Web 2.0 at Crossroads

With the Web 2.0 Conference beginning officially today in San Francisco, discourse is focusing on whether the second iteration of the Internet economy will manage a gradual ascent or turn into a gaseous bubble that will burst eventually, ending in tears for all but the smartest and most fortunate.

As an article today at InfoWorld suggests, Web 2.0 faces challenges and opportunities. How entrepreneurs and investors proceed from here will determine whether the opportunities are seized effectively and whether the challenges become serious threats to continued prosperity.

One potential problem is too much money chasing too few opportunities. Says Eric Chin, a partner at early-stage venture capital firm Bay Partners:

A lot of people are jumping into the Internet space and investing in it aggressively, so you’re seeing companies getting funded that maybe shouldn’t be getting funded. This is creating a hyper and unhealthy environment.

Analyst Rob Enderle, of the eponymous Enderle Group, concurs:

The concern now is that with so much money being thrown around, we might be looking at another dot-com catastrophe in a year or so if the market becomes overheated

Ultimately, the investment community must focus on fundamentals. It must ask basic questions about all the software startups knocking on their doors. Is there a real market for the product or service? Do consumers have time in their lives for the proposed service? What’s the business model? What are the contingencies and dependencies? Who are the competitors, now and in the future? Is the market sustainable? Is the entrepreneur focused on his customers or his investors?

My view is that there already are too many Web 2.0 companies focused on consumer applications and services. There’s room for Enterprise 2.0 applications, but even that is becoming a crowded space, and new aspirants ultimately will have to compete against entrenched players with the advantages and disadvantages that accrue to incumbents. Infrastructure plays are viable, as long as innovation and growth persists.

As always, buyer (and investor) beware.

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