Web 2.0: A Culture of Frugality?

Posted on January 26, 2008
Filed Under Web 2.0 Kool Aid |

Erick Schonfeld at TechCrunch wrote a post arguing that the gloomy outlook for corporate IT spending in 2008 is a good thing for Web 2.0 (well, at least the “Enterprise 2.0″ portion of it). I wasn’t really intrigued by the topic of the post (probably because I disagreed with its premise the minute I read it), but Erick did make a comment that jumped out at me:

The culture of frugality that is still worn as a badge of honor at many Web 2.0 startups will serve them well if (when) an IT-spending slowdown hits.

This is an interesting statement because I can’t think of too many noteworthy Web 2.0 startups that could realistically be described as having a culture of frugality (while keeping a straight face, of course). A quick browse of the funding announcements posted on the kool aid blogs over the past year shows a plethora of Web 2.0 startups taking investor money. Of course, the funding amounts are often small (six-figures to low seven-figures) relative to the type of funding seen in Bubble 1.0. The kool aid drinkers tend to infer that this demonstrates some sort of frugality, however I’d actually argue that proportionally, the overfunding seen in Bubble 1.0 and Bubble 2.0 is actually quite close to being equivalent because the prototypical Bubble 1.0 company had much greater capital requirements (i.e. an ecommerce startup has costs that a Web 2.0 startup doesn’t).

The question I ask is: if Web 2.0 has a culture of frugality, why do so many Web 2.0 companies need investment at all? The kool aid drinkers love to promote the idea that Millennials in a dorm room can get great, industry-destroying products to market and that there is a booming online advertising market that new startups can easily tap into to build viable businesses. If it’s really that simple, there shouldn’t be as much funding being provided by angels and VCs as there is.

There are certainly bootstrapped companies out there and some of them are doing alright, but on the whole, when we talk about the Web 2.0 startups that have captured the most attention, they hardly look frugal. From the sweet digs in Palo Alto, San Francisco or New York to the launch parties, fringe benefits being thrown at employees and blog and conference sponsorships, the people running these Web 2.0 companies tend to act more like drunken sailors than they do starving students. The spending today reminds me more of the spending seen during Bubble 1.0 than it does the spending seen during the period between the end of Bubble 1.0 and the start of Web 2.0 (when VCs still asked about “revenue” and “cashflow”).

One of my biggest “beefs” with the Web 2.0 kool aid drinkers is that they seem compelled to promote myths that are easily dismantled with basic logic. These myths, and more importantly, the incessant, mindless broadcasting of them, do little justice to the real opportunities that exist in the space. This notion that Web 2.0 has some sort of culture of frugality belies the fact that many of the startups that Web 2.0 groupies love to ogle over are spending their angel/VC money much the same way Web 1.0 companies did.

I’m currently trying to facilitate a possible deal in an industry unrelated to the Internet and this has provided an interesting perspective on the true meaning of “frugality.” The long-shot deal involves a small, developing company with great potential to become a big company and an already-massive, billion-dollar company. When I first started trying to put the parties together and evaluating the key interests and motivators for getting a deal sold, it was made absolutely clear to me that the billion-dollar company would not consider any deal that cannot clearly drive a tangible and noticeable increase in profits. This is a company that could easily spend billions of dollars at the drop of a hat (and has) and yet it has cultivated a culture under which the expenditure of every dime is expected to deliver a result that contributes to the bottom line. No parties, no schwag, no sponsorships, no useless “partnerships” that have “PR value” - just a rabid focus on using the company’s assets to continue its relentless production of increased value/wealth. That is real frugality and it is in incredibly short supply in Web 2.0.

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6 Responses to “Web 2.0: A Culture of Frugality?”

  1. SutroStyle on January 26th, 2008 4:43 am

    I wanted to suggest that you start Questions and Answers section on this site, much like in pud.com

    And here is my first question:

    What do you think will happen with youku.com ?
    It has all movies that are playing in theaters now (just watched “Eastern promises”) and it will not be shut down like allmp3s.com was, because unlike US deciding whether Russia will join WTO, soon China will decide whether US will stay in WTO.
    Is this a youtube killer ;)?

  2. antje wilsch on January 26th, 2008 5:49 pm

    D- those events etc are what garner publicity and therefore drive hip status and self fulfill their own destiny. Parties, schwag, etc. have the appearance of being money well spent if you can get the cool kids to attend/ wear/ demo - it means that there is tangible evidence the money is getting the company to the vaulted audience - and this is a lot of what is valued in silicon valley as being successful.

  3. Drama 2.0 on January 26th, 2008 6:52 pm

    Sutro: good suggestion. I just might do it.

    Regarding youku.com, I have no idea what will happen to youku.com and whether it has the potential to kill YouTube.com. I think movie piracy is a little bit different than music piracy. There are obviously people (like you) who are satisfied with watching movies on their computers. I personally wouldn’t do it because a) the quality usually sucks and b) I much prefer the experience of watching a movie on the big screen or my big screen. I think the “market” for movie piracy via sites like Youku, at least in markets like the United States, is far smaller than the market for pirated music.

    Antje: that’s not frugality. But you’ve given me an idea. I’m going to start offering tours to Silicon Valley entrepreneurs where I take them around the world to see how individuals and companies with real wealth (not paper wealth) do business.

  4. Grendel on January 26th, 2008 10:31 pm

    Isn’t there anyone in Web 2.0 who’s a veteran of Web 1.0? Don’t any of them see the parallels?

    I know it’s all hip and cool to think this is all new and things like revenue and profit don’t apply… In Web 1.0 we called this myth the “New Economy” and the theory was that it didn’t matter if you lost money on every customer, because you’d make it up in volume! It’s perfectly rational “New Economy” thinking!

    Do these Web 2.0 wankers really think that Web 2.0 is more different from Web 1.0 than Web 1.0 was from… nothing? It’s laughable. Between making mistakes on not planning the business up front and making mistakes not planning the technical architecture up front, Web 2.0 companies are showing us old timers what screwing the pooch is all about.

  5. antje wilsch on January 26th, 2008 11:12 pm

    D- didn’t say it was. I’m talking about how the game often goes in the valley, which you already know. I have heard many VCs on many panels say they are fiesty sheep. When their peers are validating something it makes people feel better about an investment.

  6. SutroStyle on January 27th, 2008 12:04 am

    I think youku.com will not of course kill youtube, but you should not underestimate the shift of young teens and pre-teens from TV to computers. We are operating a company full of teens (unknown to web 2.0 ;-), and these trends are quite amazing. Also, the flash player now supports H.264 video format (as of the last 3 months) - even on a slow American DSL it plays very high quality video.

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