Web 2.0 Boom is Okay: Wrong

Josh Quittner is wrong in his Time magazine hymn to all thing Web 2.0. Far from being different from the prior dot-com boom, this boom is achingly similar in many ways, with the main difference being that it is cheaper this time to get yourself in just as deep — and this time there is no IPO market to bail you out.

Sure, while Quittner’s right that no-one can name any Web 2.0 IPOs, that’s not the same as they don’t know anything about the liquidity providers/sources. They can name the main buyer — Google — and they can name its largest acquisition — YouTube. And that is a reminder why this is so perilous: Web 2.0 is an even more concentrated boom, one that centers on only a few names on the liquidity provider side, rather than the wide-open affair we saw back in 1999.

Liquidity aside, Josh then goes on to repeat a favorite myth about Web 2.0, the one that says profits are key. Bullshit. Josh tries to make the point, but then he backpedals to eyeballs (shades of Web 1.0), and then makes  up a factoid about how “sugar daddies” will only buy profitable Web 2.0 companies. Really? Okay, name one. Not Jot, YouTube, Flickr, etc. etc. None of these high-profile buys were
profitable when purchased.

So, is this bubble different, as Quittner suggests? Only if by different you mean “riskier”. Because the main difference between Web 2.0 and Web 1.0 is that we have higher risks with lower payoffs. It is the concentration of risk, the narrowness of the exits, the low cost of market entry, and the ephemeral nature of consumer markets that makes this a more perilous time.

Sorry Josh. Like most times when someone says “this time it’s different” about capital markets, the only thing truly different is the person saying it.

[obDisclosure: I like Josh, and even briefly wrote a column for the Quittner-edited Business 2.0.]

Related posts:

  1. Why We Worry About the Wrong Things, Part II
  2. GSpreadsheets: I Don’t Get It
  3. The Big Boom
  4. Be it Resolved: VCs are Wrong About Desktop Apps
  5. The VC Echo Boom

Comments

  1. I agree with most of your points, but I wouldn’t define “risk” the same way: even if the Web 2.0 failure rate is higher, one dot.com company failing for $10M is a considerably worse outcome than ten Web 2.0 companies failing for $100K each. In fact, I think it’s extremely unlikely that investors will lose even 10% of what they lost in the dot.com bubble, because there’s just not that much money out there right now, at least not compared to 1999.
    It’s also worth noting that the last decade’s dot.com bubble was exacerbated by the Y2K scare, which gave companies huge amounts of money to spend on IT over a short period of time. There’s nothing like that to pump up the bubble this time around (the terrorism scare causes relatively IT little spending).

  2. Robert F says:

    Another difference between this time and 1999 is that the general public is much less heavily invested in these offerings. Sure the VC’s are frothing but I don’t have friends of my parents asking me what Qualcomm does because they just invested $250K in the company. I’ve seen little evidence of heavy investing beyond the private equity area (with the exception of Google’s stock of course.)

  3. Andi says:

    Unless the “difference” is used as a rationale for investment it is a difference without a distinction. Vive La Différence!

  4. Andrew says:

    Paul, how does the statement that “this time there is no IPO market to bail you out” reconcile with some of your recent posts about the IPO market?