Web 2.0's Biggest $inkholes

But as a VC, your entire business model is based in the fact that most of your investments will fail, and the ones that make it - hopefully will compensate for those, and then some.

Some technologies are ahead of their times, a failure? Economically yes, but it'tsnot a complete failure.

There is nothing wrong with the VC model per se -- in fact it works pretty well. The formula is well described in the book "The Black Swan" -- make a bunch of bets -- preferably 20 or so. chances are most will be dogs. But 1 and 10 or 1 in 20 will be huge hits that return 100X yoru money, make up for all the losers and then some, and delivery returns to your clients. By nature, this is going to generate a lot of crappy companies as well, but that doesn't matter as long as statistically your Google comes along every now and then.

Some VC firms have been more succesful at this game than others. They have a sufficient filter to make sure that the $1B or $2B in capital gets deployed to decent enough companies -- and then the percentages work out the rest, as they get enough Black Swan returns to make their investors.

The problem is the VC game in aggregate has gotten way too big -- there are now hundreds of firms deploying, say, $25B per year. And the number of exits have gotten smaller. So, by definition, there is a larger amount of money chasing fewer deals, and less chances of a successful exit. More money, less Black Swans. That means the aggregate returns of the industry will be lower.

In a way, it's possible that what's happening in the VC market is similar to what happened in the credit bubble: There was too much liquidity. With all that money sloshing around, people do stupid things. When the music stops, there are few exit strategies, and tons of folks get stuck with a lot of bad assets. The VC industry will probably be thinned out, though it will take a lot longer than what just happend to the investment banks beause their funds are geared for 5-8 years of work, rather than collecting banking fees.

I think many limited partners of VC firms will also start rebelling at the "vig" or the asset-management fee -- when they see that the returns will be lower over time.

 

As the "World's Oldest Lifecaster" on Justin.tv, I have noticed the one year old "web blogging" company has shifted gears, either intentionally or accidentally since it opened it's video broadcasting site to the public a year ago.

The big idea apparently was to let anyone with a webcam broadcast anything not illegal or pornographic anytime they wished, and even had "permanent" archives of everything broadcast, for future viewing or making highlighted clips of previous live broadcasts.

But it quickly became apparent the majority of JTV viewers were not too interested in watching mostly teens broadcast from their bedrooms.

About 95% of all viewers are actually logging in to JTV broadcast channels of live sports from around the world. Of course, this would be great for attracting millions of views monthly, which JTV claims to have done already.

But the hitch is, the sports broadcasts on JTV are all illegally being transmitted directly from users' cable and satellites to JTV servers, and out to the world without permission of the copyright owners.

So what problem is being tackled by the Justin.tv brainkids? The problem of how to provide free streaming of copyrighted live sports from around the world. They seem to have accomplished this. But who is going to keep investing in a company that primarily is enabling broadcasting of live sporting events without permission from anyone. Seems to me that someone better rethink this scheme quick. 

Social networking began in the late 90s when California girls began chatting on Yahoo. 

Surely, I jest, but "social networking" on the web is at its best when it results in something in 3rd, like a party, or date or whatever.   

 A lot of sterile blogging and complaining about "Republicans" does not a social network make.

I think the next generation of this stuff has to get people out of the house and into real world plazas and town squares.

That's the problem with the also-rans. They're trying to play catch-up after the winner  already crossed the finish line. The successful ones grew organically - that is, they grew because they offered something people wanted.

Yahoo provided an index at a time when there were only scattered, random, and poorly-maintained web indices.

eBay provided an easy way for people to sell and buy PEZ dispensers and other collectibles, replacing (or augmenting) swap meets and flea markets.

Google developed an innovative search algorithm that really helped people find what they wanted.

MySpace connected people who share tastes in entertainment, and replaced mix tapes and xeroxed show fliers with band profiles and bulletins.

Facebook helped college students remember all those new faces in their classes.

All of these successful sites were developed by people who had a particular problem to solve, and found a new way to solve it. Their creators had a particular problem, not just a desire to make loads of cash. The secondary investors, trying to make the "next Google" or the "next MySpace" don't get it. They're playing catch-up instead of innovating. They're trying to throw money at the same business plan someone else succeeded with, and hoping that people will somehow see their site as "different" and switch. But if your friends are already on MySpace of Facebook, why would you want to go to Yet Another Social Network, and do all the same things you've already done, all over again?If Google gets the results you need, why would you bother with another, unproven site, if it just offers the same thing, claiming to be "better"?

First, the VC formula, from the VC point of view, is 1 homerun out of ten, more or less. So the few millions down the drain, often to startup guys (and a few women) with track records, is chump change and probably some kind of tax loss against the big wins. So the fact that some startups went down the drain, taking good money with them isn't in itself proof of anything.

I would definitely like to see a count of startups (and their $$ and their backers) organized by categories (advertising, video, social network, etc.) and by success or failure, and what the founders SAID their unique advantage was or was supposed to be.

2. Nicole, your summaries didn't tell us what the revenue models were for most of the failures, but I would bet they're all tied to your first category -- advertising. Of course, if the sites fail to attract users, there's no chance of advertisers signing up, or renewing their contracts, but overall, the advertising market is being saturated by the flood of new pageviews, and pricing is depressed. Why can't we see some different revenue models?

3. Back to #1, I'd love to see the unique selling proposition for each of these -- and subject them to "crowd-testing" to see how unique they really are!

4. One of your search startups you dismissed by saying they're not up to a million yet, vs. others that were still in the thousands of uniques. Maybe that million will be enough, if it's the right million. But overall, if you're going to compete with a Google, you have to be more than 10% percent better, more than 50% better. You'd better be at least twice as good, if not an order of magnitude better -- in order to get people to switch. Or you have to be so narrowly focused that the right people will pay you for what you do for them, and only them...

5. I'd also like to see the startups mapped on one of those alternative data visualization sites (how many of those are there, and what's happened to them, I wonder), so you can see what's missing -- and maybe inspire some new startups in the gaps, this time!

 

 

"yeah, many of those companies didn't make it the whole nine yards but they opened the doors for other companies"

Waaaaaaaaaaaaaaaa?

Why make excuses for these failures? Do you think investors in these companies were ok with them flopping because their money "opned the door" for someone else?

In business (and the Internet is a business) you either fail or you succeed.

No grey! Just black and white (or red).  

 

 

 

Interesting Big Report and yeah, many of those companies didn't make it the whole nine yards but they opened the doors for other companies - which shouldn't be enough to call it a success but not all are meant to.

Another thing that didn't help is that some if those companies created solutions that were misused.

This article was overloaded with web2.0 facts, tragedies and hopefuls, I'll have to go through it again with a fine toothed comb to gather all the goodies in full.  Thanks a bunch for such an INFORMATIVE BIG report! It was truly BIG and SOCIAL = )