Beauty parade for Web 2.0 start-ups (FT)

Beauty parade for Web 2.0 start-ups

By Richard Waters in San Francisco
Published: November 5 2006 20:27 Last updated: November 5 2006 20:27

A “crowdsourcing” company that lets software developers vote on which product they will create next, a “social sharing” start-up that promises to get to “the very end of the Long Tail”, a maker of online Post-it notes.

These may sound like parodies of new internet companies emerging from Silicon Valley’s latest bout of internet euphoria. In fact, they are all start-ups that will be paraded this week at the Web 2.0 conference in San Francisco, an annual event that has turned into a celebration of the Valley’s recovery from its post-dotcom slump.

While promoters of the new wave of internet start-ups claim this is not turning into another bubble, it is reminiscent of the last boom in at least one respect. “There is a great deal of hype,” says Mitchell Kertzman, a partner at Hummer Winblad, a Valley venture capital firm.

And where there is hype, opportunism flourishes. Many of the companies emerging from this start-up wave, like the last, look as if they were created with an eye to being sold on quick. But this time the aim is not to “flip” them to Wall Street investors, but to sell them to a Google or Yahoo.

With the mania in full swing, the amount of venture capital money finding its way into US internet companies has jumped to levels not seen since the boom.

Defining exactly what it is that characterises this new wave of internet euphoria, however, is not easy. “Web 2.0 means so many things to so many people,” says Steve Ballmer, chief executive of Microsoft. “There’s a technology aspect, a community phenomenon, an advertising business model.”

The new internet companies are built on low-cost technologies such as open source software and cheap commodity hardware. Many – such as photo-sharing site Flickr – employ tools designed to stimulate online community behaviour. Also, thanks to the rise of online advertising networks, the new start-ups often have a way to generate revenue immediately.

Young internet companies once rushed to see how much cash they could raise, much of it to be spent on advertising. But the new entrepreneurs boast instead about how little they need. In spite of that, the sheer number of new arrivals suggests there will be many casualties. “For every YouTube, there have probably been 20 or 30 companies funded that won’t be worth anything,” Mr Kertzman says. “If a company doesn’t take off virally and get ‘hot’ on its own, the only tool you have is consumer marketing, which is very expensive.”

Meanwhile, the cash flooding back into consumer internet start-ups has had an inevitable effect. Geoff Yang, a venture capitalist at Redpoint – which backed MySpace – estimates that valuations of private internet companies have risen 30-40 per cent in the past six months.

However, the public markets have not experienced similar upswings, and the dearth of initial public offerings in the US suggests that few of these new companies will ever make it to Wall Street. Once Google and Yahoo tire of acquisitions, the Web 2.0 hangover could be acute.

Copyright The Financial Times Limited 2006