"Web 2.0" Bubble?

Maybe, but probably not. Some mostly random (but painfully organized) thoughts.

Caught between worsening CPM figures, savvy consumers and Click Fraud, companies who derive the bulk of their income from online ads might just find themselves being squeezed for cash.

Even the social networks .. the darlings of the 2.0 moment are struggling. Sure, they’re showing a lot of adverts to their huge memberships, but the folks who frequent these sites typically aren’t there to buy .. they’re there to connect. Poor CPMs? The social networks have them .. in the neighborhood of $0.40, it takes 2.5 billion impressions to earn one million dollars.

The web isn’t comprised solely of social networks and ad-funded business models .. and this is a good thing. Other features and business models are emerging at a rapid rate.

Pragmatic financiers of the VC variety are now looking very carefully at exit points before they enter into transactions with "Web 2.0" companies. Hence, deals are few and far between, and all expenses are scrutinized.

Pragmatic founders might avoid the VC discussions entirely. The decisions of "going public" (where the big exit bucks live) versus being acquired are on every VC and founder’s mind. However, due to the requirements of Sarbanes-Oxely, the costs to maintain financial disclosure for a public company are estimated at about $5 million per year .. for a company whose revenue is $50 million, that’s a big chunk of dough. Better for them to be acquired than try to grow their business and incur that kind of overhead. Penalized for growth .. imagine that!

Acquisition is a far less appealing exit strategy for VCs, who may hold sway over these decisions, encouraging founder avoidance for VC cash (for as long as they can afford it, of course .. Angel Investor, anyone?).

Facts to back up some of these bits? Glad you asked. From WSJ blogs "Afternoon Reading: Mission Critical for Venture-Backed IPOs" you’ll read:

The second quarter saw zero venture-backed companies go public–the first quarter in more than 30 years without a venture-capital-backed initial public offering in the U.S. And it follows a lackluster first quarter, when only five such firms went public. Now compare that to the first half of last year, when 43 venture-backed firms went public, according to this Washington Post article reporting on a study by the National Venture Capital Association and Thomson Reuters.

Overall momentum in technology isn’t lost, however. The market appears to be moving toward a "smaller success" model, where more realistic goals are set, growth is managed to cash flow and literally hundreds of companies can chase the same feature opportunity. Thanks to low cost-of-entry, these companies can survive longer, creating a "thickening" of the Web 2.0 bubble.

Business runs in cycles, with booms following busts following booms. Nowadays, this is happening in Internet time, and in many cases, through the release of a new technology or the discovery of a feature / paradigm that can be monetized. Further, booms for a particular feature may overlap booms for related features, creating a "rolling boom" that keeps interest levels high.

Greed and the perception of opportunity fuels a boom, while the fear of of an opportunity loss throws gasoline on the fire. Fear comes in another form though, a form that causes a founder to well, founder .. continually monitoring progress (or lack thereof) questioning their business plan. A high level of market research, common sense and pragmatism, coupled with fiscal discipline is very handy as a boom starts to age. A well-planned exit / stop loss strategy is handy as well; including considerations for merging, selling out or shutting down.

There’s good news here as well. It is far less expensive to launch a Web 2.0 company today than it was back in dot-com days. Capital needs are far lower, thanks to the plethora of sky and cloud services, which are available at little or no cost to start up companies. Start-ups deploying into these highly-commoditized infrastructures enjoy immediate visibility on the web, potentially unlimited scalability and a cost-to-operate model that suits minimal cash flow. Founders and VCs can make a larger number of smaller bets when chasing an opportunity.

What about new business models? I’ve seen an interesting social network tangent emerging .. the rise of product-based social networking, where consumer companies use the social networking paradigm to promote their products to like-minded consumers .. also for brand awareness (not the same as advertising) .. or both. More on this as it develops.

Location awareness is potentially huge .. and potentially intrusive (and therefore, annoying). Imagine a coupon in a text message because a system knows you’re near a Gap or a Starbucks. Creepy (but saving cash is fun!). I’m watching this too.

Twists on old business models? Sure. Subscription-based models are proven only with the most fanatic / devoted / sole-source audiences (think World of Warcraft or Major League Baseball) or to services deemed critical to security / LoB (think OneCare or SalesForce). Maybe there’s a consumption-subscription hybrid working out there (stream x hours of content for a set fee, with additional y costing only z). A few years ago, we were fighting micropayments: a small enough charge that would provide no barrier to entry to making a small purchase ($0.99 per song on iTunes, or a copy of USA Today online) .. that seems to have sorted itself out. What else is waiting in the wings?

So, bubble? Not likely.

There are a huge number of really smart folks looking at extending existing business models in ways that take advantage of new web-based features and social interaction. Add a low cost of entry and there should be enough boom for us all.