The Catch-22 of Web 2.0
Monday, September 25th, 2006 by MR
I think one of the reasons I continue to write on this blog about the funny circumstances I witness in the “Web 2.0″ industry is because I feel like I’m the only person seeing certain things happen — like watching a train wreck in slow motion. Change the comparison to relate to reputation, innovation, and mindshare and it’s pretty similar.
The following are a few ironic and funny circumstances about this “Web 2.0″ industry we all known and love.
I Can Give You $10 Million But Don’t Ask Me What Ajax Really Means
Venture capitalists have the money that entrepreneurs seek, but have they ever written a line of code? Pushed any pixels? I find that it’s rare to see a VC who is technologically savvy enough to be able to *produce* any type of software rather than just talk about it or invest in it. I challenge VCs reading this to take my simple Web 2.0 quiz from last year and see if you’ve got the chops to backup the bankroll!
I Want To Start A Software Company Even Though I Can’t Code
I do design work so I’ve worked with my share of “visionary” entrepreneurs — ones that have the big picture together but think they can push a full beta out in 3 months with a distributed development team. Communicating your vision to a development and design team is difficult because we rely on the little details that non-technical people wouldn’t think about, and without those details figured out in a reasonable time, scope is bound to creep. Another reason that the odds are stacked against non-technical entrepreneurs is because development and design is expensive, and the best team in the world will still get pissed off if the founders are flakey or change their mind a hundred times.
I Know You Gave Me Millions But I “Need” More
To date, Technorati has raised nearly $20 million and has grown to dozens of employees, but their blog numbers and link counts are consistently incorrect, plus the service has been plagued with outages for months. My question is why they don’t fix these core problems before expanding or taking more and more money? To quote Jason Fried, “ever notice how companies don’t just take one round of funding, they always need more?” Greedy, greedy, greedy. How could a few million *not* be enough to hire some great people and kick ass?
Industry Pundits’ Own Companies Are Struggling
Michael Arrington is a celebrity in the “Web 2.0″ world, read every single day by tens of thousands of technologists, entrepreneurs and venture capitalists looking to either get the latest industry tidbit or provoke a glowing review. He’s been profiled in major newspapers and magazines as the King of our budding industry, but his own company Edgeio has seemingly failed to lift off the runway. After a quick Cinderella period users didn’t come back and now I get the vibe that Arrington is distancing himself from the company he founded. Marketing genius Seth Godin’s company Squidoo seems lead-bottomed as well, with many sites (including Wired) declaring it as dead in the water. Note to everyone: being famous, smart, and rich doesn’t guarantee your idea or execution will be spot-on.
Reader Comments
15 Responses to “The Catch-22 of Web 2.0”
Now you see why we called it “irrational exuberance” the first time around. This time, it’s at least a little more rational. Well, at least that’s what I’m telling myself.
September 26th, 2006 at 11:53 am
Like teachers with no experience in the field, only academia, teaching students how to deal with work in the real world once they leave college.
September 26th, 2006 at 2:12 pm
In response to: I Know You Gave Me Millions But I “Need” More… I whoelheartedly disagree.
How exactly do you think an investor should invest? If a company would need 10mil to get to profitability, a smart investor would give them 2-3 million and guage what they do with it before plopping down the whole 10mil. In short, rounds are a way to protect the investor. You can always invest MORE, but it’s really challenging to ask for money back.
September 26th, 2006 at 7:46 pm
As a survivor (barely) of the tech bubble that burst in 2001 I have to say this all sounds way too familiar!
None of the VC’s I’ve met (even the ones on Sandhill road who’ve been around long enough not to have an excuse) are either sufficiently tech-savvy nor, more importantly, sufficiently marketing-savvy.
Grabbing extra rounds of funding is just plain stupid from a founder’s point of view as it dilutes their shareholding. Cynical as I am I now see such funding grabs as a great way for the “visionary” players to pay themselves huge salaries because deity knows no one else would!!
Yours in utter cynicism,
P.
September 26th, 2006 at 7:53 pm
Why do VC’s need to know how to write code? That’s not their job. It’s their job to pick good investments - not write software. Duh.
Should programmers also be able to write a business plan? Or better yet, recognize the difference between a good one or a bad one? Of course not. VC’s invest in companies that pay people to write code.
September 26th, 2006 at 8:04 pm
“How could a few million *not* be enough to hire some great people and kick ass?”
Talented employees cost too much in Silicon Valley; a talented programmer is $120K per year.. Office spaces also very very expensive..
September 26th, 2006 at 8:10 pm
I’m going to have to completely disagree with your evaluation of Squidoo. The site has experienced rather significant growth since Arrington’s Purple Albatross article five months ago. In fact, the site’s Alexa rank hovers around a rather impressive 1,000 this week.
Since Squidoo increases the amount of content they have each day, it isn’t surprising that people would find it increasingly useful, that Squidoo pages would pop up higher in Google searches, and that it’s Alexa rank would creep up even more.
Since Squidoo has one full time programmer, a reliable source of funding from Seth Godin, and a steadily increasing rank I am totally surprised to see people list this company as one of the Web 2.0 failures. I understand that there are plenty of dead in the water Web 2.0 companies (and I would probably include Arrington’s Edgeio as one of them), a site like Squidoo that’s growing by hundreds of percent each month doesn’t really fit the mold.
Squidoo may not ever be YouTube or MySpace, but I foresee them carving out a viable niche for themselves. Just because a site doesn’t have explosive growth right away doesn’t mean it can’t be a viable business. Someone who operates a blog feels that they have the time to spend consistently posting new information, signing up for a domain name, and all that jazz. Squidoo offers people a chance to catalogue what they know in one place with ads, without all the hassle associated with maintaining a one post blog with Google adsense that no one will ever go to because Google search will never find it. And lens creators get to make enough money to grab lunch or go to the movies once a month. Believe it or not, that’s enough for many people.
I suspect you’ll have to reevaluate what you think about Squidoo in the next few months as the tortoise increasingly begins to look like a hare.
Compare Squidoo with Edgeio:
http://www.alexa.com/data/details/traffic_details?compare_sites=edgeio.com&range=6m&size=medium&y=t&url=squidoo.com
Compare Squidoo with Businesslogs:
http://www.alexa.com/data/details/traffic_details?compare_sites=businesslogs.com&range=6m&size=medium&y=t&url=squidoo.com
September 26th, 2006 at 9:11 pm
I’m a little late on commenting but I’ll go in order :)
Tony - I realize that some companies need a lot of money to produce a quality product depending on what that product is, but Technorati is simply a web service, not a new piece of hardware or an electric supercar. I really find it tough to swallow the idea that they need ~$20 million in order to continue doing what they’re doing — they haven’t made any amazing new additions to their service in years, and the data and reliability behind Technorati is still spotty.
Claude - If a VC is blogging and reviewing new products and services (are any VCs not blogging?) and discussing them from a technical point of view, then yes absolutely they should know what they’re talking about. About a month ago Michael Arrington reviewed a new web service that was completely Java applet based and said that their Ajax tools are really slick… that’s what I’m talking about. And should a programmer know how to write a business plan? Absolutely, especially if that programmer is starting a company, why is it unreasonably to expect that entrepreneurs need to have a multi-faceted skillset?
Emre - I hear ya, it is pricey in SF, but I’m sure you can see what I’m getting at. It’s not as though the best programmers/designers are all based in the Valley, who says that a startup’s first hires have to be local? The best talent is distributed around the world (37signals as an example) so why pigeonhole your employee search?
Jeremy - I think the last part of your argument for Squidoo just proves that they will have a tough time ahead of them:
“Someone who operates a blog feels that they have the time to spend consistently posting new information, signing up for a domain name, and all that jazz. Squidoo offers people a chance to catalogue what they know in one place with ads, without all the hassle associated with maintaining a one post blog with Google adsense that no one will ever go to because Google search will never find it. And lens creators get to make enough money to grab lunch or go to the movies once a month. Believe it or not, that’s enough for many people.”
There’s really no impetus for someone to write for Squidoo besides making money, and like you said, they’re not going to make more than $20 or $30 a month even *if* they’re one of the top lensmasters. If you have a blog at least you get 1) control over the layout, 2) full control over the content and design, and 3) 100% of the ad revenue. A fledgling blog can easily make more than the highest monthly Squidoo payment in just a week with the multitude of ad networks, and that blog is fully yours so you can do what you want with it.
I’ve never heard a convincing argument for why someone should spend time to write on Squidoo instead of just starting a blog for free at Wordpress.com, a few bucks a month at Typepad, or a few more bucks per month to host their own. The rewards are much greater, they have more control, and they keep more of the ad money.
September 26th, 2006 at 10:22 pm
The second comment regarding “I Want To Start A Software Company Even Though I Can’t Code” reminds me of “Startup.com”. A great movie about guys that knew nothing about the Internet raise capital, build a company, and see it bust real quick.
Funny thing is that you see investors making the same mistake this time around and putting there millions in the hands of guys way to far up the food chain.
September 26th, 2006 at 11:49 pm
So a VC uses the wrong jargon and they’re suddenly ignorant to how the product works, what value it offers customers, etc? I’m still not convinced a VC needs to be all that savvy. Does an NFL franchise owner need to know how to throw a spiral?
I can agree and disagree with the first point. A lot of good companies have come from nerds (Google, ebay, Amazon, Facebook) but they all require someone to manage the business. I think if we saw more entrepreneurial teams (business, tech and finance guys/gals) then these groups would do much better.
As far as the pundits go, well, we all know that those who can: do, those who can’t: blog. ;-)
September 27th, 2006 at 2:22 pm
Devin, when a VC is blogging and analyzing companies from a technical point of view, I’d hope that they would have some type of knowledge about what they’re talking about. Rarely does a VC blogger review a company and completely disregard the technology behind the product, they’re inexplicably tied together.
September 27th, 2006 at 2:29 pm
Oh sure, I can’t disagree there. But again, I don’t need to know what a carbureator is versus a piston. I know this stuff all goes into what makes the car work.. but what’s important is it works. Does it work well? That’s the question that a review should really answer, right?
September 28th, 2006 at 1:58 pm
I think VCs can’t get the “your company needs me” chip off their shoulders and that makse them think they can pontificate on the finer technological points of their companies without knowing what they’re talking about. I’d say that the smartest VCs know when they’re over their head with jargon and stay clear of those waters, the ones I’m referencing in this article are those that think they can enlighten people on the finer details of stuff they don’t know about.
The problem is that I read press releases or hear on blogs about VC firms investing in companies based on their technology instead of their business plan, and if that’s the case, that firm better have a good grasp on what precisely is that company’s technical advantage. Investing in a company just because they use blogs, Ruby on Rails, and Ajax to make something nifty isn’t a good idea but that’s what’s happening a lot right now. That’s my main problem — VCs getting excited about “Web 2.0″ and investing in companies because of the buzzwords they flaunt, not the product they produce.
September 28th, 2006 at 2:06 pm
But Mike, your sole argument about Squidoo (that there’s no reason to do it) is belied by the fact that they have more than 20,000 people doing it! If there are 20,000, aren’t there 200,000? And why wouldn’t that be enough?
Do the facts trump your opinion?
September 29th, 2006 at 6:27 pm
There are some really good points here, Mike. I think the most important mistake people make is somehow thinking that Googlemath applies just because your business is web2ish.
Traffic is only a tiny part of the reason that Google is a homerun. MySpace may have a lot of traffic, but it’s not worth nearly as much. Why? Because the ads are a distraction, an interruption, a tax. Google ads actually make the search worth more, not less.
The media business, sooner or later, is about trading attention for money. The better new companies get at doing that, the better they’ll do.
September 29th, 2006 at 7:05 pm
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