Web 2.0: An opportunity for venture capital, or just a boom in lifestyle businesses?

I wasn’t at OSCON this year but I was told that Tim O’Reilly referred to the Ruby programming language as “the Perl of the Web 2.0 era” – I agree. Furthermore, innovation is being driven by the excitement surrounding Ajax coupled with development of open source programming frameworks such as Ruby on Rails and Django . These frameworks are designed to accelerate programming, ease Ajax implementation and improve code by enforcing the DRY (don’t repeat yourself) principal.

By leveraging these platforms, a plethora of new Web 2.0 startups are being bootstrapped and rapidly building focused WebApps such as Basecamp (web-based project management), Blinksale (web-based invoicing), Chalk.it Writeboard (web-based white boarding), and many more (see TechCrunch for daily examples). Innovation at this level has not been seen for some time. Ten years ago this month, Netscape had its wildly popular IPO which was the tipping point that marked the beginning of the Web 1.0 boom.

So what makes the creation of Web 2.0 businesses different from the Web 1.0 startups that preceded them? I believe, three things separate the two:

1) open source, 2) blogging, and 3) social networks.

The impact of open source.
Although it existed ten years ago, open source was not pervasive or widely accepted. Today the open source movement has become, in many ways, the culture that defines Web 2.0 itself. The open source attitude extends far beyond software and has created a mentality of collaboration that is driving the adoption of standards that will inevitably lead to interoperability – valid XHTML, CSS, and microformats are good examples. This movement has led to the creation of open API’s enabling apps to be built on top of existing apps. Open APIs and the LAMP stack of open source applications are enabling the launch of capital efficient enterprises that spend virtually zero on software infrastructure. As a result, infrastructure costs are limited to server and bandwidth charges, which today, are relatively inexpensive. This alone, is having a major implication on bootstrapping. Startups are being launched 100x cheaper.

The impact of blogging.
Fred Wilson summed up blogging very well in his recent post by defining it as posting, subscribing and tagging. I would also add pinging to that list. Trackback pinging is the enabler of multi-blog communication, and is the mechanism that allows global conversations occur among bloggers with shared interests. These conversations have transformed the Web into a two-way medium enabling ideas and information to spread across the Web quickly via word of mouth.

Futhermore, through tagging and subscribing, blog (post) information can be instantly and conveniently delivered via RSS directly to desktop news aggregators. Blogging’s growing impact on mainstream publishing, PR and promotion have fundamentally altered the Web’s power structure. Unlike during the Web 1.0 era where launching a new website required significant capital and channel relationships to acquire initial traffic, Web 2.0 startups are able to leverage word-of-mouth blog-fueled promotion to gain early traffic and customers to quickly validate their value propositions. Additionally, blogging creates a feedback loop that can be used to quickly improve the product. These developments have further influenced bootstrapping and a sort of “democratization” of the Internet. Through blog communication, startups are now able to bypass expensive advertising, yet still gain enough visibility to demonstrate value quickly by leveraging early customer adoption and feedback to incorporate rapid product improvements.

The impact of social networks.
In this second, Web 2.0, phase of the Web, networking has now extended from machines to people. The underlying networking infrastructure of the Web has become the foundation for a vast social networking infrastructure for groups. Popular social networking services such as LinkedIn , Del.icio.us , and MySpace are enabling like-minded individuals to come together and form social networks that are empowering groups to create value and share value like never before. The GoingOn Network plans to take interoperability between social networks to a new level.

Through these networks, talented individuals can now find each other and collaborate on software development projects, including those created in open source communities as well as those created by individuals forming virtual startups. Furthermore, folksonomies are enabling individuals to share value through spontaneous categorization of content by shared-tagging. Del.icio.us and Flickr are prime examples – both services gained rapid popularity by enabling their users to share value through tag categorization and subscribing.

Startups are able to use social networks to easily locate development talent pre-product launch and to spread information about their products/services post launch. Consequently, social networking further fuels a startup’s ability to bootstrap.

Which brings me back to my initial question. Will Web 2.0 result in an opportunity for venture-fueled value creation, or will the landscape be defined primarily by bootstrapped startups that leverage open source, blogging and social networks to fuel a Web-based lifestyle business boom? My guess – Web 2.0 will create many examples of both. Moderately successful startups will result in Web-based lifestyle businesses, while the few that gain significant traction will become attractive platforms for growth. These startups will be candidates for early acquisition or will leverage the “ Two Stage Venture ” model defined by Tim Oren to build significant standalone businesses.

With accelerated communication and collaboration driven by the above-mentioned movements, it shouldn’t take us long to find out. What are your thoughts?

Posted by Clarence Wooten on August 15, 2005
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