Sanjeev Jain
Thursday, June 1, 2006
The Internet is a limitless boundary of free exchange of digital information and profit.

That’s why it rose quickly in the mid and late 1990s. People believed the Internet would create the next industrial revolution and make mincemeat of the traditional industries. Mincemeat it did make-Of itself.

The Internet dream fell like dominoes in the fall of 2001. Its fall was as dramatic as its rise world over. The burst of the dotcom bubble was a turning point for the web. People in the industry concluded that the web was over hyped, when in fact bubbles and shakeouts are a part and parcel of all technological and industrial revolutions. Shakeouts typically mark the point at which a fledgling technology is ready to take its place center stage. The real success stories show their strength, and there begins an understanding of where the industry has gone.

This lead to the inauguration of Web 2.0, the arrival of the Internet with vigor and more inherent strengths. Today the Venture Capitalists are as interested in this space as they were during the initial days of the Internet. Such has been the power of Web 2.0 that a search on Google throws up 7.86 million citations. Dale Dougherty, a web pioneer noted that far from having ‘crashed,’ “the web is more important than ever, with new and exciting applications and sites popping up with surprising regularity.”

Such exclusiveness from the entrepreneurs has led to renewed VC interest in the web arena. In 2005, VCs in the U.S. invested $376.78 million in web 2.0 companies. Though this was much lesser compared to the VC investment during the pre-dot com boom, it is better than the previous years. “There has been tremendous excitement in the VC community for the Web 2.0 space but as in the first generation, only a few companies will be wildly successful,” says Vivek Mehra, partner August Capital. Jeff Clavier of Softtech Venture Capital says VCs are too excited with the re-emergence of the web.

Thanks to the new crop of webpreneurs, web today has become a more social phenomenon creating and distributing web content itself, characterized by open communication, decentralization of authority, freedom to share and re-use, and the market as a conversation.

The reasons for the web 2.0 space making its resurrection be many but the main reason is that broadband has become mainstream and ubiquitous, resulting in an increased usage of the Internet for even small tasks on different devices. Today more people go online for a variety of tasks and shopping and the webpreneurs of the first batch of companies have moved on to either join one of the big players or have left to join Venture Capital companies, or started or joined a completely new setup. This means a lot of experience of what did and didn’t work is in the offing for new web companies. “The litmus test for these companies is not the number of free users but their plans to monetize their services” says Mehra.

Today new ventures can grow faster as barriers to entry are lower, there’s less pressure to gain venture capital and less hype to cater to. “The cost of everything related to web infrastructure has come down to its bare minimum,” says Clavier. True. Entrepreneurs whose fortunes turned to dust following the dotcom boom and bust have adopted a more practical approach to business and a healthy skepticism towards outside investment that includes low-cost web tools. Today entrepreneurs use free open-source web development tools, such as MySQL and PHP, which have helped lower barriers to for the entry of aspiring web entrepreneurs.

Bandwidth prices today are 10-20 percent of what they were in 2000. Hardware prices too have fallen drastically, particularly for servers and storage. This means that web 2.0 start-ups do not need to break the bank to create an IT infrastructure. Low-end servers capable of servicing modest start-up’s can fit into a shoestring budget. “Labor, web designing and programming can be outsourced to developers in India or Eastern Europe,” says Clavier.

Take a look at Flickr, a web 2.0 startup that went into Yahoo’s fold last year. The company did not receive any VC funding and was started from money raised from friends and relatives. However, Yahoo took notice of their services. Clavier says that anyone with a small amount of money can get into the web 2.0 space provided they have some real good ideas like skype, Napster, del.icio.us, YouTube and SixApart.

For entrepreneurs this means entering into an already overcrowded space with innovative ideas. “For entrepreneurs, the best way is not to start a me too company. It was a fashion in pre dot com era,” says Clavier. “Entrepreneurs should identify new trends themselves. They are the best individuals to identify opportunities,” says Mehra. He believes that if an entrepreneur has a real good idea and can prove that that they can percolate into profits, VCs are prepared to invest in them. But those ideas have to be out of the box and not run of the mill. Today VCs look at companies with original ideas, a fact supported by Mehra. “Companies identifying customers’ pain points and coming up with innovative solutions are the ones VCs are looking at,” says Mehra. “They provide a viable business model, either ad supported or user supported,” he adds.

Fall-out from Enron and other corporate scandals has made initial public offerings less appealing to founding teams. Meanwhile, recent buying sprees by companies such as Google, Yahoo and News Corp have put pressure on competitors to keep up. As a result, the latest generation of Internet entrepreneurs have plenty of exit options available.
It’s time for you entrepreneurs to take your call and put your energy where your mouth is.
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