The Bubble is a Necessary Evil!

by Sachin Balagopalan on May 28, 2008 · 1 comment

Interesting article in the Financial Times today essentially suggesting a shortage of revenue from the so called “social media” websites i.e social networks, blogs and the like. While the news itself is not anything to write home about - I mean we all know that some of these startups specializing in user generated content are overvalued in most cases and I might add over-hyped in some instances - it’s definitely worth pondering about.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.

“There is going to be a shake-out here in the next year or two” as many Web 2.0 companies disappear, said Roger Lee, a partner at Battery Ventures.

One tends to analogize the web 2.0 bubble with the bubble of the late nineties and early 2000. However there are some fundamental differences. The main difference being the companies were mostly publicly traded companies. These companies were typically listed on NASDAQ, over valued and in most cases did not post a profit on their balance sheets consistently from one quarter to another. When the proverbial “shit” hit the proverbial “fan” i.e when the institutional investors began to pull out after realizing that these companies were not generating any revenue the small investors/speculators began losing their shirts and the rest as we know is history.

This time it is slightly different. Web 2.0 startups are backed by VC’s and Angel Investors for the most part and these folks are generally careful and astute as to where they put their money. So when the bubble does burst (is bursting?) the impact is not that drastic or is limited to the risk assumed by the VC.

Having said that the bottom line is the “bubble” will eventually burst regardless of who the financiers are. Startups are a proving ground for concepts and ideas and until ubiquity is achieved there is only a slight chance for making money. A good example is E-Commerce. Remember startups like Ariba and CommerceOne circa 1999/2000? Online procurement of goods and services was a new and unproven concept at that time. Today on-line shopping is norm rather than an exception.

Likewise web.20 has spurred significant changes in on-line behavior and the “rewards” will be reaped in the future as the idea of user generated content becomes mainstream and ubiquitous.


{ 1 comment… read it below or add one }

Angel Investor 07.17.12 at 12:24 pm

Great blog . Worth a share . :) 

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