Google is going through that glorious period where It Can Do No Wrong. Sergey and Larry can buy a 767 and still do no evil. Google can take on the phone companies with free WiFi. It can take out the libraries by digitizing books. It can align with Sun and take on Microsoft! Fear of Google is causing odd business mashups like Yahoo IM + MSN IM, or MSN + AOL. So maybe Google can also overturn the venture business?
As we watch these big stories, we may be missing this little one. Google (and Yahoo) may be challenging the venture community for Web 2.0 deals. They both have snarfed up a lot of Web 2.0 ventures quickly, and then put them out in 'beta' very cheaply. Check out Google Labs online - this is where they start. If they gain traction, great! If not, it was only a few micro-percents of Google Stock.
This first began with companies like Blogger, bought for a mere $5m of Google Stock. Of course, that was pre-IPO Google Stock, now worth many Shekels more. Then came Flickr, the poster child of Web 2.0 ventures. Started for something like $1m, it was sold to Yahoo within a year or so for a rumored $25m plus a 50% earn-out. Not bad for a few founders and a handful of angels! Why put up with voracious VCs when you can pocket a quick $10m and do the next one? After our friend Flickr have come a growing number of small, quick buy-outs. Most recently we have seen a big exit - MySpace for $580m. Now we're talking! The VCs are piling in, and there is froth in the Series A market.
The very nature of Web 2.0, however, raises the question of why go the venture route. Any Web 2.0 company worth its salt should be able to cobble together the technology quickly, run the service cheaply, and acquire the beloved 'uniques' and 'page views' with cheap word-of-mouth, search optimization, and viral marketing. If you have to pay to acquire readers, you ain't Web 2.0!
A lot of ink has been spilled on Web 2.0. Most of it shares the insight that Web 1.0 was about publishing - we read web pages - and Web 2.0 is about participating - we post blogs (and then pictures and profiles and so on). The web becomes two-way. You are defined by your links.
Web 2.0 is happening because Internet technologies have matured to the point that it is 10x easier to do webbie things. Whenever an order-of-magnitude improvement in technology happens, so does innovation. And then comes the bubble. It helps that so many of us are online already. What these improvements have done is give us tools to quickly create a web service, get it found and attract an audience, and scale it. Again, why bother with voracious VCs?
Well, they might overpay ...
Still, whenever someone says This Time It Is Different, you should hold onto your wallet. In the venture community, we used to chuckle over how 47 disk drive companies could get funded, or 52 workstations deals. What were we thinking? By now we have counted over 300 social network deals who got some funding, and so far only one (MySpace) has had a big success, and only a couple seem poised to grow into serious franchises (Facebook, Hi5). Whither the rest? And why did MySpace succeed while so many faded? Was it first mover? No, that was Friendster. Was it smart follower? No, they were waaay late to the party. Was it technology? No, Tribe did it better. Was it seeding the network? MySpace got hot LA models into their network early, and the boys followed ... hmm, maybe. We can all deliberate on what it was - and for investors it is important to find out what really makes a Web 2.0 venture succeed or fail - but overall this looks like a crapshoot. A dangerous one, because what happens when Google or Yahoo throw there weight behind a competitive service?
The very ease of getting going means there will be a boatload of fellow travelers. The very ease of gaining a look-see and attracting an audience means there will be churn - the audience can go as fast as it comes. The very explosion of options will drive people into brands and trusted communities. Like Google and Yahoo.
Hence we come back to the venture model. Regis McKenna used to say that Venture Capital arose by disintermediating corporate R&D. It is more efficient to let the R be done by Universities, fund the D by venture capital, and then sell the promising technology back to a big corporation to market it, to do the M. A number of tech companies found they can outsource their R&D and rely on venture capital - Cisco most notably. Many deals got funded during the bubble as "Cisco Fodder", designer ventures formed to be bought. The venture capital role was to select the better ideas, bring in the better teams, and apply financial and market discipline that would never be found in a corporate R&D department or lab. Cisco Fodder deals required serious capital, and the venture community provided it.
With Web 2.0, that serious capital is not needed. Nor is the market discipline. With the global reach of a Google or Yahoo, so much better to throw it against the wall and see if it sticks. Dave Carlick likes to explain that with click-thru ads, every click is a customer survey. SImilarly, with the public beta of web services, every click is a marketing plan. Google has pioneered at scale a model of using direct market feedback to target ads and promotions, rather than guessing as we did in the past with TV ads and direct mail. Similarly, it can now pioneer at scale a model of public beta of web services rather than struggling with venture-backed companies that need to build a management team and slug it out in the war-of-attrition with 300 indistinguishable competitors.
The venture reaction has been to chase deals. The entrepreneurs reaction has been to take the easy money. The Google reaction may be to pass on those over-priced deals and pick up the angel-backed ones, leapfrogging the venture-backed deals by catapulting the laggards into winners with their incredible reach. If you had to choose where to put your money, who would you back?