Venturing into Web 2.0

Not since the heady days of the 1990s dotcom boom has there been such a buzz around web start-ups. Venture capital has been flowing to innovative companies aiming to revolutionize the way people use and view the internet, with YouTube, MySpace, LinkedIn and Flickr just a few examples of the new wave known as Web 2.0. According to research by analysts at PwC, $942 million was invested in US internet content start-ups in 2006. Confidence is riding high, but some are skeptical after the collapse of so many internet firms during the first dotcom bust. So have lessons been learnt since then, or is Web 2.0 just another bubble waiting to burst?

What many of these new internet startups have in common is that they are user-generated, focusing on online collaboration and content-sharing amongst users, so anyone can publish their own content whether it be video clips on YouTube or a profile on social networking website MySpace. The rise of these websites has been meteoric, with MySpace already reported to have over 100 million accounts and gaining new registrations at a rate of 230,000 per day.

Venture capitalist David Hornik, a General Partner at August Capital, has invested in a number of such companies after spotting their potential, including SixApart and Technorati. “At the time I invested in both Six Apart and Technorati, blogs were just starting to emerge as a meaningful communications medium,” he says. “I believed, and continue to believe, that blogs would play a significant role in the way enterprises and individuals shared information. Thus, I invested in Six Apart, the leading independent blogging software and service company; and Technorati, the leading blog and RSS search engine.”

In fact, blogging has become a modern phenomenon. According to Technorati, there were 60 million blogs on the web as of November 2006, and this number is likely to grow dramatically as an increasing number of companies begin to realize the potential of blogs in building better business and customer relationships. Blogging can be an effective tool in helping a company maintain its relationships with partners and employees, and also to reach out to potential clients.

Following on from this success, Hornik thinks that the Web 2.0 movement will have a dramatic impact on the global business community. “The internet continues to be the most transformative business force of our age. I anticipate that internet software and services will permanently change every aspect of the global economy.”

Web businesses that serve as platforms have the best opportunity for long-term success, according to Hornik, and it is for this reason that he decided to invest in Six Apart along with VideoEgg. “Six Apart is the leading blogging platform provider. They make Movable Type, TypePad, LiveJournal and Vox. Millions of people blog using Six Apart’s platforms and hundreds of millions of people a month read blogs that are powered by Six Apart software. That is an exciting and growing business.

“Similarly, VideoEgg has created a platform for simple publishing and hosting of video. They are the video network for a large number of social media properties, including the likes of bebo, hi5, Piczo and Tagged. By serving as the video platform for a number of large networks, VideoEgg is now serving about a billion videos a month. Other platform opportunities I think are interesting include companies like Facebook, LinkedIn and Etsy. All of these companies enable significant activity by empowering both publishers and consumers.”

Despite the wealth of innovative start-ups, some are apprehensive that Web 2.0 might just be another dotcom disaster waiting to happen. As yet, none of the big names in the sector have gone public. However, times have changed and the conditions for start-ups are much more favorable. For instance, there are now widespread broadband connections, less start-up capital needed is needed and money comes from private companies rather than public investors.

According to Hornik, starting a new venture is always a risky business regardless of the format. “Start-ups fail every day,” he states. “It is the nature of start-ups, they are inherently risky endeavors. For every successful start up, there are dozens of failures. But I do not believe that there is anything unique about the funding environment today. Some companies will succeed and some will fail.”

What is evident is that lessons have been learnt from the first time round. “I believe that the public markets have learned a lot from the bursting of the first dotcom bubble. Companies with speculative business models that have not achieved profitability are not well suited for the public markets. The thing that over-inflated the last bubble was a robust public market for speculative stocks. I do not think that we will see such a public market again in my lifetime.”

The internet is likely to be an epicenter for great opportunities and Hornik is anticipating a bright future. “I am certain that there will be significant businesses that are created to continue to leverage the internet. What precisely those investment opportunities will look like, I won’t even speculate. The key to building great companies is great entrepreneurs. And there is a never-ending stream of brilliant and fanatical entrepreneurs who will create the next great companies.”