On Web 2.0 bubble and entry barriers
If Amitabh Bacchan was a technology blogger and not the host of KBC 2 (desi version of Who Wants To Be a Millionaire), he would have a proclaimed "aaiye hum aur aap dekhte hai internet bubble dwitiya" (come let us together witness the internet bubble 2.0). And he would have been right as always.
BeyondVC has an excellent post on this topic. He links to another VC who also feels that all this hype about web2.0 might well be a bubble.
The gist of their (and of many others') concerns is that:
1. With the advent of cheap computing power, open APIs, and RAD technologies like LAMP, it has become increasingly easy to start a new venture.
2. So this leads to many bright entrepreneurs creating products which should really only qualify as features of a larger product.
3. These entrepreneurs fail to realize that a) there are already dozens of other teams around the world building the same technology, b) if they can build something cheap and fast, so can others. So entry barriers are really low.and c) its really hard to make money when you are selling a feature that is also being sold by dozens of other companies.
4. Repeat steps 1-3 a few times and you have a bubble.
I think these are genuine cautionary signals that every startup will do well to pay heed to. Especially the part about low entry barriers. Entry barriers can be of many forms:
1. Product based on data/technology that has been exclusively licensed. For example, if I had exclusive rights to put satellite data for Indian cities on the internet, I could be fairly confident that a clone wont crop up as soon as my product is released. If I had exclusive rights to sell music from all Ram Gopal Varma movies on the internet, I can be sure that is a safe business to get into.
2. Technology that is complex to create or clone. Many will disagree, but Skype is an example of this. Its really hard to write reliable P2P network software that works all sorts of configurations (NATs, firewalls etc). And till date, I am yet to see something as reliable and easy to use as Skype.
3. Products that will ride on the shoulders of a giant from day one. If I were to write a neat "web 2.0" mobile app and had a deal with Airtel (largest cell phone service provider in India) to distribute my app on their network, my app is likely to race so far ahead of upcoming competitiors that it will be difficult to catch up.
My guess is this is what VCs thought process would be when they evaluate startups for investing into.
Comments
A friend recently commented: "Anytime you see incubation companies for xyz idea (in this case he was refering to Web 2.0) you can be sure that we are in a bubble phase!"
Posted by: Tarun Anand | October 28, 2005 06:41 PM
Firstly, Im Bhasker V Kode - and soon to explore the world of being an entrepreneur ,after my graduation in IT,with my colleagues. I was brought here in a bid to find out ,if the indian scene for VC's,startup funding can really show me some tangible hints for entrepreneurial innovation.
1. Product based on data/technology that has been exclusively licensed.
>> In this respect ,Qualcomm wouldnt be in such a good position if it wasnt for the royalty it reaps.But i doubt there will ever be an innovation that will not be bandwagoned,borrowed or stolen .This however is not a recent trend, but it has always been this way,only less apparent with the changes in market dynamics.
2. Technology that is complex to create or clone.
>> I believe ,today we are not "realising the potential" ,as much as we could . Sure,we could go on from 1.0 to 1.1 .But when does someone stop to say - "hey,ive got all i need .lets make an imapct ! " .That will be the day of the entrepreneur.
3. Products that will ride on the shoulders of a giant from day one.
>> Lets face it , M&A' s continue to be the best exit strategy .So why not start early ;)
I am totally against the notion of service based startups. Does tht coincide for the fact taht the world biggest startups being product based ,or the fact that i dont want to be "yet another - do anything" company . The writings on the wall.
If service based companies could learn one thing from startups ,it would be to change the business model from -"expandinf the verticals to end-to-end delivery in a single /few verticals ,canvassing as niche players.Are'nt all startups ?! 8 )
Keep Clicking,
Bhasker V Kode
Posted by: Bhasker V Kode | December 25, 2005 12:43 AM