Is it worth to ride Web 2.0 boom?
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How Web 2.0 is different then?
Oh! So you mean it is indeed Bubble 2.0!
Enough confusion! Do you suggest startup is bad idea then?
| Jack declares, “Sweetie, you’ve gotta news … I am quitting my job soon!” Jill exclaims, “What?” Jack affirms, “Yes darling, you heard it right. I am going for my own startup next month. Don’t you see big fortunes made by startups these days?” Jill resists, “Honey, not again! You had promised not to get trapped into any of these booms … its just 7 years from the last collapse and we are still paying the debts … why don’t you understand?” Jack argues, “Jeez! It’s not the same thing; it’s quite different than the DotCom boom. It’s Web 2.0. Why don’t you understand?” Jill doubts, “Really?” Jack begins, “Listen, it’s not about eCommerce anymore, it’s about changing the lives of people … it’s about changing the way world communicates today …” and the rhetoric continues … |
News Corp acquired MySpace for USD 580 million in cash, Google bought YouTube for USD 1.65 billion in stock, eBay bought Skype for USD 2.6 billion in cash and stock[1] and all together triggered conversations like the one above in almost every software engineer’s home! The question of the moment is – “Is Web 2.0 really different than DotCom boom?” One needs to analyze DotCom boom first in order to answer this very question …
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Why DotCom Failed?
US government opened internet for commercial use in 1970s. Slowly it started getting popular into masses and by 1990, a wind of “new economy” started blowing into Silicon Valley. Amazon.com was the first company to have .com (aka DotCom) in its name and extolled success of Amazon.com[2] rolled in thousands of new startups pursuing eCommerce market. Series of IPOs (Initial Public Offerings) began making these new entrepreneurs paper-millionaires over night! NASDAQ composite index peaked at 5048 in March 2000 and then eventually followed by a ground breaking crash to 1200 within less than two years causing around USD 4.5 trillion of market loss!
Aftermath blamed excessive speculation and over hype by media. The biggest problem of DotCom era was the wrongly pursued business model of GBF (Get Big Fast). Everyone tried to acquire largest share of their business market even at the cost of initial financial loss. Wall Street’s then contemporary wisdom encouraged VCs (Venture Capitalists) to take on risk financing startups to get them big. The overlooked fact was that network effect would choose only one (or at most very few) winner(s) at end and so many others were bound to collapse. Another problem was disregard of conventional wisdom by VCs. In the elated atmosphere of “new economy”, financers ignored requirements of sound business plan, positive cash-flow generation strategies, and experienced people. VCs, entrepreneurs and individual investors all became victims of herd behavior; almost 500 companies who issued IPOs during the boom were crashed immediately after burst.
How Web 2.0 is different then?
Despite of failure, DotCom era has helped to build the very foundation over which Web 2.0 boom is flourishing. Internet penetration to masses has made Web as preferred medium of business marketing and entertainment. Large population today spends more time on web than ever before. Over time, due to advances in technologies, hardware cost has been drastically reduced. The most valuable asset for software companies – software – has become almost free of cost due to proliferation of Open Source culture. This brings up striking differences between DotCom and Web 2.0 booms. A Web 2.0 venture requires ten times or sometimes even hundred times lesser finance and so instead of Wall Street financers, this time, creativity and talent of geeks is the driving force behind current boom. Trend has been shifted from IPOs to acquisitions by big players (read as Google, Yahoo! and Microsoft). This shift makes VCs and big players as possible victims of crash if at all it occurs; and spares individual investors. In other words, if Web 2.0 boom is going to burst then the affected entities are the ones who can afford to get affected. This change of placement of responsibility on right shoulders, per se, reduces the chances of having a crash.
DotCom crash had one more important reason behind it. It was based on eCommerce. Trust of masses had been taken for granted, who were not, by then, much familiar with internet transactions. On the other hand, Web 2.0 is based on the concept of marketing over web. It takes into account the large population that already uses web as primary medium of communication and actively contributes[3] to make it run.
Then does it mean that Web 2.0 is different from DotCom? I think “Yes and No”. It is different as far as above observations are concerned. It looks it has better prospects in terms of acceptance from masses. Nonetheless, it does share some similarities with DotCom (and with any other earlier boom for that sake).
Oh! So you mean it is indeed Bubble 2.0!
Most obvious similarity between DotCom and Web 2.0 booms is over hype. It is being said and shown as if it is completely changing the way of internet usage. Come on, give me a break! It is precisely about success of certain types of web applications e.g. social networking and online video. This success gives a better platform for communication, entertainment and most importantly advertising! Moreover it just manifests evolution of web, if nothing less than that. Secondly, flip side of coin is getting ignored as was during DotCom. In DotCom era, companies wanted to earn extra profit by removing middleman between producers and consumers. But at the same time, they forgot that they were empowering consumers to select best deal with just a few clicks which in turn means that who can afford low profit by selling cheaper (or cheapest) will get more customers - as in any earlier economy. In Web 2.0, major money earning factor is clicks by users on ads; there are raising threats of fraudulent clicks and fraudulent transactions, which certainly need more than currently paid attention. One more similarity is about impact of high profile deals on minds of future entrepreneurs. Lots of hot deals of acquisitions are happening these days which are luring new entrepreneurs to enter this market even if they don’t have good business plan and enough experience. It is obvious to say that fate of large numbers of those crowd followers is bound to collapse tomorrow or the day after tomorrow for sure. And this way no, it is not much different than DotCom boom.
Enough confusion! Do you suggest startup is bad idea then?
| A boom basically indicates a new opportunity to gain from a market sector either due to arrival of a completely new technology or discovery of an innovative way of applying existing technology. Moreover it means that the new opportunity has already being pursued by many players in that sector[4]. These many contenders, together after that particular opportunity, clearly bring up cut-throat competition. Now a contender who has already been established in that sector has clear advantage over any new comer as the prior has better infrastructure ready in terms of business resources and customer trust. Thus a boom does not create any easy gain opportunities for new comers; rather it makes it difficult by putting them against giants. Ironically, new comers are not well prepared for this tougher competition partly because of wrong perception of boom as easy gain opportunity and partly because of rushing to catch the timeframe. There are, of course, success stories of boom endeavors. Those are mostly attributed to early adapters[5]. Point worth to mention here is, early adapters don’t have much of certainty with them in terms of validity of the opportunity. They have to believe their instincts. Other few winners during a boom are those who are well prepared for the tougher competition. According to me, more efforts are needed to succeed inside the shell of a boom than otherwise; as the shell gives validation of the opportunity at the expense of increased competition. Ultimately, better chances of success in a business depend on adherence to the long proven wisdom of rock-solid business plan, meticulous market study, sufficient experience, and most importantly a long term value based vision instead of an immature gain based attempt on volatile grounds of any market boom. DotCom and all other booms consistently validating one saying that “there is no such thing as free lunch!” and am quite sure Web 2.0 won’t be much different from any of the earlier booms in this respect. |
[1] These 3 acquisitions have been perceived by many as representative of Web 2.0 boom but rather these are exceptions. Most of the other acquisitions are below USD 50 million.
[2] Success of Amazon.com here refers to adaptation by masses i.e. high volume of sells. It does not indicate financial profit. Amazon.com took approximately 8 years to turn in profits.
[3] The word web 2.0 is used to represents web applications in which content is mainly provided by users of it. Unlike traditional hard-line separation between content providers and consumers, web 2.0 applications empower consumers to drive the applications.
[4] A situation when market trends strongly validate an opportunity is called as a boom. Followers of boom consist of people who have applied their knowledge and study to validate it on personal level; along with those who just follow the crowd. And that’s why so many competitors.
[5] If only few people foresee an opportunity and invest resources over it taking a risk of failure then those people certainly deserve greater benefits from it, if it succeeds (High risk high gain principle or early mover advantage).
Technology Business Discussions
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- Would you suggest a fresher to join a startup?
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- Is working for a startup your cup of tea?
- What an entreprenur wants?
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- Why do you wanna be an entrepreneur?
- Are software patents evil?
- Can business schools build entrepreneurs?
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- Who is entrepreneur, exactly?
- Why are we here?
Here you meant to say that in Web 2.0 enterprenuers who start these companies get bought by the big players (Google, Microsoft, Ebay etc) and are not affected by the crash, correct?
One Question:
Are you reserching and writing these articles yourself or your blog is just featuring articles from other sources?
I agree with the arguments in the article. Any business has to create a value system. I feel that in any business, you have to be meticulous and focussed on adding true value. Google is the best at search engines, but it does not mean that they are achieved perfection. It means have to work hard and be persistent to take the Google-set bechmark to a new height. Business plans, market study, financial analysis, advertising are very important, but are not the only ingredients. There should be a certain life to it, a certain value, a certain something that keeps the business (a process) alive. If the business lacks a true passion or love, it will function like a dead body that starts degrading slowly. I hope it made senese. Let me know
(Comment this)
The term "Individual Investor" here indeed refers to a person who buys stocks of companies (and not entrepreneurs). Then how the web 2.0 crash will spare them? Lets consider DotCom situation ... almost all startups were issuing IPOs and so an individual has to make a decision about his/her investment in any of those startups (which ofcourse did not have any proven record or trackable historyby then). On the contrary, web 2.0 is the era of acquisions. Here decisions are being done by big players and these guys are certainly better at making these decisions. So the point I was trying to make is "control" has been shifted into more capable hands now. And say, despite of all the capability, even if these big guys made a mistake then too it will not break them completely (as the investments made by big players it small compared to their own market value). So stock prices might fluctuate for a while but certainly won't lead to a collapse.
Well, answer to your question is - I am trying to go through as much as possible resources online and offline e.g. research papers, surveys and analysis reports, information received from experts those I get a chance to talk to and ofcourse other blogs. What I am trying to put here is not just a gist of what all I perceive but also the opinion that I form over it (which is then ofcourse open to discuss).
And yes, perfectly said, passion and genuine inspiration are certainly at the core of a long-lasting successful venture.
FYI, I am planning to have an article as a case study of Google sometime soon so stay tuned! (Comment this)