By Steve Baloff
Web 2.0 is a buzzword that we hear everywhere these days. But is this purely hype or is there a viable opportunity for successful investments? To some, the Web 2.0 buzz sounds eerily similar to that of the Internet boom. Is this Boom 2.0?
What’s the buzz?
Web 2.0 is the fulfillment of the original promise that began in the early to mid-1990s – a convergence of community, content and commerce. While some Web 2.0 niches are over-hyped, there is potential for success if you look closely. A Web 2.0 ecosystem has developed and we see three promising factors that make it a viable investment area.
The first is that a business model has evolved and been proven. There is now a very clear way to monetize traffic through Internet advertising, and community-driven commerce. While this has been the promise since the mid-1990s, the Internet advertising business is now displacing more traditional forms of advertising and reaching a younger demographic, which is extremely appealing to advertisers.
The second is capital efficiency. Companies can get off the ground at a lower cost than ever before, which makes a focused, vertical strategy feasible. Ideas that were solely horizontal in the late 1990s – including social networking, web collaboration, eCommerce – can now target a specific niche and make headway against bigger, established competitors.
The last differentiator is the increasing access to broadband connections around the world. This fuels bandwidth-intensive applications like peer-to-peer networks and video sharing, and that fundamentally alters traditional content distribution mediums like television and music stores. Broadband adoption, coupled with new enabling technologies like AJAX, allow for a more robust user experience.
Investment opportunities – Consumers driving Web 2.0
There is renewed consumer interest in Internet applications driven by the fact that consumers all over the world can create content and instantly share it with friends, family and the larger online community. Digital videos and pictures make content more available now than it was five years ago. Consumers’ creative behavior is a strong driver for the adoption of Internet applications and services. As a result, various viable investment areas have presented themselves: MySpace and Skype are perfect examples of this.
We’ve also grown accustomed to accessing information anywhere at anytime, which is creating opportunities for content developers (think games on cell phones) and innovation on the hardware side – for example, the Palm Treo provides easy access to the Internet on a handheld device.
Another investment opportunity was created by the increasing amount of information available on the Web and the new need for companies that help consumers access this information. Google is no longer sufficient for all types of searches anymore. Eight search companies launched at DEMO in February, and they all bring something slightly different to the table. An ATV company called Browster, for example, allows you to quickly view a Web site that a search engine pulled up, without actually clicking through, saving the consumer time.
New, paradigm-shifting technologies and services that bring communities of interest together in meaningful ways are also interesting. This can take the form of gaming, convergent digital media platforms, and new service offerings.
It’s easy to start a company and scale today and Web 2.0 companies will continue to take advantage of this trend. This makes a venture capitalist’s job of picking winners difficult because of the crowded market, but the key is to stay clear of second-generation solutions that don’t provide meaningful, differentiated capabilities, or solutions, that by virtue of being late to market, do not address a large enough market need. ATV is optimistic about innovative ideas in gaming and search thus far, and we continue to be encouraged by the number of ideas that could potentially capitalize on the Web 2.0 opportunity.
Steve Baloff is a general partner at Advanced Technology Ventures, a bi-coastal venture capital firm with more than $1.5 billion in capital under management.