24 October 2005

Are we inside Bubble 2.0?

Something truly significant is happening right now in the world of web creation. Engineers, entrepreneurs, and investors are buzzing with the possibilities of web 2.0 technologies, and the interactive applications they enable. There's an energy — even a joyfulness — pervading the industry that this former web gal hasn't seen since perhaps 1999. The web is getting fun again.

But the flip side of the fun is the fear that we might be witnessing (or rather, inflating) another bubble. "Bubble 2.0," as TEDster David Hornik calls it in VentureBlog today:

Over the last couple of months I've noticed an increasing sense of unease in the venture community about the trend in Web 2.0 company creation and financing events. While no one is officially willing to peg it Bubble 2.0 for fear of missing the next great opportunity, I've been having lots of conversations with venture investors about this nagging feeling that we've been here before....
So why am I now getting this increasingly uneasy feeling? ... There are a large number of "companies" being created again for the express purpose of being acquired ... These folks are unabashed about their intention to be acquired and they are developing their software and services with an eye towards compatibility with their would-be acquirers.
Acquisitions in and of themselves are certainly not a problem. The vast majority of money-making venture investments reach liquidity through acquisition. But, by in large, the most successful venture investments end in Initial Public Offerings (IPOs) ... If companies are indeed again being built for acquisition rather than independence, venture investors are in for a rude re-awakening (that will be precipitated by a very loud popping sound). While a few companies being built for acquisition will be acquired, the vast majority will ultimately run out of money and be shut down.

For those of us, as David writes, "who've seen this movie before," it's an important conversation to continue. Full post from VentureBlog: Built To Be Bought (Bubble 2.0)

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Tom Lord – October 25 2005

William:

None of those people are idiots, obviously, but when I look at materials from the Web 2.0 conference or at what the current generation of start-ups are building, and hold them up against posts like June Cohen's and articles like David Hornick's and then just take a lowly hacker's-eye-view of the technology in play here I keep coming back to the conclusion that we're looking at a highly influential and powerful clique that is also a bit too insulated, suffering from incestuous reinforcement, and not spending enough (time, effort, money) thinking about fundamentals.

Analysis that starts and ends with evaluation of "excitement" and "exit strategies" is pretty shallow. It's a dangerous kind of shallowness because, with the tech we have, it is easy to satisfy that shallowness 10 different ways from tuesday -- the clique is too easily dazzled. So people take something that has, abstractly, a few good ideas at core (say, wikipedia), and they riff on those to make them domain specific and this results in many dollars spent on N+1 start-ups and mega-company efforts. The incremental results are promising-looking for quite a few initial steps but meanwhile it's overlooked that the whole thing is a kind of fake: the few core ideas are never clearly realized with simple robust tech, instead you see a huge pile of crudely hacked-up, almost-kinda-works stacks that are legacy systems as soon as they're deployed. It's harder to stop and do things right. It costs more up front. But it's worth it and, indeed, the alternative is a cycle of bubbles until some smarter, richer player lays down a trump card (which at this point may very well be Google (or MSFT), not that this is a clearly socially desirable outcome).

-t
William Shipley – October 25 2005

Tom: I'm not sure I get your point. The TED community I've met has been incredibly thoughtful, insightful, and introspective. I don't know anyone in TED who is full of buzzwords and gloss. I'm not clear on who you're saying is ignorant. Not L.P. from Google, surely? Not Dean Kamen? Not Jeff Bezos? Not the artists and scientists and engineers and master chefs that I met? They seemed anything but. I have never been amongst a group that left me feeling more... small.
Tom Lord – October 25 2005

Dear "TED"

You can go case by case and look at actual technology instead of trying to indirectly evaluate things based on people's enthusiasm/evangelism/rumours. If you're a big time investor or other kind of big time mover and shaker, and you're not qualified to do that evaluation (the expected case) then you can spend some money on *that* problem. Nobody ever said these computer thingies were supposed to be *easy* to understand.

The herd tends to climb hills, sure, but those are foothills and there's a mudslide or two a' comin'.

There's too few of you, too much ignorance among you, and you have too much influence.

-t
David Hornik – October 24 2005

Wil –

I totally agree with you. Interesting companies are those that are built for the love of the product or the experience. And great teams are driven not just by the desire to make a buck but by the desire to do something important and special. Those are precisely the sorts of teams that I back. My only point is that you can build a company to be bought or to be self-sustaining and if you aren’t building it to be self-sustaining, it will have a pretty limited shelf life.

DAVID
William Shipley – October 24 2005

Being both a computer dude and a guy whose investment manager lost a TON of his money in Bubble 1.0, my firm opinion is that companies whose mission statement is to be bought -OR- have an IPO tend to be pretty crappy.

Look at the companies that were born during but survived Bubble 1.0, and that we admire (and are also, notably, run by people I met at TED2005): Google, Amazon. Google's stated philosophy is "let's make cool products for people and figure out where the profit is later." And Jeff Bezos at Amazon issued tons of warnings during the first bubble that his people need to ignore the crazy stock price and concentrate on making a good product and becoming profitable.

Both are now amazing companies. The companies I know that just wanted to survive until an IPO aren't anywhere to be found.