Silicon Valley faces Web startup glut

Silicon Valley faces Web startup glut

There is a new profusion of well-funded Internet ventures — but is this a good or a bad thing?

Business 2.0 Magazine

By Snigdha Sen, Business 2.0 Magazine reporter

SAN FRANCISCO (Business 2.0) – Launching a Web startup is easy these days, thanks to a heady mix of new software, cheap hardware, and ever-more-ubiquitous broadband. But getting a startup to take off as a business is as challenging as ever.

That was the conclusion reached at a panel of entrepreneurs and venture capitalists who gathered to discuss the Next Net 25, Business 2.0‘s list
of the companies at the vanguard of the next Web revolution.
Editor-at-large Erick Schonfeld organized the event, which was attended
by many of the CEOs and founders of the companies on the list.

One concern aired by veteran venture capitalist Bill Burnham was the fact that so many Web companies are using advertising as their business model. Many of them, he noted, build flashy websites using cutting-edge technology like Ajax — a point of pride among the Web set. Then they offer free services to consumers, relying upon revenue from Google’s AdSense network, which pays websites to carry the contextual ads that Google (Research ) sells.

Burnham faulted what he called the "Triple A" approach. "You can’t take Ajax, AdSense, and arrogance and call it a company," he said. "It’s so easy to create a company, that you have many companies in the same space."

For instance, Kevin Rose, cofounder of the tech news website Digg, noted that other companies have already cloned his popular community-edited news website and added a feature or two. But he added that he doesn’t expect many of them to survive.

The problem, Burnham responded, is when all of those clones get $10 million apiece in venture capital. (Burnham, formerly with Mobius Venture Capital, is now starting his own, as-yet-unnamed VC firm.)

The absence of tested business models is another challenge for today’s startups. JotSpot CEO Joe Kraus, whose company builds online collaborative applications, said he regrets not testing subscription plans when he launched his product.

"We put our product in beta, but we didn’t put our business model in beta," says Kraus. "Feedback on a free product doesn’t teach you squat about how your business model will work."

But others argued that it’s a good idea to test a free product and see how users react to it. "If you are attracting users [inexpensively] you are going to make money," said Michael Robertson, CEO of SipPhone, a voice-over-Internet-protocol startup. "Without ‘hope’ as a business model, there’d be no Google, there’d be no Yahoo."

Panelists also wondered whether the glut of startups offering free services is turning into another bubble. "It’s not a bubble at all," says Dave McClure, CEO of Simply Hired, a job-search website. "That’s horses***. It’s a land grab. Now is the time for plenty of great companies to be created."

And there are still plenty of opportunities to be seized, panelists observed.

Toni Schneider, CEO of Automattic, a blog-software startup, points out that advertising is seen as a revenue stream, but not as a product that can be improved upon through clever engineering. But that shouldn’t be the case, said Schneider, who suggested that advertising could be made more targeted and interactive.

"The Next Net is all about consumers taking control," said Schneider. "They are talking back [to businesses] about everything except ads." Schneider proposed letting users right-click on an ad to see why it was shown to them, and giving them the ability to correct or comment on the information that website was using to target ads to them.

Burnham, the venture capitalist, said he saw opportunities in automating and integrating systems inside businesses, giving corporate customers the same kind of slick Web experience that consumer Internet startups now provide.

Jim Fowler, CEO of the networking site Jigsaw, proposed starting businesses that give users back a cut of the revenues they generate.

Will entrepreneurs and venture capitalists’ pursuit of all these ideas just result in another boom and bust?

Jay Adelson, the CEO of Digg, who previously founded Equinix, was sanguine about the prospects of this wave of Internet startups. Adelson, like many people in the room, endured the 90’s bubble first hand. His previous company Equinix, was one of the few data-center companies to survive the telecom bubble.

"The difference is [all of] us, because we went through the bubble bursting," says Adelson. [Now] we are 10 times more cautious than we were 10 years ago."


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