Web 2.0 fails to produce cash

Web 2.0 fails to produce cash
By Richard Waters and Chris Nuttall in San Francisco

Published: May 26 2008 19:18 | Last updated: May 26 2008 19:18

Many members of the Web 2.0 generation of internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.

“There is going to be a shake-out here in the next year or two” as many Web 2.0 companies disappear, said Roger Lee, a partner at Battery Ventures.

“These are challenging macro-economic conditions,” said Shawn Hardin, chief executive of Flock, a browser maker that raised $15m in venture capital last week.

Yet that has not stopped a continuing round of venture capital fundraising and acquisition activity at high valuations as investors and corporate acquirers hunt for businesses capable of rising above a crowded field.

“If you look at some of the valuations, you wonder what fantasy of revenues they’re based on,” said Mitchell Kertzman, a partner at Silicon Valley venture capital firm Hummer Winblad.

In one sign of the continued hopes for start-ups that have yet to alight on a solid business model, several financiers expressed support for the private fundraising being undertaken by Twitter, one of Silicon Valley’s most talked-about companies. The “micro-blogging” service, whose users post messages no more than 40 characters long, has yet to find a way to make money, but its early adoption by a group of enthusiastic users is seen as a sign that it will eventually be successful.

Other recent venture capital deals have included fundraisings that have put valuations of about $500m each on Slide, a maker of “widgets”, small applications that are carried on social networks, and Ning, a social networking platform founded by Marc Andreessen, a co-founder of browser maker Netscape.

Despite the slow start to money-making by Web 2.0 companies, the trend towards more social online behaviour that it embodies is widely claimed by insiders to be of lasting significance.

“The capabilities that are coming with Web 2.0 are very profound,” said Devin Wenig, head of the markets division of Thomson Reuters. “The Valley is usually right, and it’s usually early.”
Copyright The Financial Times Limited 2008