Web 2.0 “Investment Boom May Be Peaking”

Posted on March 19, 2008
Filed Under VC Insanity |

Common sense is back in vogue. From the about the Facebook hype to the Old Media isn’t dying to the growing consumer and advertiser dissatsifaction with user-generated content, it’s clear that common sense is starting to make a comeback, perhaps fueled in part by the best antidote to a kool aid-induced high - a stark economic reality.

Yesterday produced a sign that even those who typically lack common sense (venture capitalists) may be starting to recover from their stupors: Dow Jones VentureSource released 2007’s Web 2.0 funding figures which suggest that the Web 2.0 “investment boom may be peaking.”

$1.34 billion was invested across 178 Web 2.0 deals in 2007, marking an 88% increase over 2006, but Facebook’s $300 million heist accounted for 22% of the funding. When Facebook is excluded, “the numbers don’t look as bullish” as pointed out by Martin LaMonica at News.com.

According to Jessica Canning, director of global research for Dow Jones VentureSource:

2008 may be a make-or-break year for many Internet companies with business models relying on advertising. The slumping economy, coupled with a slowdown in click-through rates for online advertising, is going to pose a real challenge to their ability to generate revenues and position themselves for an exit.

Who woulda thunk that a viable business model that generates revenue is required? And who woulda thunk that the biggest financial crisis in decades would become a problem for Internet startups?

Thinking VCs are worried VCs. In his article “Fear and doubt spread in Silicon Valley,” The San Francisco Chronicle’s Tom Abate points out that the IPOs and acquisitions that investors rely on to “achieve liquidity have been drying up for months.” That’s cause for concern for VCs who need exits to make money from portfolio companies that, well, don’t make money.

Perhaps most interestingly, Dow Jones VentureSource found that if you’re a Web 2.0 startup, Silicon Valley may not be the best place to be. The number of deals in the Bay Area decreased slightly and two companies (Facebook and Ning) accounted for $344 million of the region’s $721 million in Web 2.0 funding. Meanwhile, startups in bizarre places such as New York, Boston, Southern California and Seattle saw more rapid growth in total deals closed and average deal size.

In short, it looks like the Silicon Valley clique is going to have to rework its pitch to gullible entrepreneurs: a shitty lifestyle coupled with a Sand Hill Road ATM machine whose daily withdrawal limit is being lowered is a tough sell to anybody with an IQ above 90.

Clearly, however, those with IQs over 110 aren’t thinking about starting or funding a Web 2.0 company these days. After all, who needs another generic social network, Digg wannabe, YouTube clone or widget maker? It’s time to move on to the next big thing: saving the world with “green” technology, an area where VCs invested just over $3 billion last year.

Of course, those with IQs over 130 have good reason to be a little bit skeptical about that bubble too. So where have they invested? Commodities like oil and gold. After all, there’s big money to be made when you play ball in a real world dominated by .

Update: a major Web 2.0 blog has finally covered this news. Somehow it seems like this story has received much less attention from the A-list Web 2.0 blogs than it deserves. Wonder why? You do the math.

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4 Responses to “Web 2.0 “Investment Boom May Be Peaking””

  1. antje wilsch on March 19th, 2008 12:51 pm

    This is not new news. For those companies I talk to in this space seeking funding, most web companies are getting rejected and have been for many months now. What’s hot is clean/bio tech (green), search, and advertising.

    While your disdain of the VC world is palpable D, and not without cause, I still shudder to think where the country would be if we didn’t have technology; a lot of it rises to the top (on top of a lot of crap that silts to the bottom) and the funding world plays a large role in innovation.

    To go drama-to-the-other-side, if *everyone* invested in oil & gold, we’d be wearing turbans and I wouldn’t be allowed to drive.

  2. Drama 2.0 on March 19th, 2008 7:24 pm

    Antje: there’s no doubt that access to capital has been synonymous with technological innovation. The problem, of course, is that many VCs are today working against innovation just as much (if not more) than they’re working for it. In many cases, their investment strategy is not sufficient for the type of innovation that has the greatest potential and is most needed.

    I actually like clean energy but one of the significant problems I see with many of the investments VCs are making in this space is that they’re backing the wrong people. I will not go so far as to say that a former Silicon Valley executive, for instance, is completely incapable of building a successful clean energy business, but VCs should recognize that this is a completely different ball game and I think many will learn that the hard way.

    I’d guess that a fairly substantial number of VC-backed clean energy companies are not going to be economically viable anytime soon and may never be. Some only have a chance if government subsidies stay in place.

    As for oil, I think your perceptions may be a bit too stereotypical. Go to Dubai, Doha or Tehran. You might be surprised. And if you’re still not comfortable, Houston isn’t such a bad place either. :)

  3. Is Web 2.0 Funding Over? Or Just Moving? - Profy.Com on March 19th, 2008 9:12 pm

    […] a story today that virtually every blog has been tiptoeing around but not addressing, except for Drama 2.0, but we know how much he likes to rub our noses in any possible popping of the bubble. The story, […]

  4. antje wilsch on March 19th, 2008 10:51 pm

    actually I’ve been to Dubai, Kuwait and if you can believe it, Iran! And I didn’t wear a headscarf all the time. But I meant Saudi Arabia, where I am not legally allowed to drive.

    You know that we agree on a lot of laughs on some of the vc-backed environment, some of the valuations and agree more often than not (well except for your lame attempts at rap lyrics) ;) and the silicon valley investment community has a lot of very, well, strange people involved in it overall. But there are also a lot of very smart people. It’s not ~all~ luck.

    But, I put forward that a lot of the internet is going to be about eyeballs and consolidating traffic. There will always be disruptions, such as Cable TV to the old 3 or 5 channels. Or bloggers to newspapers. Or MySpace to Friendster. But I also understand the rush to try and entrench while everything is still a bit up in the air. Just like last time there will be a few “last men standing” (how’s that for steretypical and sexist) giants after the fluff fails. It’s everyone’s shot honestly. Ebay, Amazon, Yahoo, the others who came from the last big rush - still relatively young companies comparatively - this is what everyone is striving for (that or a big acquisition so they can buy a couple of houses in Aruba).

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Drama 2.0 spikes the Web 2.0 kool aid by providing critical analyses of Web 2.0, its people, its startups and its impact on the world of media. Other topics are explored when Drama 2.0 has been drinking too much 1975 Dom Perignon. Read more about the Internet's version of Keyser Söze here.