TechLahore

The craziness is beginning to scare me just a little now. News.com reports on how insane the new outflow of VC money in the valley really is. When it gets to the point where VCs fund companies that should find it hard to even convince themselves of the value they bring to the market, you’d better watch out! The big difference between Bust 1.0 and its second incarnation is that on a per-company basis, VCs are not allocating as much money to Web 2.0 plays as they did to .com startups. In addition, the general acceptance of Open Source technology, such as the LAMP stack, has probably de-linked enterprise software company revenues from an over dependence on airy-fairy Web startups. That’s a good thing, because hopefully the fallout can be contained this time – that’s the hope anyway!

Bill Joy, now a partner at Kleiner, talked about his nervousness with the amount of funding Web 2.0 companies are attracting. He is arguing for more of a focus on Green investing, i.e. alternate energy and similar plays. Come to think of it, the presence of an alternate, equally-hot investment opportunity is another big difference between the original .com crash and what might happen in future. Back in 2000, the B2C companies were the first to take a hit and the industry scrambled to find another poster child… the best they could do was focus on B2B, which soon took a nosedive as well. There was no other alternative technology area that provided an equally hot growth opportunity for the panicked money to be captured by!

The whole point of Web 2.0 is that it allows collaboration and emerging technologies (mostly open) to be used so that value creation on the web is quicker and less expensive. Whereas previously Britannica.com had to hire a whole team of highly paid authors, now Wikipedia.org can essentially do the same job for free. While .com companies had to invest in expensive server side technologies hosted on Sun servers running paid-for app servers such as BEA Weblogic, now you can scale higher and for a fraction of the cost using Amazon’s Elastic Cloud service running the LAMP stack. You can push more load out to the client using AJAX so you get another scaling advantage. Solid Web 2.0 plays will remember to leverage these core advantages… and if they properly utilize these benefits, there will be very little reason to go raise a lot of money. A first-cut Web 2.0 property can be built on a budget of $50-100K. If you have the ability to leverage offshore labour in an effective way, maybe even less. By playing to the strengths of the Web 2.0 model, entrepreneurs can avoid many of the pitfalls that caused the original .com crash.

I started this post out by saying that the amount of money going into Web 2.0 companies is beginning to scare me a little. And that’s because the magnitude of funding going in also implies that entrepreneurs and VCs are getting a little too trigger happy and not fully leveraging the strengths of the 2.0 model that we just talked about. Over-investment is a sin, in this case. It creates false expectations and accelerates needless spending, thus, artificially inflating values of companies that are temporary beneficiaries of these excesses. When reality triumphs in the end, which it always does, inflated valuations  fueled by revenue spikes, in turn caused by ludicrous, unjustifiable spending, can take a nose dive (phew! parse that!)

There is time still to fix this. VCs need to realize that by putting gobs of money into Web 2.0 companies they are not necessarily increasing their chances of a hit-out-the-park, but instead, creating a dynamic that could result in the untimely demise of even legitimate companies in and around this space.

Learn from the past and don’t do it again guys, just don’t do it!

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