January 07, 2006
Bubble 2.0 - Ratfarts!
Built To Be Bought (Bubble 2.0)
By David Hornik on October 24, 2005 02:40 AM | Permalink | Links In | Print | Comments (15) | TrackBack (1) | Categories: Conferences and Consumer Internet & Media and The Economy & Finance
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. Which is not to say that there aren't potentially extremely interesting companies being built in the context of Web 2.0 -- after all, while Webvan and Pets.com and Excite@Home were born and died in Bubble 1.0, Yahoo and eBay and Amazon were born and thrived.
So why am I now getting this increasingly uneasy feeling? I was chatting with a veteran of Bubble 1.0 recently and I think he hit on the thing that makes those of us who've seen this movie before most nervous. He pointed out that there are a large number of "companies" being created again for the express purpose of being acquired. I certainly have seen it. I have met with companies that clearly state their intention to be acquired by Yahoo or Google or, in a pinch, Interactive Corp. I even had one company pitch me at the Web 2.0 Conference that if all went well they would be acquired by Odeo (don't get me wrong, I'm a big fan of Ev's and I certainly think that podcasting is exciting, but it strikes me as a tad premature to bet your company's future on being acquired by a pre-revenue company). 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 and large, the most successful venture investments end in Initial Public Offerings (IPOs). It certainly isn't surprising that independent, stand-alone companies would in most cases be worth more than companies that can only survive through being consumed by larger entities. Therefore, from a venture capital perspective, startups that have the capacity to be stand-alone entities are by their very nature more appealing than companies that will ultimately require acquisition.
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 (particularly as each new Web 2.0 idea doesn't just spawn one company but three or four). So when I hear large numbers of companies pitching themselves as excellent acquisition candidates before they've even gotten out of the gate I can't help but think to myself that we are in the heart of Bubble 2.0. Sadly, only one thing follows Bubble 2.0 and that is Bust 2.0. On the good side, there's always Web 3.0.