Tough Times Ahead for Some Web 2.0 Firms

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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.