Vast Majority of Web 2.0 Companies Doomed?

Todd Dagres, formerly with VC firm Battery Ventures and now founder and general partner at Spark Capital, says too many Web 2.0 companies are being funded. He suggests that the surfeit of firms chasing limited returns will result in an inordinately large number of companies that will ultimately meet with gruesome ends.

In a BusinessWeek article titled "Bubble 2.0?", Dagres says:

Obviously there are too many companies being funded in the area. What we’re seeing is inflation similar to back in the bubble . . . . For every one (company) that works, another 100 will fail.

For VCs, a batting average of .001 won’t keep the funding or management fees flowing. Dagres and other savvy VCs realize the odds of success aren’t as good as Web 2.0’s self-interested impresarios and promoters would have us believe, and they’re scaling back their exposure to some of the more speculative ventures that are trolling for money.

Also quoted in the same BusinessWeek piece is longtime market analyst David Card, now a senior analyst at Jupiter Research:

This is scarily like 1998 in some ways. There’s easy money out there, and there are some bad ideas getting funded. . . . I’m highly skeptical about social networking. I think it’s a feature. It’s not a business.

Despite the wariness of Card and Dagres, among others, Web 2.0 startups are getting funded a brisk clip. Market-research firm VentureOne says venture firms put $455.5 million into 79 Web 2.0 companies during the first nine months of the year, more than twice as much than was invested in such companies during the same period of 2005.

On the whole, though, today’s venture funding hasn’t scaled the dizzying heights of the original Internet bubble. Quoting from the BusinessWeek story:

Venture investments in Web 2.0 companies certainly aren’t high enough to push funding back to bubble levels. Some $19.5 billion was invested during the first nine months of this year, according to VentureOne, indicating that total investments for the year will come in at around $26 billion. That would be up slightly from the $24 billion last year. But it’s still a far cry from 2000, when the venture firms threw $95 billion into companies.

It’s a good thing, too, because the bursting of that first bubble set back technological innovation severely. Moreover, it’s becoming readily apparent that, from a fundamental ROI perspective, most Web 2.0 vehicles, particularly in the consumer space, don’t warrant the investment capital they’re seeking.

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