Thursday, July 06, 2006

 

More on Web2.0 models

This has been a big week for us - spin out from Caz and merger with Prelude completed. Office move started, and ongoing.....

All good fun and very exciting. I might have managed to have a few beers on Friday as well. And then a barbecue at Bob Hook's house on Saturday for all the new Esprit'ers. Great pad. Fantastic garden.

So very busy, but I'm going to attempt two posts tonight. This one explores a little more where I think the money might be in web2.0.

In my first post (which was a month ago and this is only number three - I need to speed up a bit) I put web2.0 companies into three categories:

1) Stuff people have always done - simply moved to the net - e.g. ActiveHotels
2) Old stuff done new ways on the net - e.g. LastFM, betfair
3) Stuff people have never done before - e.g. Myspace, Blogger

Now I'm trying to figure out where the money is going to be made in the next few years. To take each area:

1) Stuff People Have Always Done - Simply Moved to the Net
This is the easiest to understand and unsurprisingly the most developed. Opportunities for small companies here are limited to the increasingly small universe of "what hasn't been done before". Furthermore it is the easiest stuff that has been done, meaning the remaining opportunities are the ones with the most execution challenges. Nonetheless as the web develops things that are on the margin of feasible today will become good opportunities tomorrow and the great thing about a lot of companies in this space is that they have transactions at their heart and the business models come naturally.

The features of markets that are ripe for this kind of disruption are:

2) Old Stuff Done New Ways

Companies in this space often seem to start by giving their stuff away for free and they only come to VCs for the big money once they have thousands (or millions - pick it) of "users". And therein lies the rub. What exactly is a user? This is all obvious stuff, but to get it down for completeness users can vary from registered and used once for 10mins, to occasional free user, to regular free user, to paid once user to regularly pays user. Ultimately there is only value (and I mean real value, the sort that can get your company bought for a LOT of money) if it is clear that there will be lots of "regularly pays" users. The problem is that valuation expectations start to leap up when there are lots of non-paying users and the risk that there will never be many regularly paying users remains substantial. I thank Zennstrom and all involved at Skype for putting European VC on the map last year, but people need to understand that emulating them is not a viable investment thesis! So will there be a lot of big companies created here in Europe? My gut is telling me there will be a few. Collaborative filtering has the potential to disrupt a lot of media consumption. It will take a while though - people's behaviour needs to change, people need to start forming more communities, learn to tag etc.

The features of service ripe for this kind of disruption are:

3) Stuff people have never done before

The growth in blogging is astounding. In March 2005 Technorati announced it was tracking 7.8m blogs and that the blogosphere was doubling every 5 months - in April this year they were up to 37.3m blogs - the growth continues. This is phenomenal. Teen social networks and geek social networks have also had dramatic growth. Ajax personalised home pages may be the next place to go. To my way of thinking this is all stuff that is new - it is true that kids used to hang out together in the street and now that we won't let them outside at night they are doing it online, but there is a personal expression thing going on here that is new. Making money here is not easy either. Most of the business models are long-tail advertising based and unproven. The sustainability of these properties is also more a matter of faith than evidence, to my knowledge at least. It would be wrong not to mention here the online personality extension plays - e.g. sulake and stardoll - they have a revenue model at their core - selling lots of stuff to lots of kids that adds to their identity for pennies a time. I think there will be more opportunities here as well, although they will be for the brave.

I don't think it is useful to be prescriptive here as I have been for the first two categories. Spotting the next thing is a matter of keeping ones' ear to the ground (and maybe keeping a close eye on what my brethren on Sand Hill Road are doing...).

Conclusion
There is a little opportunity in (1), a little more in (2) and a little more still in (3). Which tells me that this is not a useful categorisation for the purpose of identifying where the opportunity will be! But nonetheless, this has given me some kind of framework for thinking about opportunities in this arena.

So it is only going to be one post tonight after all. One to follow shortly on infrastructure/trust.

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