Credit crunch to be the death of Web 2.0?

The death of Web 2.0 has been predicted several times over the past couple of months and even years. Currently, it’s still alive and kicking but the current economic climate could have a severe impact on the industry. Cash and credit are becoming rarer these days and venture capitalists are focusing more on efficiency.

Here’s a snip from BusinessWeek from a new article about Web 2.0:

OK, that’s a little harsh, even if there may be a grain of truth there about the famously hard-nosed folks at Sequoia (and at other VC firms). But frankly, not to sound too cold, a lot of startups, especially Web startups that have driven the Valley’s recent boom, probably don’t deserve to survive. Many Web 2.0 startups are completely redundant or unnecessary, or both. I feel for the people working hard inside them, but we all knew in our hearts that the 47th social network or video sharing site, and at least 35 or 40 before them, really weren’t going to make it on their own.

And in other ways, their failures will be a good thing. The problem with those companies wasn’t so much wasted VC money, which still seems plentiful for now, but wasted talent. And the folks who are laid off or voluntarily bail from doomed startups—and again, I don’t mean to be cold about this—will probably be happy to work hard at a new place with more promise, even if they don’t get showered with so much stock option funny money. Mark Pincus, CEO of the casual games site Zynga, told me yesterday that he’s getting 30 to 40 resumes a day now, from people who suddenly aren’t so demanding. Up to now, getting talent has been the major bane of new startups’ existence. And ultimately, it’s better for these people that they’re working at a company with a solid user base and business model that has a better chance to succeed.

This time most Web 2.0 firms aren’t trading on the stock market at ridiculous high p/e rates but it can’t be denied that the business model of many popular Web 2.0 sites isn’t sound at all.

Just take a look at a list of some of the most popular sites, do some research on how they’re doing and you’ll discover that many of them aren’t making money. Google spend $1.65 billion on YouTube – and they have no clue on how to make this insanely popular video streaming site profitable. One of the more popular YouTube alternatives is French online video sharing site Dailymotion. More than 32 million euros have been pumped into this site but so far Dailymotion isn’t profitable, although the CEO expects they’ll be cash-positive in early 2009.

Another popular Web 2.0 site is Digg, the site generates lots of income for the sites it refers people to but isn’t profitable. While getting another $28.7 million in venture capital, Digg announced last month that while their ad revenue tripled this year, they’re still not profitable. Ouch.

Twitter is another great example of a bad business model. No doubt that it’s a killer app for millions of people but how could you make money with it without pissing off all your users?

The same is true for StumbleUpon, eBay put them for sale this month because the services’ popularity is fading and they don’t know what to do with it. The online auction giant also has Skype, this program was a hype a few years ago, eBay gobbled it up for $2.6 billion in 2005 but didn’t get the results it hoped for. While Skype is profitable, eBay said it didn’t get what it hoped for and plans to give Skype a year to prove its synergies.

Facebook could be another example. This social networking site is enormously popular but sites like ReadWriteWeb suggest the financial side isn’t that rosy. And the list probably goes on and on. I’m not saying all of the sites I mentioned will just disappear, but they’ll need to focus a lot more on efficiency if they want to survive. You can’t just keep burning capital to grow and hope that some day, out of the blue, your business will become profitable.


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