Tough Times Ahead for Some Web 2.0 Firms

Ann All

Web 2.0 may be in the media, but is it in the money?

It doesn't appear so, based on research from Dow Jones VentureOne and Ernst & Young that is spotlighted in this Red Herring article.

According to the researchers, venture capitalists invested a hefty $455 million in Web 2.0 startups in the first three quarters of 2006 -- yet they didn't see much of a return on that investment.

Not a single Web 2.0 company went public during '06. Perhaps understable, given the market's limited appetite for IPOs. Only four Web 2.0 companies were acquired, however. Google's big-bucks purchase of YouTube made a splash, but so far has resulted mostly in headaches for the search giant.

The article quotes VCs and analysts who predict that a number of Web 2.0 firms will vanish during a market readjustment. Some startups are already experiencing layoffs, executive migrations and even closures.

Part of the problem, says a source quoted in this Ars Technica article, is that many Web 2.0 firms become so enamored of technology that they make the mistake of ignoring the non-geek market.

CIOs shouldn't use this news as a reason to dismiss Web 2.0, however. Better to heed the advice of Beagle Research Group principal analyst Denis Pombriant, who in this IT Business Edge interview advises execs to consider conducting tests of Web 2.0 technologies, albeit in an environment "where nothing would blow up."

Companies open to Web 2.0 could enjoy results like those experienced by retailer Eastern Mountain Sports, which saw a chain-wide increase in same-store sales after a buyer used a business intelligence tool to figure out what one store was doing right and standardize the practice across the company.

To encourage further information-sharing and collaboration among its stores, the retailer has plans to embed RSS feeds into its BI dashboards and also to employ tools such as wikis.

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Jan 22, 2007 6:46 AM Denis Pombriant Denis Pombriant  says:
Generally, the companies that I see going public have been in business and figuring things out for a good 5 years.  To say that VC's saw no return on Web 2.0 applications in 2006 despite a hefty investment is looking for premature results, I think.  Prior to IPOs I would look for a round of consolidation. Reply
Jan 25, 2007 7:17 AM Ulrich Leutbecher Ulrich Leutbecher  says:
The problem is that many Web 2.0 products are not suited for the Intranet (security, integration, corporate style guide etc.). Maybe VC's are looking for the wrong companies to invest in.I found a unique product ( - more than Web 2.0 actually - to massively improve internal communication and collaboration for a complex project. The potential for solving problems is much bigger ...  Reply

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