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Summary:

A couple of weeks ago, Edelman marketing strategist Steve Rubel declared the Web 2.0 world to be skunk drunk on its own Kool Aid. But I’ve seen signs of sobriety recently. Kleiner Perkins has said no more Web 2.0 startups. Teqlo shut down abruptly once investors […]

martini.jpegA couple of weeks ago, Edelman marketing strategist Steve Rubel declared the Web 2.0 world to be skunk drunk on its own Kool Aid. But I’ve seen signs of sobriety recently. Kleiner Perkins has said no more Web 2.0 startups. Teqlo shut down abruptly once investors were no longer willing to fund their continued search for a workable strategy. HiveLive is finding success not by giving away services, but by selling them.

Are we heading for a crushing hangover? Maybe not. Having learned from the mistakes of the dot-com years, and having found a newly efficient climate for creating web businesses, it could be that we’re not as drunk as we seem this time around — endless conferences and multibillion-dollar acquisitions notwithstanding.

What’s the reason for the new sobriety? Maybe the credit crunch has spooked people. Even though Web 2.0 startups require very little capital, and thus aren’t directly affected by gyrations in the interbank lending market, the space could be hit hard by contractions in online advertising. Yesterday’s slide in tech stock prices made it clear that tech can’t wall itself off from broad economic conditions.

A “get real” moment for social web tools

But fortunately, this doesn’t look like a bubble popping so much as a get-real moment for social web tools. This version of the web revolution doesn’t economically support a bubble, DEMO Conference Executive Producer Chris Shipley told me. “Companies don’t need a ton of money to succeed. Smart VCs and smart investors are looking to back highly efficient business models,” she said. She predicted we’ll see a social and investor backlash against the idea that you can invest in Web 2.0. “It’s a communications dynamic, a social dynamic. But investors should be funding businesses.”

In a blog post about what’s next for Web 2.0, Shipley makes a case that the next stage won’t be focused on reflective logos, silly names, and Ajax for Ajax’s sake:

The past year for Web 2.0 has been a marvelous ride. But the better news is that the next few years are going to be even better. Strip away the trivial and you’ll see that the concepts of the Social Web are fundamentally changing the way people work and play together. Pull back the face of Web 2.0 and you’ll see a new paradigm for computing: a highly distributed information architecture that distributes not just data, but also the power and authority to leverage it. It’s a highly distributed information architecture that requires substantial innovation in infrastructure, technology, security, and services to support it.

We’re not that wasted

Here’s a bit of evidence that we’re nowhere near as smashed as we were in 1999. Union Square Ventures VC Fred Wilson is running a series of blog posts looking at venture fund performance statistics since 1990, and has created a chart showing how many venture funds existed reported returns at different points in time. According to Cambridge Associates, the number of venture funds reporting returns today is comparable to the number that existed reporting returns in 1995… not 1999, when there was a deluge of new funds.

Chart showing number of venture funds, 1990 to 2006

The Cambridge numbers even show a decrease in the number of funds in 2006 compared to 2005. [Note that's for number of funds reporting returns not number of funds raised; VC Data Junky comments that the number of funds 2006 is actually up slightly from 2005 (230 funds vs 228 respectively).]

Granted, there are still plenty of crazy things happening: media companies acquiring web properties at blood vessel-bursting prices, established tech companies making PR announcements made mainly of plans rather than actual products, and conference after conference where startups can show off their ideas.

Still, it seems that some people in the Web 2.0 community are starting to say, “No more drinks, I’ve had enough.” And maybe this time we won’t wake up with a bad hangover.

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  1. VC Data Junky Friday, November 9, 2007

    You’ve misunderstood the data in Fred’s post. Those numbers show the number of funds reporting returns, not the numbers of funds raised. The numbers of funds raised is still pretty high. Each of 2004-06 have the same number of funds being raised as in 1997. And 2006 is actually up from 2005 (230 funds vs 228 respectively).

  2. Thanks for the comment/correction VC Data Junky. Are there significantly different proportions of funds reporting returns during different years? I suppose new venture funds might be less likely to report returns, meaning that the numbers of reporting firms are a lagging indicator of actual numbers of funds.

    Whether today’s numbers are closest to 1997 or 1995, they are not anything like 1999-2000.

  3. VC Data Junky Friday, November 9, 2007

    Anne,

    If you read through all of Fred’s posts and the various comments you’ll see the discussion of selection bias. The proportion of funds reporting has dropped dramatically. The average up to ’93 is about 40% of funds reporting, ’94-99 is about 26% reporting, 2000-01 is about 18% reporting, and 2002-2006 is about 8% reporting.

    Why is a whole other question. To clear answer, just lots of guesses and assumptions. For sure there seem to be 1 or 2 more funds per vintage year (for the more recent vintages) each time they add to the report (quarterly).

  4. So a better chart given dropping proportion of funds reporting numbers would be actual numbers of funds raised, on that measure sounds like we are not near dotcom peak. 2004-2006 is at about 1997 level, a little buzzed but not totally smashed. But only in comparison to dotcom boom, how much does that tell us anyway?

    VC Data Junky, you know the numbers through and through — do you think it looks drunken from VC perspective? With caveat every situation is different and this is all speculative talk. Unlike with actual drunkenness, it’s hard to tell when things have gotten too crazy economically speaking.

  5. VC Data Junky Friday, November 9, 2007

    Hmm, comment thread as interview. First for me. ;)

    You’re correct in that we are at almost precisely 1997 levels for numbers of funds raised and have been for the last 3ish years. When you consider the best returns have always seemed to come from vintages with lower numbers of funds (1997 was the last decent year, 1996 was the peak of returns – again see some of Fred’s posts) seems like we got hammered, started sobering up, then decided we’d keep trying to hold off the headache with the occasional beer. I think there’s still a bunch of carange to be seen over the next few years in terms of funds going away, or splitting up (as has happened a lot in the life sciences funds).

  6. Can’t pass up the chance to get some informed insight!

    You make a good point that whatever’s happening now has a lot to do with what happened in the nineties… some people/firms/industries never did fully sober up. We had a soft landing as housing picked up the slack, now housing is stumbling and what’s left to keep us going?

    Maybe tech, who knows. But maybe there will be more carnage. It sure seems the economy’s never fully worked out the excesses of the late nineties.

  7. News Corp Makes A Bone Shaking Phone To Combat Beacon | How To Split An Atom Friday, November 9, 2007

    [...] Corp decides to join the newest craze of rolling up an ad network, Web 2.0 might be losing a bit of steam and iTunes just might be letting you rent videos [...]

  8. What we’re seeing isn’t binge drinking, just social drinking. ;)

  9. Mark Evans » Blog Archive » The Weekly Wrap Saturday, November 10, 2007

    [...] I’ve seen in a long time: Bub.blicio.us, which covers the “social economy”. Given all the angst recently about the Web 2.0 sky falling, Bub.blicio.us is ironically [...]

  10. Vincent van Wylick Saturday, November 10, 2007

    In my experience, VCs (at least the Kleiner Perkins-type) are pretty rational in their investments. There is no point in investing in businesses, of which there are dozens of clones, or which can easily be replicated to negate any possible sustainable competitive advantage. Alternatively, those businesses, which base their products and services on highly innovative technology (and very talented people), and can communicate this well, should find little problems in finding funding.

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