb and assume that Qtrax utilitizes Rails? Which makes it newer! better! different!) but the mentality is still the same. Changing a code base or adding social sharing or using different web site colors (teal! kelly green!) isn’t enough to alter a mindset, which seems to have been passed down to the second generation of innovators without any of the lessons learned.
When I’m tottering around with my walker, I can only hope that the Web 3.0 and Web 4.0 innovators do more than say “not us!”
Justin, I assume from point #1 that you’ve never been around VC’s. If you’d ever been in a company dealing with VC’s to try to get funding you’d know that most VC’s would be off the show “Are you Smarter than a 5th Grader?” faster than that show should be off the air… All you have to do to see the lemming-ness of VC’s and the lack of thought they put into investments is to look at the number of YouTube.com me-too companies that they’ve funded. You know, if one company shows videos online and sells out to Google for $1 Billion, at least 10 or 20 others should be able to do the same, right? VC’s fear new and different things as “unproven” and will jump on same-old ideas like a bandwagon if they see the slightest glimmer of success, assuming they can duplicate it.
What’s more, this round of “innovators” isn’t even shooting very high… Web 1.0 was different, really different, because there was nothing there before. Web 2.0? It’s a bunch of features and nary a product in sight. I know, I know, it’s all about “mashups” and “reusable services” but at some point, you have to actually make a product that people will pay for, right? Advertising can’t pay for everything, because there’s only so many eyeballs to go around, and Google pretty much owns that market.
Why do I see companies coming up with “products” like ReadItLater that are doing little more than re-creating a feature that already comes built into my browser? Are you people kidding me? Do you think about revenue at all, or is that too old school?
Web 1.0 was trying to sell things and make money, they just fell short in mapping costs vs. revenues. Web 2.0 seems to think if you take less money from VCs and spend less money (or at least some of them spend less money), it means you don’t have to have any revenue at all, but the numbers don’t work that way.
I just figured it out! I’m ready to start a Web 2.0 company!
1. Come up with something interesting I’d like to see a plugin to my browser do
2. Get a VC to give me money to build it
That’s it! VC funding is the end state! VC’s are the customers of Web 2.0 companies! I was so old fashioned in thinking about terms like “end users”… I mean, do end users have $1 Billion funds just waiting to be spent? No, I don’t think so, so why should I bother with them?
@Cyndy - Thanks, you pretty much always make me smile. I’m in the “too old” camp also AND I co-founded a Web 2.0 company…. oy, what to do… Web 3 and 4 when you’re in your walker? Nah, by the time we get to our walkers people will have lost count.
@Justin - On VCs, as others pointed out, they don’t ever assume all their companies are winners. It’s a game of statics, not unlike the Freemium model: most folks will just cost you money, a select few will pay off in spades.
@Grendel - Careful, not all Web 2.0 companies expect advertising revenues to float the company, and some (many?) of us actually are trying to offer new and valuable services. Also keep in mind that these are all fairly young companies and many products that may seem piddly or clunky now, could have plans to release some mind boggling stuff in the future. I’m trying to suspend judgment for another couple of years (not easy, but I’m trying).
Cheers,
Tara, PassPack.com
Always happy to make you smile, Tara!
I think there is just a level of frustration at the mentality that VC counts as revenue, and no one knew what they were doing in the 1.0 bubble. There were some absolutely awesome companies (my husband’s included) that had phenomenal ideas but had a burn rate much, MUCH higher than the revenue could catch up with. Facebook is easy to pick on since it’s so ridiculously valued and people are throwing money at it right and left, but if the market doesn’t turn back around, it’s going to be an awfully huge Goliath dropping if they can’t figure out a way to make enough money.
You guys are also smart enough to stay out of the U.S. with PassPack. Hopefully outside the U.S. VCs aren’t convinced that offices HAVE to be in Silicon Valley for any start-up. It just increases the burn rate.
Man, you got all that from my one little post? Wow, you and drama have an issue with reading in to things way to much? Their is a difference between those involved in web 1.0 and web 2.0. Do you think we haven’t learned from those before us? Shit a lot of web 1.0 people are helping the web 2.0 companies make the right decisions. Secondly, we aren’t seeking huge IPO’s, which was a major cause of the huge bubble. Do you really think the VC’s haven’t learned their lesson as well? The major difference is the increase in bandwidth, reduced startup costs and overhead, and majority web 2.0ers who’s exit strategy is make a quick half million to million and get out. It was the greed that caused the web 1.0 bubble.
Also, a large majority of web 2.0 applications are low cost alternatives to expensive software not your etoys, pet supplies, etc… One day their might be a web 2.0 bubble as it is a pattern that happens in any business. We are seeing one right now with the lending problems. People with greed get involved and bring everything crashing down. It is inevitable sooner or later it will happen not as quickly as web 1.0 for the simple fact that the 20 somethingers are not as greedy, are focused on low cost alternative software with greater usability, and most VC’s are being a little more wise in their investing.
Again let web 1.0 go, mistakes were made and people lost a lot of money. Stop player hating.
Jason, how can you say there is no bubble when the valuation of companies has no relevance to their profitability? The very definition of a bubble is a high valuation (either of company or stock price) to earnings ratio. Did I miss Facebook raking in billions of dollars? The most money actually being made on Facebook right now is by app owners who sell ads to other app owners. It’s a pretty daisy chain, but how doest that translate into the current valuation of Facebook?
You can reduce the cost as much as you like, bootstrapping a business, but you still have to make a profit at some point. Usability is all well and good, but how does it make money? Every business has a bottom line.
And not greedy? You said it yourself that the goal of most companies is to get bought out quickly rather than try to build a business. How is that not greed? Google can’t buy everyone, so what’s the plan then? No one seems interested in actually building something with some endurance.
And as for VCs being wise, you are going to have to explain to me how investing in a company with no business plan is a great decision. At some point, sustainability has to factor in, because relying on the big buyout isn’t any more of a business plan than viewing VC as revenue.
I don’t assume that VC’s are investing in all successes. I assume that they are ultimately making money, like you said, by having a few winners…..and in the end they are still making money. Nobody thinks that every VC funded web site will be profitable, but the fact that VC’s continue to put a lot of money into startups shows that on the whole they still believe it’s a viable model, and not a bubble.
The fact that the venture capitalists are not aiming as “high” is also a sign that they are restrained. And I still think it is arrogant and misinformed to really think you’re average Venture Capitalist is an idiot. And yes I do know a venture capitalist extremely well, and he is a bright, technical, web-savvy, guy. Who has funded several smart startups. I’m not saying it’s a world of rocket scientists but to act like they are so much more ignorant than us “netizens” is pretty haughty.
When google first released, with pagerank, they had not even invented text/context based advertising…I’m not so sure that actually was from the very get-go their business model. Nonetheless, I’d say Facebook also has a business model (also revolving around advertising).
Yes I see QTrax didn’t really have the RIAA’s blessing. However as I said before, Napster was not really a great success, it just did it before the RIAA came on the scene. And QTrax is substantially different in a much more profound way than just running rails or using different server side technology. QTrax aims to harness peer-to-peer networking to distribute their songs. (more bittorrenty/gnutellaey).
If we compare Napster (a failed music distribution service), to ITunes, or Rhapsody, then it would seem that web2.0 has made viable business models out of what were just future-thinking visions in Web1.0 but not mature enough to succeed. I think that is largely where we are now.
@Justin
You’re showing your age…. QTrax is different because it’s harnessing peer-to-peer? Really? What do you think the first major P2P app was? Yeah, it was Napster. QTrax == Napster, right down to not having the licensing.
VC’s are a tricky bunch… Get one alone, and they can seem ok, and carry on a normal conversation (if you take away their CrackBerry)… Yeah, they’ll think they’re smarter than they are and more worldly than they are, and they have this false assumption that they know something about running a business, but they can carry on a conversation and you’re not going to want to immediately choke them. See, but the problem is that they’re prone to lemming-esque groupthink.
Get a few together and they’ll blat on and on about how web-enabled social video sharing is going to destroy TV and democratize the world and there’s obviously room for hundreds of niche video sharing sites and they’ve personally invested in 20…. blah blah blah… If you actually step back and view it with a critical eye, you’ll see that they’re full of sh*t and they’re repeating what all of the other lemmings said. Ask them, and they’ll laugh about it and admit that they’re lemmings, but they keep on…
Of course, when you’re talking about VC’s making their money and still investing… They kept investing right up until the market collapsed last time too. Oh, and they don’t have to have big hits to make their money. You know the VC gets paid a multiplier of their investment before the company founders see a dime, right? Sweat equity only applies after you’ve paid the piper his cut.
1) I guess i’d suggest you become a venture capitalist, since you are so much smarter at finding and recognizing the best businesses…
2) Napster was peer-2-peer when transferring the mp3’s, but it’s main index of assets was stored centrally….I’m sure I’m younger than you (not exactly something I’m going to be sad about), but nonetheless I was a heavy napster user in it’s day (when i was in highschool)
Or perhaps I am “showing my age” because I’m optimistic about the web 2.0? If so I’d say then yes, I see this trend always. The older a person is, the more pessimistic they are about the future, and the more they rant along the lines of “kids these days” and “they don’t make it like they used to” etc etc. so it goes.
Justin, do you have any idea how bittorrent works?
I’m not cut out to be a VC because I like to build things of actual value, I like to think for myself, and I’m not a shmoozy salesman type.
Maybe you should be a VC. You seem to have the critical thought skills required.