We ran a cracking event on Web2.0 on 18th November. Here are the notes:
My Introduction
What
My definition is that web2.0 is a collection of new technologies which are offered over the web which make possible a new set of products, services and business models.
That is pretty broad.
Tim O’Reilly goes into far more detail and comes up with 7 core competencies that define a 2.0.
The important thing, I think, is that there is unquestionably disruption.
Given this disruption, given the confusion and pace of change there is opportunity And there is innovation. And where there is opportunity and innovation there is, inevitably, venture capital.
Why now
Two reasons why; technical and cultural.
1) Technical innovations are enabling this market.
According to Neilsen/Netratings today over 60% of US homes have broadband connections. In six months times this is expected to be around 75%.
Bandwidth is no longer a problem for many web based services, and will become less of a barrier as time goes on.
2) Not only are the pipes bigger but there are more of them. There is now a ubiquity of access to IP networks from Starbucks to tiny mobile phones in your daughter's pocket. Internet protocol is everywhere.
3) We also have a brace of more granular technical enablers (many of which have been around for while) which are today being exploited to do new things:
- RSS news feed pushing user generated content,
Ajax
pushing web software & mashups,- P2P lowering distribution costs
- Open-source & LAMP is pushing entrepreneurs to deliver value beyond commodity software.
Culturally
Another way to answer the question "Why now"is to look at what has gone before. The first wave of dotcom companies have been useful for a number of reasons.
These companies have experimented with hundreds of different business models. This means that today, both large corporates and entrepreneurs have a much better understanding of what the value chain is, and where they can sit within it.
We also have today an educated user-base. The dot coms spent lots to time and money promoting to both consumers and businesses. This has lead to the mass adoption of the web.
This brings us to the question of
Who?
My nephew is an internet power user. He is twelve years old. I have seen him concurrently listening to podcasts, watching web video and sending IMs all whilst copying his homework from the web.
My father thinks that the internet is what you get when you look at the MSN homepage.
Both search for, compare and buy products over the web. Both users are valuable.
When?
So, when does this new wave of technology collide with this hungry base of users?
It is happening now.
The evidence can be seen in current web economics:
1) Web advertising market share is predicted to be 6.9% in 2007 up from 1.2% in 2000 and at the expense of TV and press. (According to stats from Zenith Optimedia)
http://www.businessweek.com/magazine/content/05_47/b3960075.htm
2) The long tail of consumer demand is real. The web is one big low-cost route to market. This is why we have Bob Young: the founder of Red Hat software; leaving Red Hat and to set up Lulu, a long-tail publishing technology business.
3) Finally many entrepreneurs I talk to are telling me they no longer want, no longer need venture capital
Entrepreneurs are today launching web-businesses that have:
• a very low initial capital cost,
• a zero cost of customer acquisition,
• which are cash flow positive from day one or two
This means that VC money is a nice to have rather than a must have.
Yet these businesses are still very high growth.
How much?
Does the size of the market justify Venture Capital investment?
The analyst groups are still feeling their way around sizing this market. A better way of justifying an investment decision is to look at exits and ask: Do they justify VC investment?
The short answer is yes.
There are some very healthy early signs of web 2.0 exits.
MySpace. ($580mn Newscorp.)
ITV (£140mn Friends Re-United 28 times earnings).
Finally there’s also a business called Skype: one the best things to ever happen to European Venture Capital.
Skype was classic web2.0: using the ubiquity of IP, broadband, adding some clever technology into the mix and leveraging these to do something new.
Selected web based businesses are clearly making money. The challenge for VCs is to answer which ones?
John Battelle
Chairman of Federated Media publishing, Founder of Wired and industry Standard, Author of “The Search”.
Version 1.0 was very long on vision. Between 1995 & 2000 there was more funding and public funding than the market was ready for. Today the market is now ready for Web 2.0. Why?
1) Large amounts of money dedicated to research and development.
2) Much more opportunities and profits now, than in the late 90s.
3) In the early 90s, many believed the war was over who owned the window into the web, but the value lies in what is in the window and service and application that each user chooses to use.
The rise of platform sites e.g. Google, Amazon, Yahoo, eBay. They guys let other people build their business for them.
General principles of web 2.0?
1) Web is a platform where you can access web services, which are not controlled by one company.
2) Architecture of participation: whereby you watch what your customers do, encourage them to do it more; and figure out ways to let them build your business; e.g. Amazon’s recommendation system. All successful Web 2.0 businesses in one way or another figure out how to get their customers to build their business.
3) Innovation in assembly: Much is free on the Web. The value lies in how you package it, put it together, and deliver it. In Web 2.0 business innovation and assembly are key.
4) Lightweight business models: Businesses can be set up cheaply now using open source software and leveraging contract relationships e.g. Boing Boing a blog, has over 2 million readers & an overhead of £1000 a month, setting up such websites in the 90’s may have cost millions
5) Power of the tail: there are many opportunities in leveraging down the tail. Content providers can find bliss & an audience in the small, and make money without having to reach the head (e.g. Adsense is an excellent example of harnessing the tail, matching lots of advertisers and buyers using advanced technology).
6) Search rules: search is important in the economy because it drives web 2.0 businesses. The search is driving audiences and that is driving business.
There is still a significant gap between web advertising spending and web usage; but the money is gradually moving to where the audiences are.
Content is king: the best content gets found and once it is found, you can build a business around it. Media 2.0= lower barriers to entry so all comes down to who has best content:
Federated Media Publishing has been set up to make blogs profitable: to help leading independent authors turn their publications into sole-proprietor media businesses, at the same time providing media buyers with a scalable mechanism by which they can tap the audience loyalty and engagement that are fostered by the best blogs.
Judy Gibbons
Venture Partner at Accel. Non Exec Director of O2
Judy highlighted a number of key recent trends which she believes characterise “Web 2.0” and lead to opportunities for innovation:
Broadband penetration The Internet is now constantly available and has become an intrinsic part of our lives. Broadband has also facilitated the “always-on” applications and enabled a new breed of applications (e.g. Instant Messaging). Users have moved from a transactional relationship with the internet, to an interactive relationship.
User Power: if someone doesn’t like you product or service, they are one click away from finding another one. There is now a “Darwinian” element to success on the internet: it is a “survival of the fittest” in terms of content provision; If your product is good it will get engagement, if its not good you will find out quickly.
Democracy. Extensive content coupled with online communities and the power of viral marketing mean that success on the internet now is democratic: users choose what they want, and so the key to success is to provide the best content.
Evolving Business Models: none of these ideas are new, people came up with them 5 years ago, the problem was they couldn’t build businesses out of them then as it was too costly, and you couldn’t get any revenue, whereas the advertising has changed this now. Huge amount from big advertisers around creating relationships online.
Less is more: a levelling of the playing field, the democratisation of participation. The barriers to entry are low, and if you are deeply connected in your niche area, getting constant feedback loops, allowing you to constantly refine and upgrade your product is a huge advantage over larger organisations, which have long product development cycles.
More exit options: large organisations cannot innovate at the speed of entrepreneurs. There will be a massive appetite from companies like Yahoo and Cisco to develop a core competence in acquisition and incubation.
Range of devices: People now depend on and are “addicted” to the internet in so many areas of their life, and want access everywhere they go: this presents massive opportunities with mobile internet people want the internet on the phone. While many operators have invested in their own ‘walled and semi-walled gardens’ for internet content, higher speed browsing on more capable handsets is likely to demand for access to the broader Internet.
The forces of openness from the PC internet are so overwhelming, that fairly quickly, one by one there will be an embracing of new open model, as the internet comes to mobile device. The paradigms of the value of the Internet in a mobile device are different, people will want to use it in a different way i.e. personalisation and location, so therefore there will be fantastic opportunities for start-ups.
Simon Levene
Managing director of Corporate Development Yahoo.
Amount of M & A has grown rapidly within Yahoo over the past few years
The opportunities with Web 2.0 are enormous, and gives rise to great investment opportunities.
The challenge that investors will face is that companies such as Yahoo are increasingly going to compete with VCs for deals. Historically Yahoo looked at VCs as a partner.
The cost of entry for many Web 2.0 companies is small; you can start businesses using open source software, get to market very quickly and cheaply, and monetize without having a sales force. Such companies capital needs are very modest, so VCs need to invest in companies at early stages, as there may never be a later round.
Its possible to tell whether a company will be successful very early on by looking at the frequency of usage. Such companies are very de-risked. & What Goggle, Yahoo etc have begun to realise that there is no value for them in waiting for month 12 before acquiring a company.
Nick Kingsbury
Drivers of Web 2.0
We are now in a post-broadband era.
This means that industry is no longer interested in the buying patterns of government defence departments nor enterprises but an increasingly focused on the end consumer. i.e. (typically Chinese female teenagers).
Opportunities
It is not one market; as it is not just one market, but thousands of markets.
Security could be potential serious bump in road. We need better security solutions, particularly where there are situations where there is trading going on.
3i have made a series of investments around the area of web 2.0.
Issues
US has been tapped into Web 2.0 ahead of
Europe
, but there is no reason why European businesses can’t succeed: just look at Skype. And remember that with the web, Geography does not matter.
The amount of money needed by Web 2.0 businesses are going down; web 2.0 businesses are capital efficient.
Is there a Bubble? There’s a simple way to answer this question: to look at price on the way in & the price on way out. As a VC in
Europe
the pricing of deals in the way in is not at crazy levels. In US, prices often too high. On the Way out: the success stories are getting very high valuations, but there are also numerous other underperformers. So in US
There were two things wrong with Web 1.0 (which have been solved with Web 2.0)
1) Timing. VCs overestimated how quickly it would happen. Change/ buying patterns take time. 5-10 not 2 yrs.
2) Impact. In 2000 VCs actually underestimated the impact of the web. . The impact of the technologies which we were looking at then and seeing now, are much more profound than we thought.
Great post
too bad I missed the event
the bubble is coming for adfunded model
but there are a million other areas and services that will continue to make money.... skype, amazon, ebay, price comparison sites etc. Mobile hasnt really been touched yet
Posted by: Mikej | December 13, 2007 at 12:34 PM