September - 2005 issue > On The Cover

By Ashwini Kachapeswaran

When Baidu, a Google look alike from China went public, it sent the cash registers ringing and stunned many a Wall Street analysts. With rumors of Google intending to acquire Baidu wafting around the circuit, the Chinese search engine continued to assert its dominance in China over Google. Amidst all the hoopla around Baidu, 15 innovative Internet companies quietly inked millions in venture funding. It is striking to note that these Internet companies with innovative ideas and executable business concepts could be the second coming of the Internet known as the Web 2.0.

With investments in companies like reply.com, jobster.com, engage.com, SimplyHired.com and CafePress.com there seems to be a positive re-invigoration of interest in the Internet economy. This new approach brings in communities and social relationship into the foray. What has changed since the dot-com bust? Why VCs are interested in Internet companies again? To find some answers we spoke to three innovative online companies that have sent some interest down the VCs radar.

It was Dale Dougherty of O’Reilly Media who said in 2003 that Web 2.0 will signify the changing rules and evolving business models of the Web and defined the second coming to be dominated by innovative Web technologies. It is just 2005 and change is visible. It is no more random search that pulls out a million pages, but contextual search that adds value to the user experience, it is no more a static social relationship website or web chat but building a community with the social network and it is no more shopping online but customizing online that unleashes the power of the user.

Unlike many other technologies, Internet witnessed unusually accelerated adoption rate. In the 1990’s following the herd mentality, entrepreneurs and VCs invested in the Internet companies completely ignoring the fundamentals of business. Now that the scenario is evolving, Internet companies are perfecting their business models toward sustaining in the long term than to make a quick cash exit. Just like the radio, television and any other significant phenomenon before the Internet, it is pretty clear that Internet is here to stay.

With VCs funding many innovative online ventures there is collective exuberance in the air. But a report by the National Venture Capital Association reveals a rather tepid investment environment. The NVCA reports that venture capitalists invested $104 billion in over 7,000 companies in the year 2000. The average deal in the year 2000 was $13.4 million. But in contrast, in 2004, VCs invested $21 billion overall in over 2,500 companies with the average deal size being about $7.31 million.

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