Why won't the current boom have as big a bust as the dot.com bubble? Sifting through this wide-ranging conversation at SXSW Interactive results in 5 key reasons that 'Bust 2.0' should be less painful to the market:
- There's more infrastructure to support ad-based business models. Google and Yahoo! may be aggregating 80% of online ad revenue and only sharing pennies with publishers, but they're also expanding the pool of online advertisers. Specifically, small businesses are now buying online ads because of AdSense. In addition to increased advertiser demand, the lower cost of Web development means that it's easier to break even on your costs. The caveat: This does not imply that it's now easy to sell online ads - the development of critical mass in the online media audience does not mean that the ad business has changed.
- Established companies are developing online plays, but looking to startups for help. USA Today just redesigned its home page to essentially, be digg. (Disclosure note: Omidyar Network is an investor in digg.) However, openness, community, and authenticity are Web 2.0 concepts that are hard to graft on to existing businesses. Eric Hellweg of the Harvard Business Review commented that "it's hard for the HBR - used to being the voice of God - to start listening to the congregation." Many traditional media companies are trying to go big and broad in order to maintain their audiences. But as Narenda Rocherolle of 30boxes puts it, it's still an open question of both (1) what is the core value that these folks brought to their consumer audience in the first place, and (2) can they stay focused upon it while making these changes?
- Business models are more diverse. Michael Sippey of Six Apart likes his diverse business model because it both (a) helps them to understand different ways of acquiring and serving customers, and (b) reduces their revenue risk. "Sell software, sell ads, and learn." On the VC side, I would agree that more startups are thinking about how to diversify their revenue streams.
- It doesn't take as long to prove/disprove your business model. The time to prove that something works has become much shorter, so you can prove your model without wasting capital if you're scrappy. As Gina Bianchi of Ning says, "it's a great time to be entrepreneur." Two companies that were mocked during the bubble, eBags and Zappos, are bruised survivors, but are also the ones making $600M today. Bianchi: "There's value to knowing in your gut what your business is, rather than building it to look cool to VCs." (Hornik: "That's cool to VCs!")
- Valuations aren't as ridiculous. David Hornik of August Capital identified two types of deals in the consumer internet space: "those that haven't proven they can work like crazy, and those who have." Among those companies who haven't yet proven themselves, there is another division, between entrepreneurs who have done it before, and those who haven't. Valuations are set for these startup classifications accordingly, rather than stratospheric across the board.
I agree with Hornik's bottom line, that there will always be both rational and irrational investors. Investing because of momentum will always be more risky. In Boom 2.0, hopefully Hornik is not the only one looking to invest in businesses creating real value and that can become self-supporting. More of this approach is bound to help minimize Bust 2.0.
