I’m getting tired of hearing people saying that Web 2.0 is in a bubble – it’s clearly not the case, in my humble opinion. The Internet market has matured remarkably since 2000, and even though there are failures, such as Teqlo – which recently announced it was shutting down – this is no different from other industries out there.
The Internet sector has built a number of safeguards into it, including the fact that startups still have to go through the usual channels – concept – angel – series a – series b – etc. This self policing system is weeding out unsustainable business models quickly, and if a startup cannot show further traction after a round of funding – it’s most likely going to fold, unlike back in 2000.
VC’s are injecting around $3m in the average Web 2.0 startup – this is conservatively about 18-24 months runway, and it’s make or break. The ones that make it, get through to another round of funding. The bubble occurred when VC’s started to think “this time it’s different” and started making $25m series a funding rounds the norm – which meant that Series B rounds were forced higher, and so on. This is certainly not the case today.
Also, the cost of testing business ideas and models have dropped dramatically, which is allowing many more startups to pass through major development milestones whilst still inside the angel funding rounds – this is just making the natural selection process more efficient by allowing more companies to get to the point where VC’s are interested in playing the numbers, if the development up until that point has been sound.
Statistically, they say 4 out of 5 startup businesses fail – this number is flawed, as it is the average for all industries – and if you take the average IQ of the population in general at 100 – it’s even more skewed in our favour when you consider our industry. I would think that people in the Internet sector have above average IQ’s and business acumen, in general (although sometimes I wonder 
) – so that chances of success are much better.
If VC’s can invest $30m into 10 companies, and 5 of them go through the next round of funding – they’re on track for great returns, statistically. Next year, we’re going to see a lot of companies run out of money, from investments made back in 2005 – which are running out of cash now, with no traction – but that’s exactly what’s going to create a check & balance in our industry. This does not mean there is a bubble bursting!
The real question is whether or not the successful companies, such as Facebook, Skype, YouTube, etc. are overvalued. My gut feel that in the short term they are, but in the long term, they are probably undervalued. The great things is that these successes, ensure that our sector keeps ticking along, and investors are willing to make the investments, knowing that the potential upside exceeds the risk factor. Remember, as long as these startup companies are opting for corporate M&A activity as an exit, as opposed to IPO – the broader market is shielded from the buying frenzy we saw in the late 90’s, and this greatly reduces the chance of a bubble across the sector.
