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Summary:

As the current Web 2.0 cycle runs out of steam, we’re going to see the startup equivalent of a brownout. I think there is a real money-making opportunity here, perhaps in the form of a Web 2.0 Vulture Fund — an aggregation of startups with decent technologies that have otherwise failed to get themselves off the ground. Continue Reading

Brad Greenspan’s LiveUniverse is indeed buying personalized web page startup Pageflakes, the two confirmed today, bringing the curtain down on a critically acclaimed service that failed to gain much traction, mostly because it was chasing savvier competitors with deeper pockets.

The company blew through nearly $4.3 million and was close to running out of cash, as we first reported over the weekend. Their quick embrace of bargain-hunting Greenspan only adds credence to the rumors of them running out of gas.

But in the broader scheme of things, Pageflakes’ sale is not that big of a deal. Startups that fail to become category leaders either shut down or have to settle for the ignominy of being sold for pennies on a dollar — it’s standard operating procedure in Silicon Valley. And as the current Web 2.0 cycle runs out of steam, we’re going to see the startup equivalent of a brownout. I think there is a real opportunity here for someone to make money.

Back in the dark days of the telecom depression, some crazy mavericks started buying up distressed telecom assets, packaging them and flipping them for a nifty profit. More recently, many vulture funds have started buying out distressed real estate assets. Maybe it’s time for someone to start a Web 2.0 Vulture Fund, aggregating startups with decent technologies that have otherwise failed to get themselves off the ground.

Someone could, for example, roll up the social bookmarking startups with social news companies, or bundle Office 2.0 web apps. Aggregating web utilities such as online storage services, or online address books and calendaring services could be another opportunity.

How would such a fund be different than Greenspan’s Live Universe or Internet Brands? Those are companies with a roll-up strategy. In comparison, as Morgan Stanley notes, “Most vulture funds are limited partnerships, but some are retail mutual funds that are open to individual investors.” (The other option is a buyout fund specializing in distressed Web 2.0 assets.) You can help define the properties of this Web 2.0 Vulture Fund, either on your own blog or in our comments section. Or just email me directly.

If you don’t care much for that, answer this big question, dear reader: Which Web 2.0 company do you think is going to run out of steam and is worth being picked up by a Vulture Fund?

  1. It…is…so…quiet…here. It it possible that your readers are tired of the muckracking and doomsaying? You got scooped by Arrington on the Pageflakes acquistion, and the best you can do is to spin this deal as proof of your wisdom as you try to twist your first knife deeper?

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  2. Actually I broke the story on Pageflakes running out of gas. Arrington got the sale scoop, and good for him. Part of the process is to extend the conversation and try and see if there are longer term implications. If that doesn’t work for you, well too bad.

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  3. Well said Om!

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  4. I think the most obvious “roll-up” that we’ll see in the next few years is a “collaboration platform” roll-up or a “pure SaaS roll-up.”

    The Private Equity guys can smell it.

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  5. mmmmmmmm tough one, technorati, any of the yc companies…

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  6. Slightly Off Topic – Will Micahel Arrington will be the Tony Perkins of Web 2.0? I think he could be.

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  7. “as the current Web 2.0 cycle runs out of steam”…

    Do you really think that we’re seeing the end of a cycle? Seems like the startup funnel in web 2.0 is just a lot more darwinian than ever before.

    A lots more companies were started due to the ready availability of seed money and low startup costs (open source, cheap computing, etc.). But the end game is the same. To raise a successful Series B you need either strong exponential user growth or solid revenue traction.

    It’s not surprising that all these companies won’t be able to make it. But that doesn’t mean the ecosystem is broken.

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  8. @ craig,

    the ecosystem is a bit crowded and needs some cleaning out (consolidation). I don’t mean to suggest the innovation cycle runs out of steam, it is more on the investment side of thing. the macro trends you mention are going to remain intact for a while, but there are issues of economics and those make your your point about “darwin” is spot on.

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  9. Pick any number of CGM metrics and brand monitoring startups that text mine blogs, forums, and main stream news. I guarantee that almost the whole lot will be in tthe dead pool in late 2008 09.

    Buzzmetrics may be the last one standing, due to their connection with Neilsen.

    Down the toilet for adding nothing to the branding conversation, no framework for decision support, and ignoring the brand intermediaries (retailers, durable goods dealers, and enthusiast products.)

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  10. Om, part of what your comments point to is a fundamental re-pricing of a lot of assets, as those assets go from being assessed as standalone businesses with some audience value, proxy of a business model to a technology/team buy of ‘piece parts’ for use in someone else’s larger strategy.

    For companies funded on the premise of the former that find themselves looking like the latter, that is a bitter pill to swallow. VCs are also realists, however, when the writing is on the wall so indigestion aside, you are probably right that there is a buyer’s market for vultures and roll-up plays.

    It does, though, raise the question why more of the corporate development arms of big companies that have crapped out in Web 2.0 implementation don’t themselves use this time to define a global strategy, figure out the piece parts integral to that strategy and fill their portfolios when the market conditions are right.

    The probable answer is that fear is driving more of these companies than greed given the turbulent economy. Plus, few companies excel at technology integration.

    Mark

    My Blog: http://www.thenetworkgarden.com

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