Storms in the Web 2.0 Petri Dish
The Web 2.0 world is looking increasingly like a giant petri dish. There are so many experiments, so much innovation and, as yet, relatively little real revenue. Within this petri dish are a few ideas that will turn into billions of dollars, at which point we will all say “why didn't I think of that”? There are also lots of “what on earth were we all thinking” ideas out there. Numerically of course, there will be much more of the latter - but in $ terms the few big winners will mean it'll all make some kind of sense in the end.
The few places where we are seeing real revenue, such as at MySpace and Facebook, are enough encouragement to everybody else to keep experimenting. Henry Blodget, a man who knows a thing or two about the valuation of disruptive innovation, said something very insightful when commenting on the Facebook/Microsoft story:
“But the mistake analysts have made consistently, since the beginning of Internet time, is to underestimate the potential of the winners–and overestimate the potential for everyone else.”
Whether it is the network effect (aka Metcalf’s Law) or the swarm effect of millions of consumers and investors with ADD, I don’t know. But Blodget is right - it is increasingly a “winner takes all” environment in many markets.
The search for that pot of gold at the end of the rainbow keeps the experimentation going and the VC taps on full blast. It is also now so cheap to build an online service and get some initial traction that plenty of self-funded businesses are getting off the ground. Apart from all that, it is tremendous fun when the “the times they are a changing” and the old order looks ripe for disruption (the dinosaurs are sleeping and so on).
Storms Brewing
We probably should be in a digestion phase right now. But it does not feel that way. The innovation just keeps on coming.
We live on a street corner, where Main Street, Wall Street, Sand Hill Road and MG Road (Bangalore aka globalization) cross. It is a busy place. Storms from one street can cross another street quite easily. On Sand Hill Road and MG Road, the sun is shining on a perfect late summer/early fall day. On Wall Street you can see the shipwrecks, hear the shouts of “man the lifeboats” and also see the early signs of hardy types picking up the broken bits and starting to build again.
Meanwhile out on Main Street, the storm clouds are gathering. The Main Street storms take the longest to build, but they are the ones that matter. Recession will put a stop to all this, particularly if it impacts online advertising. At some point somebody has to buy something. That can be delayed for a long, long time when the prize is so big and the funding so plentiful, but when too many people say that consumers are locking up their wallets, the Wall Street/Sand Hill/MG crowd get affected as well.
Maybe the half point rate cut will do the trick and create the famous soft landing; and maybe it won’t. I don’t know, Bernanke does not know, nobody knows. But lots of people have factored the increased odds of a recession soon into their planning.
What Entrepreneurs Can Do to Weather The Storms
Entrepreneurs are not by nature people who walk around with a Plan B in their pocket. Even though it goes against the grain. It goes against the unflagging optimism and sense of “I can do this” that keeps great entrepreneurs going long after others have given up. But successful entrepreneurs are also savvy, practical survivors.
Great entrepreneurs are also masters of timing. The master of timing in Web 1.0 was Steve Case, when he persuaded Time Warner that AOL was their equal in a merger. It was so outrageous that it was the signal that triggered the end of the Web 1.0 boom. Of course when history does repeat itself - as it usually does - it does so with a surprising twist that takes everybody by surprise. The obvious parallel today, Facebook and Microsoft, does not apply. Microsoft is only investing what is a rounding error for them; and they may well have a preferred rate, which means that in the worst case they get the same return as they get on their cash hoard in Bonds.
So, no, I am not calling a bubble or even forecasting the timing of a recession. But I would say that one of the following should be on the To Do List for entrepreneurs in the current climate (which one depends on the lifestage of your venture):
1. Raise more money (a lot more) than you think you need. VCs have plenty of money to put to work and you need enough to ride out a cycle and really build something to last. Jason Calacanis said he raised enough for 5 years with Mahalo and he has seen a cycle come and go.
2. Get to cash flow positive quicker than you had planned. (And if you are already there, don’t take this as the time to start a major expansion built on borrowed money).
3. Accept that offer. Not the first one of course. Not the second one if you have good poker nerves. But take the third one. Live to venture another day.
Photo by are you my rik?
Share
Comments
Subscribe to comments for this post OR Subscribe to comments for all ReadWriteWeb posts
Bernard, Interesting points in the todo list. Nice to see you mention of MG Road in Bangalore.
Have you been to Bangalore any time, looks like you happened to spend quite a lot of time in MG Road. :)
Awesome post - I really enjoyed your suggestions
Little depressive but I think it's all true. When do you think Bernard the Internet depression will come?
# 3. Sorry if this ruined your day, certainly not my intention. No I am not suggesting any Internet depression, let alone forecasting one, just saying the odds of a normal cyclical recession are higher than they were a few months ago and that should be factored into planning.
I am actually more bullish on start-up prospects today than I have ever been. I have never seen a period when the power has shifted so much from the incumbent to the innovator. The speed with with which companies like Google and Craigslist have decimated the value of once mighty businesses (including ones that the great Warren Buffet said he would hold ‚Äúforever‚Ä?) is staggering. This is a time for Venture Capital (growth, disruption) more than Private Equity (cash flow, stability). Actually in an era when it is possible to build new online services for ridiculously small sums of money, we may have finally reached the time when the entrepreneur really holds more of the cards.
I still maintain a Facebook IPO will be the most readily identifiable catalyst that leads to the current boom cycle slowing down (not necessarily going bust like last time though.)
There's some solid and emerging behavioral-targeting ad platforms in place. But there's just nothing on the horizon to justify the wild speculation around the valuation of Facebook. And once the current revenues (and potential) of this high profile property are more open and fully realized it could lead to a bit of a temporary push-back from online advertising.
However, any push-back won't be to anywhere near the same extent as last time. This time there's some very solid online ad platforms in place (search of course being the well-proven bell-cow.) And the trend of offline advertising dollars continuing to shift to online advertising won't be stopping either. If anything, a broader economic slowdown might actually speed the allocation of ad dollars from offline media to online media since online media is still usually a FAR less costly proposition for major advertisers.
# 5, the last cycle is too recent memory for an IPO without solid profitability to succeed IMO. So no need to worry on that score. FB won't IPO till they are ready. It would be great if they did IPO, it would add one more hungry acquirer with a public currency, but I just don't see that any time soon. When Google did IPO their monetization was proven and obvious - you could debate switching costs, barriers, growth etc - but the basic model (who pays and why) was not in doubt. I have yet to see that simple story on FB.
On your last point I totally agree. A cyclical recession will drive more $$$ from "faith based advertising" to models where ROI can be measured.
Bernard -- great post. As someone who's been through at least three major down cycles, as I suspect you have also, I can very much relate to what you're saying.
But I do not believe we will see a downturn in online advertising. The disparity between time spent by consumers online as a percentage of all media (in the range of 20%), versus the percentage of the total ad spend now devoted to online (around 5%) is just too damn wide.
You could drive the proverbial truck through it!
regards,
Graeme
How would web 2 effect google exactly?
Graeme, thanks. Yes I agree that the secular wave to online beats any cyclical backwash. But a downturn does make advertisers, investors, everybody do a "flight to safety" and start-ups with negative cash flow and inadequate funding are exposed at that point. I believe the wave is less offline to online and more from "faith based advertising" to advertising that has strong, measurable ROI. Some weak online advertising models will get exposed in a downturn as well. At the same time a scrappy, underfunded start-up with a great and provable ROI story will do just great in a downturn; in fact a downturn will be their window of opportunity.
I see you are surfer. I wish my sport - skiing - lent itself so well to entrepreneurial analogies.