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.
If you enjoyed this post, make sure you subscribe to my RSS feed!
Comments On This Post
November 10, 2007 at 11:18 am
Vinny, Even if this is a bubble it is not going to hurt as much like the 2K bubble. Back then, every website was going public like mad, and it surely hurt the shareholders a lot.
That being said, I would not like to refute it not being a bubble. The way thousands of startups with no great business plans or scope for monetization are getting funded, I seriously doubt the VCs who actually are funding these sites. They definitely are going to be hurted in the burst soon to come.
However, I do think this burst is only going to affect the American startups. And if it does burst in the US, it will be a boon for startups in India and elsewhere as these VCs will definitely move out of US to Europe and here.
November 10, 2007 at 12:32 pm
Vinny I agree that we’re not in a bubble. This stage that we are in, I feel, is an inevitable evolution of the Web that could only manifest after certain growths were undergone. There might be little bursts, but that again is inevitable. I don’t foresee a crash and a tumble though. I think we’re on a firm platform and only more change and moving forward can be expected. The industry is maturing and so are the communities that make up the industry.
November 10, 2007 at 1:53 pm
well said Vinny. I agree
November 10, 2007 at 9:18 am
Vinny, Even if this is a bubble it is not going to hurt as much like the 2K bubble. Back then, every website was going public like mad, and it surely hurt the shareholders a lot.
That being said, I would not like to refute it not being a bubble. The way thousands of startups with no great business plans or scope for monetization are getting funded, I seriously doubt the VCs who actually are funding these sites. They definitely are going to be hurted in the burst soon to come.
However, I do think this burst is only going to affect the American startups. And if it does burst in the US, it will be a boon for startups in India and elsewhere as these VCs will definitely move out of US to Europe and here.
November 10, 2007 at 10:32 am
Vinny I agree that we’re not in a bubble. This stage that we are in, I feel, is an inevitable evolution of the Web that could only manifest after certain growths were undergone. There might be little bursts, but that again is inevitable. I don’t foresee a crash and a tumble though. I think we’re on a firm platform and only more change and moving forward can be expected. The industry is maturing and so are the communities that make up the industry.
November 10, 2007 at 11:53 am
well said Vinny. I agree
November 13, 2007 at 1:17 pm
Agreed. As Anand points out where is the IPO feeding frenzy that characterised the 2k bubble? I’m confused by why the possibility of VC losing money on startups would be deemed a bursting bubble.
They throw their dice and take their changes in a very calculated way. Where I would be suprised is to see VC’s shutting up shop because of a multiplicity of bad investments, but this is highly unlikely …. or is?
November 13, 2007 at 11:17 am
Agreed. As Anand points out where is the IPO feeding frenzy that characterised the 2k bubble? I’m confused by why the possibility of VC losing money on startups would be deemed a bursting bubble.
They throw their dice and take their changes in a very calculated way. Where I would be suprised is to see VC’s shutting up shop because of a multiplicity of bad investments, but this is highly unlikely …. or is?
November 18, 2007 at 8:30 am
I keep hearing about people mentioning Web 3.0. I hope it is not a hyped situation also..
November 18, 2007 at 6:30 am
I keep hearing about people mentioning Web 3.0. I hope it is not a hyped situation also..
November 22, 2007 at 12:26 am
Vinny, I couldn’t agree more. I’m based in Silicon Valley and interviewing with several start ups as of late. The key difference in today’s startups Vs 2001 is every company is extremely lean. The business teams here in the U.S. are comprised of a handful of people. Almost all development and sales functions are now happening overseas in India, Romania, and Israel. This is a stark contrast from turn of the century start ups where shoddy engineers were earning $150k and companies were building out all imaginable company functions. I don’t see any accounting or human resources teams at today’s startups. Everyone wears multiple hats and companies operate lean and mean which means the good ones will be able to take the time they need turning good ideas into profit. Exciting times in our flat world!
November 21, 2007 at 10:26 pm
Vinny, I couldn’t agree more. I’m based in Silicon Valley and interviewing with several start ups as of late. The key difference in today’s startups Vs 2001 is every company is extremely lean. The business teams here in the U.S. are comprised of a handful of people. Almost all development and sales functions are now happening overseas in India, Romania, and Israel. This is a stark contrast from turn of the century start ups where shoddy engineers were earning $150k and companies were building out all imaginable company functions. I don’t see any accounting or human resources teams at today’s startups. Everyone wears multiple hats and companies operate lean and mean which means the good ones will be able to take the time they need turning good ideas into profit. Exciting times in our flat world!
December 4, 2007 at 9:42 pm
If any of these are overvalued ,they all worth it ,For someone to bring out a great idea is worth billions as no one is ready to come out and ask to be sold for 1$bn.Great job and great ideas
December 4, 2007 at 7:42 pm
If any of these are overvalued ,they all worth it ,For someone to bring out a great idea is worth billions as no one is ready to come out and ask to be sold for 1$bn.Great job and great ideas
January 8, 2008 at 2:55 pm
[...] Media, Web, startup, web 2.0. Tags: bubble, Internet, startup, vinny lingham, web 2.0 trackback Vinny Lingham is getting tired of people saying that Web 2.0 is in a bubble. According to Vinny the Internet [...]
February 24, 2008 at 10:30 pm
Vinny I agree that the web 2.0 bubble is exaggerated and that the industry is a lot stronger than in the past.
You mentioned that IQ’s are likely higher in the Internet industry, wouldn’t this mean that the Internet competition is higher too? The average could still represent the Industry.
I’m interested in seeing the future of many of these companies. I read an article on Marketing Pilgrim talking about how Facebook is having a hard time monetizing the site or at least meeting it’s expectations. I’m sure they’ll figure something out. Thanks Vinny
February 24, 2008 at 8:30 pm
Vinny I agree that the web 2.0 bubble is exaggerated and that the industry is a lot stronger than in the past.
You mentioned that IQ’s are likely higher in the Internet industry, wouldn’t this mean that the Internet competition is higher too? The average could still represent the Industry.
I’m interested in seeing the future of many of these companies. I read an article on Marketing Pilgrim talking about how Facebook is having a hard time monetizing the site or at least meeting it’s expectations. I’m sure they’ll figure something out. Thanks Vinny
April 3, 2008 at 4:00 am
I regards to the first post,,, ghmmmm……what does IQ mean eh,,,,spambo
April 3, 2008 at 4:01 am
Hmmm,,, Vimmy who,,,eh,,,,,IQ,,,fit
April 3, 2008 at 4:04 am
I actually took the time to begin the process but after that referral to us mere mortals forget it,,,,wait will I manage to find the delete button ,, will my IQ allow it,,,dam am not in the buisness,,,,I know I will go o web and see if I can find some directions,,,,,,,,,,,,,,,bye vimmy
April 3, 2008 at 2:00 am
I regards to the first post,,, ghmmmm……what does IQ mean eh,,,,spambo
April 3, 2008 at 2:01 am
Hmmm,,, Vimmy who,,,eh,,,,,IQ,,,fit
April 3, 2008 at 2:04 am
I actually took the time to begin the process but after that referral to us mere mortals forget it,,,,wait will I manage to find the delete button ,, will my IQ allow it,,,dam am not in the buisness,,,,I know I will go o web and see if I can find some directions,,,,,,,,,,,,,,,bye vimmy
July 26, 2009 at 1:04 pm
Vinny, Even if this is a bubble it is not going to hurt as much like the 2K bubble. Back then, every website was going public like mad, and it surely hurt the shareholders a lot.
August 15, 2009 at 1:49 pm
Thank youu very muchh….h
August 16, 2009 at 10:32 pm
thank you for sharing
Sorry, comments for this entry are closed at this time.