Recently, I had the opportunity to present to CommonAngels on the topic of Web 2.0. CommonAngels is a prominent Boston-based angel investor group of which I am a member. As part of the preparation for this meeting, I tried to figure out how to define Web 2.0 for those that were new to the concept and meme. I couldn’t do it.
This is why I think Web 2.0 is like pornography. I can’t really define what it is, but I know it when I see it.
So, instead of trying to define Web 2.0, I thought to cover some of the attributes and aspects of “Web 2.0ness”. Clearly, not all of these criteria need to be met (for example, I don’t believe that a startup just has to have
So, here are the things I think of when I think of Web 2.0. This is intended to be an intro for those that don’t read TechCrunch, are not Web 2.0 startup founders and otherwise don’t follow the trend (but are still curious). If you’re a Web 2.0 expert, you can safely stop reading now.
Attributes and Aspects Of Web 2.0
The history of Web 2.0 is a little strange because the term was coined before it actually had a definition. Subsequently, various industry pundits ascribed various things to Web 2.0. Rather than try to come up with a singular definition, I would describe Web 2.0 as a combination of technology and social approaches. More broadly, I think of Web 2.0 as being the “next generation” of what can be done on the web.
2. Web As Connected Platform (Mash-ups): One of the interesting things about the current generation of internet applications is that many are exposing their capabilities via an API (application programming interface). This allows other application developers to use the functionality and data of multiple existing web applications and create a new service that combines them. The result is a “mash-up” of multiple web applications that offers a new experience and new functionality.
3. Advertising Revenue: Making money on advertising on the web is nothing new. There were many startups in the “Web 1.0” generation that sought to acquire traffic with the hopes of monetizing it. But, two major things have changed. First, there’s a lot more traffic on the web now then there used to be during the last bubble. More and more users are coming on the Internet, and they’re doing more and more on it. As such, there’s more traffic to monetize. Second, the process of connecting advertisers to end consumers is now much more “efficient” with platforms like those offered by Google and Yahoo!. As a result, Web 2.0 startups have several alternatives of monetizing web traffic – without having to negotiate deals with individual advertisers.
4. Long Tail Effects: This is a bit of a complicated topic and deserves an article in and of itself, but I’ll simplify a bit. Coined originally by Chris Anderson (and now the topic of a popular book), the long tail is about how the “blockbuster hits” can be overshadowed by the aggregation of a large volume of “niche” offerings. For example, the revenue generated from the bestsellers on Amazon may be overshadowed by the revenues generated by the hundreds of thousands of books that only sell a few copies. The Internet makes it possible to change the economics of certain industries, making it possible to leverage long tail effects.
5. User Generated Content: This idea is a good lead-in from the long tail concept. If we accept that the value (could be measured in terms of website traffic) from aggregating lots of “niche” content can exceed the value from the “big hits” (like CNN.com), then the challenge shifts to the production of this niche-market content. One way to solve this problem is to have the community generate the content itself. An example of this is YouTube, an online video sharing site. Thousands of niche videos get uploaded to YouTube every day. These videos in turn generate traffic as other users view them. By using UGC, companies can capture the value generated by the long tail.
6. Social Networking: Social networking is about software that allows individuals to connect to each other and form online “networks”. Usually, the purpose of social networking websites is the same as other types of web 2.0 startups – to attract traffic which can be monetized. The oft-cited example is MySpace which is targeted at teens and was acquired by NewsCorp for over $500 million. I see two big advantages to leveraging social networks: First, because of their very nature, they tend to spread virally (as it is in the community’s interest for the network to expand). Second, once a certain “critical mass” is achieved, it forms a formidable barrier to entry. Another example of a social networking startup is LinkedIn, which is targeted at professionals. LinkedIn is rumored to be profitable now.
From an investor’s perspective, I think Web 2.0 startups represent a significant opportunity. However, the level of risk is pretty high. It takes a fair amount of traffic for advertising-based startups to break even and many categories of Web 2.0 startups are already very saturated. So there will be a large number of companies looking to close M&A; transactions with a reasonably small number of acquirers. Unless we have some high-flying IPO (like YouTube) that opens up the public markets again for web-based startups, M&A; will continue to be the most likely exit path for investors. Further, the landscape is shifting quickly, so it’s hard to really predict what’s a fad and what’s a potentially profitable trend. Most of the Web 2.0 startups out there haven’t been around long enough to really get any true insights on what’s going to work (and what’s not). Examples like MySpace and Facebook help, but are still only one small piece of the Web 2.0 puzzle.