I think you guys make a solid argument, and I am going to try and answer that with a post. It can become an unwieldily comment if I tried to do here. I still believe that some of these failing properties are going to have value.

On Pageflakes, I didn’t say they are dead. i think from an investor perspective one group got wiped out while another got a bargain. I am just suggestion, a fund to find-and-buy those bargains when they become available.

There are several problems with this strategy, as others have pointed out: 1. The fundamental tenet of most distressed investments is “good business, bad balance sheet.” In other words, two things must be true: a) the underlying business is sound and can generate cash (and not continue to consume capital); and b) due to prior circumstances, the company got over-leveraged or had a mismatch between the timing of cash inflows and outflows that caused it to be insolvent. This means that the fundamental problem that forced the business into distress cannot be that the company has no capability to generate cash over the long term, only that it found itself temporarily upside-down in terms of short-term assets and liabilities. 2. Alternatively, great distressed investments have come from highly out-of-favor assets with long useful lives where the cost to replicate the infrastructure in place is vastly greater than the cost to acquire it. In technology, Digital Realty Trust acquired surplus data center space–which can cost hundreds of dollars per foot to construct–at fire-sale prices during the bust when companies like Exodus went out of business. If you have the cash and the patience to wait out the market, the price will likely eventually return to fair value (though it is hard to know how long this will take, which is why stabilizing cash flow is priority #1 in a turnaround). Likewise, Sam Zell made his billions as “the grave dancer,” buying distressed buildings at times of crisis for far less than replacement cost.

The reason most failed web 2.0 businesses (or, in prior eras, VC-based companies in enterprise software and communications equipment) make poor candidates is that 1) they have few tangible assets that can be acquired below replacement cost, especially given that replacement cost tends to drop over time due to rapid depreciation; 2) the value of IP is fleeting, as technology continues to evolve, meaning that it takes cash to continue R&D; and 3) they never demonstrated a cash-generating ability in the first place.

Contrast this to the acquisition of eHow’s assets out of bankruptcy–there was an enormous library of content that could be acquired below replacement cost, has a long useful life, and is newly valuable given the availability of a new revenue source in the form of Adsense. The site quickly became profitable, and eventually was sold (minus WikiHow) to Demand Media for a large gain.

Look at pages like socialmarker.com and see how many social bookmarking services there are! And all those social networking websites and microblogging services. They flood me with invitations or information which at a closer look is mostly useless spam. I could spend my entire working day on that and get nothing done.

But one has to always be afraid to miss something important. It would be much easier if there were only a handful of Web 2.0 services to follow. At least Facebook gets boring and I have to check it only once a week now.

The telecoms and real estate vultures actually had hard assets to acquire which had some potential of being of greater value in due course.

Internet start ups have two assets: talent and users.

As Q-dub pointed out the talent is likely to move on.

And if the start up is sick enough for the vultures to be swooping in, I dare say the number (or stickiness or some other metric) of users isn’t impressive.

And integrating a handful of 2.0 properties is no easy task–read Paul Graham’s latest work–even Google isn’t very good at building cohesive packages out of it’s acquisitions.

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

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.)