Ryan Says…

To me, there seem to be two fashionable areas in which to be starting a company in Silicon Valley right now:
“Web 2.0″ and Biotech (and to a lesser extent nanotech which I will lump in together here because it involves similar investments in complex research and engineering)

I find it interesting how these two areas are at completely opposite ends of a spectrum. On one end you have web 2.0 - anyone who can hack together a nice looking web gui, implement a backend in ruby on rails or php, and pay a few hundred dollars for a web hosting service, can start a web 2.0 company. There is very little investment required, other than the time of a few engineers. Then you have the bio/nano-tech - pushing the limit of not only our research into these fields, but also our manufacturing/process technologies to build products emerging from research breakthroughs. Very capital intensive, very R&D intensive, very expensive!

So it’s no wonder that web 2.0 startups are popping up by the day, if not by the hour. The problem is, there are very few examples of business models in this space that have been shown to be effective, other than throwing up a few google ads on your site. Thus, revenue opportunities for web 2.0 startups are relatively scarce. It seems at present to be very much a low-risk, low-reward path. As an aside, this is great for Google. I like to compare this to the days of the gold rush, with everyone hoping to hit on something big and strike it rich - but who made the real money through solid business models? Those providing the tools, and the infrastructure for all the miners. In the same way, google provides the advertising infrastructure allowing web 2.0 miners to extract money from the ‘goldmine’ of this new generation of tech savvy web surfers, hungry for new ways to socialize, organize, collaborate and anything else the web 2.0 entrepreneurs can dream up.

It puzzles me why VCs are investing like crazy in web 2.0 startups. This kind of business lends it self much more towards organic growth, bootstrapping from generated cashflow. An injection of capital isn’t necessarily going to open the doors to new revenue opportunities and increase returns significantly. Bio/nano-tech on the other hand, with its high-risk high-reward profile, is perfectly suited to VC investment. Without a heavy dose of capital upfront, it’s unlikely that these companies will last long enough to see a return at all. But I’m guessing that in most cases, if one of these companies does see a return it will be BIG. Hopefully a home-run like all VC firms are seeking.

Of course, there is a tonne of VC activity in the bio/nanotech space for precisely this reason. I just find it puzzling that there is a seemingly similar amount of activity in web 2.0. Seems like after-shocks of the bubble mentality - investing in companies based on metrics like number of users and ‘activity’, rather than business fundamentals.

To the web 2.0 entrepreneurs, enjoy it while it lasts. By all means I wish you success and hope you find an amazing new business model that renders all my comments invalid. Heck, maybe I’ll go and start a web 2.0 venture myself to see what all the fuss is about :)

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