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The Web 2.0 Bubble Debate
Posted in Financing
Is Web 2.0 headed for Bubble 2.0? That was the subject of debate at the TiECON East Confernece. Fred Wilson (Unionsquare Ventures), Don Dodge (Microsoft), Nabeel Hyatt (Conduit Labs), and Brian Balfour (Viximo) had a lively debate and arrived at very different conclusions.
All booms go bust - Business runs in cycles. All big booms have been followed by painful busts. The market is ruled by two things; fear and greed. Greed fuels the boom, and fear prolongs the bust. Fear is very powerful. Everyone starts to question their own beliefs. But, fear is temporary, greed is permanent. We have all pretty much forgotten the Dot Com Bubble. Greed and optimism always overcome fear and lead a new economic boom.
Hundreds of smaller successes- Fred Wilson believes there will be hundreds of companies with smaller successes, not a few billion dollar successes. Facebook and MySpace get all the headlines but hundreds of smaller companies with $50M in revenue and $20M in profit will be successful. But, will VCs invest in these companies? Lots of VCs look at Web 2.0 companies and say "I like the concept, and I like the team, I'm just not convinced it will generate VC level returns at exit."
Capital efficiency matters - Web 2.0 companies can be launched for far less money than ever before. Many don't take VC money at all. The point is that capital requirements and operating cost structure must be commensurate with the opportunity.
Is advertising the only revenue model?- Too many startups point to Google and Facebook as evidence that advertising is the best path to success. They fail to understand the scale (users and page views) required to make it work. Most social network sites generate CPMs of $0.40 or less. To generate $1M in ad revenue would require 2.5 Billion page views. Not many sites attain that scale.
Freemium Model- Free services like Flickr, TypePad, and others provide a free service with premium upgrades for more storage, more features, or other services. This model works as long as the marginal cost of providing the service is close to zero. Conversions from free to paid run about 3% to 5%, so the revenue from paid subscribers must cover the cost of all the free service plus provide a profit. Think of the cost of free service as marketing costs...and make sure it fits your business model.
Virtual or Digital Goods- The cost of goods and distribution costs of digital/virtual goods is almost zero. Ringtones, avatars, icons, virtual flowers, widgets, virtual cards, and lots of other products are producing big revenues (and profits) for web companies. Socializing online is similar to real life. We want the same sorts of fun, impulse items, and entertainment online, and we are willing to pay a few bucks for them. The gross profit on these impulse items is huge.
New models?- Social networks and word of mouth recommendations are powerful. All the demographic data, ratings, attention data, profiles, and social connections will enable new ways to target advertising and ecommerce. Advertising is.....
Read the full article on Dan Dodge's blog.