Where are Web 2.0's Amazon.com, PayPal, Google, or Travelocity? They were never funded.
Paul Graham and now Eric Schonfeld are extending the several-year-old "VCs don't know what to do with Web 2.0's super-low-cost startups" meme. The extension has to do with the recession, arguing that it will accelerate the decline of VC relevance, as VCs become more reluctant to fund these shoestring startups, and more entrepreneurs pull a DIY anyway and ignore VC.
Well... maybe. The VC problem with micro-cap micro-startups is real, in the sense that it's a real math problem where the VC fund size divided by the proposed investment size equals too many portfolio companies to interact with, and a kind of interaction that is a big break away from the old model.
But the easiest fix is for VCs to simply invest in more expensive businesses. The current predicament is a classic chicken/egg: after the dot-com crash, VC money was hard or impossible to get, so the businesses people started were these undergraduate-level 1 man-year (or couple-of-weekends!) efforts.
Small product, small team, small money. We got things like 'Remember the Milk.' Cute, sure. Useful, sure. But nothing too hard or too ambitious. Nothing a tiny shop -- or a bored college student -- couldn't hack out in their spare time. Indeed many were spare time or side projects.
Some of these apps got a lot of users, especially where network effects were involved, and eventually VC wanted nothing that wasn't viral, network-effect, social. Never mind that there was never big challenge or big value in those. Facebook is the biggest thing in Web 2.0 at the moment, and it's nothing but network effect and questionable monetization. "Not that there's anything wrong with that..." It's a fine, useful application. But in the absence of any real substance the model became more Hollywoodesque, more personality- and connection-dominated than it should have.
So where is the Amazon? PayPal? Google? Travelocity? Ariba? Netflix? Danger (maker of the Sidekick devices)? Those big projects that take tens of man-years, maybe hundreds? The projects that can't "launch in beta" after a few months and acquire tens of thousands of fanatical users because they're more than a glossy AJAX UI on a local database?
Where are the startups that drag whole industries whining and screaming into the 21st century and liberate billions in value, trapped in transactions that real people make every day?
Those big projects haven't been A-round darlings for a long, long time. VCs, terrified of risk, moving in a tight pack, loved the new ethos: let the entrepreneur build a product, get it launched ("beta"), get customers, get mirror-hall PR (blogosphere), then later drop in a few bucks. Less risk. But not easy money. Count the exits. And the ad-only valuation has no more magic today than it did in 1998.
And no one even notices when hundreds or thousands of these little pownces and iwantsandys hit the deadpool.
It's no coincidence that many of the step-by-step tutorials for new frameworks and tools teach you to clone a blogger, a flickr, or a wiki farm in a sitting. After all, those are trivial undertakings, lacking only for a network-effect mob signing on. And we'd all have a good laugh about widgets one day... if we weren't laughing so hard already.
Can you imagine a tool vendor of the dot-com era giving an hour tutorial that produces a working Travelocity clone? a working PayPal clone? It's sketch comedy, or something sadder and more disturbing. Frankly, the most ambitious projects in all of web 2.0 are the tooling and infrastructure plays that are largely open source.
Investors, entrepreneurs, engineers and end users might all do well by hunting some bigger game.
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