Internet 2.0 out of VC control

November 18th, 2005 by jeremychone

Web 2.0 Out of VC ControlIn the early days of the Internet, innovators and venture firms were equally important forces behind the internet evolution. At the time, most Internet ideas needed some external funding to get started. Consequently, ideas often started with the now infamous PowerPoint presentation to the VC. If ideas were accepted, most first round funds were devoted to building the proof of concept and generating enough buzz to acquire a user base. As a result, venture firms played key role in choosing which idea or group of people would start or not.

Although this model has created some great Internet companies (Amazon, Ebay), it also created the dot-com saga that we know all too much about. Even for companies with good ideas, putting the “Buzz before the Bits” could be very costly.

In today’s internet (often referred to as "Web 2.0"), the environment has changed dramatically, and has become much more favorable to innovators. Three main factors have contributed to this change:

  • Extremely low cost of infrastructure: In contrast to the early days of high start-up cost, today’s “commoditization” of infrastructure hardware and software allows entrepreneur to start with just an idea, skills, and time. It is probably clear that this new era will not have the same effect on Sun that the dot-com era had.
  • Abundance of technical information and tools: Thanks to open source and advanced search capabilities, the abundance of available technical information and tools is unprecedented. This significantly reduces the cost of development and deployment, and allows start-ups to just focus on their core ideas.
  • Past experience: The dot-com experience has brought a lot of wisdom and some humility to the technology industry. Entrepreneurs view their ideas with much more objectivity now, and often know from the start if an idea would be better as a stand-alone business or as complement to another service. VCs have become more prudent about investing as a result as their painful dot-com experiences. Angels avail of some very mature processes and forums in which to evaluate early ideas.

Consequently, innovation has become cheaper and investors have become wiser. With innovators doing more to drive process. This, ultimately is a good thing for everybody, including investors.

This reduction in the cost of innovation, coupled with new challenges of creating a long-lasting businesses (see VC Squeeze from Paul Graham), is pushing entrepreneurs to evaluate the “flip” strategy (selling to a Google, Yahoo or others) before even talking to venture capital firms. The Riya-Google Rumor from Techcrunch might be the latest example to date.

All of this is not to say that venture capitalists are not adding any value. Actually, they add a great deal of wisdom due to their memory of the dot-com bust. In a great panel about Internet 2.0, Josh Stein of DFJ pointed out that many of the ideas of 1999 could be good inspirations for today’s market. Indeed, we are seeing many of them resurface. It is probably fair to say that many of the dot-com ideas were too early for their time, and that Web 2.0 might be the right distribution for many of them. Only time will tell, I guess.

In short, Internet Innovation is back on, more innovative and more "free" than ever. This is a very exciting time, and great things will come out of it. So, we should enjoy the wave and give the best of ourselves.

3 Responses to “Internet 2.0 out of VC control”

  1. Jean Sini Says:

    A recent post by Jason Calacanis echoes your point about how cheap it’s become to start a company. The Riya-Google play, as Om Malik pointed out, diverges slightly from a straight VC squeeze scenario, “because (as per Silicon Beat) Riya’s backers are Leapfrog Ventures and Bluerun Ventures and have invested close to $4 million in the company.”

  2. Jeremy Chone Says:

    Thank you Jean for pointing this out. You are right. So, I guess the last one was Dodgeball in May 2005.

    BTW, there is a great page on Kuro5Shin about Google past acquisitions and possible future ones.

  3. Jeff Says:

    I think two factors are at play here:

    – Clearly most “build” costs have decreased by as much as 90% compared to 5 years ago.

    – Because many (seed) investors got burned in the dotcom bust, most entrepreuneurs can’t raise money this time around until they can show something that works. This narrows the field to ideas that can be executed with “little” upfront cash. This aspect is often overlooked.