The Web 2.0 economy hangs in limbo

This post was updated at 10:11 AM on Friday with comment from Chi.mp's Myles Weissleder.

SAN FRANCISCO--Wednesday night was a wild one.

As part of this week's Web 2.0 Expo, the ubiquitous digital-media blog Mashable enlisted a brand-new social-media site called Chi.mp to sponsor its all-night bash at a cavernous nightclub called Mighty. The open bar was flowing, the dance floor was seeing plenty of attention (a rarity at a tech industry party), and young women left and right were posing for photos with snappily-dressed Mashable overlord Pete Cashmore and numerous Chi.mp-branded trucker hats.

Amid the drunken revelry and pulsing electronic music, one prominent tech-industry veteran at the party was asked exactly what Chi.mp is. "I'll tell you what Chi.mp is. It's venture money getting set on fire," the jaded observer replied. Surveying the buoyant crowd, he added, "This feels a little like 1999."

The atmosphere was radically different during the day at Web 2.0 Expo, as talk of economic recession was unavoidable. TechWeb's Jennifer Pahlka, one of the expo's organizers, told attendees in a welcome address on Tuesday that she thanked them all for coming to the conference "in this time of budgets that are being scrutinized, and some bad headlines." Veteran entrepreneur Marc Andreessen was grilled in a keynote interview on his use of the term "nuclear winter" as a justification for his start-up Ning's new round of venture funding.

With investment banks going down and food prices going up, the gloomy economic forecasts have cast a dark cloud over cloud computing (and everything else getting talked about at Web 2.0). Yet tech companies like Apple, Google, and Amazon are posting healthy earnings, and despite talk of an advertising downturn, new digital-ad networks seem to be debuting by the day.

The economic attitude of the Web 2.0 Expo hangs in an awkward limbo: The tech industry relies on innovation, but no one can deny that these economic times demand caution. What's a geek to do?

Conference czar Tim O'Reilly preached a keep-on-trucking sermon in his keynote address Wednesday, admitting, "We've been kind of whipsawed lately." He also railed upon the statistics detailed in reports like one by Dow Jones VentureSource last week, which are finding that venture dollars for start-up companies are growing scarcer. Urging conference attendees to focus on innovation, he said, "If you're following the headlines you might as well stay home, because you'll be very terminally confused," he said. "You have to think about what really matters."

It's O'Reilly's job to be bullish, though it seemed a little hyperbolic when he said the times are just too crucial to be cautious. "We're at a turning point akin to literacy or the formation of cities," O'Reilly said. "This is a huge change in the way the world works."

"We're at a turning point akin to literacy or the formation of cities. This is a huge change in the way the world works."

--Web 2.0 Expo organizer Tim O'Reilly

Changing the world, sure. But it still helps to be realistic. "The recession will touch the Internet," Slide founder Max Levchin, a Web 2.0 Expo keynote speaker, told CNET News.com in an interview. "There's no question about it."

Like Andreessen's Ning, Slide just went through a massive venture funding round, and Levchin insisted the best thing a company can do is just be smart. Slide, he told News.com, is looking at other revenue streams besides advertising. "Trying to shift away from advertising partially and going direct to consumers is a really good idea, because it cuts out one more party from the equation," he explained. "During a recession time you don't have to worry so much about building an enormous scale, you just have to build up a loyal base of fans that pay you a little bit." He might want to tell that to Twitter, whose execs banter about scaling and growth nonstop but haven't made significant revenue, because their investors can still keep them in business for the time being.

"Nobody knows what's going to happen in the recession. It might take five years," Levchin said. "It has proven to be clever of us to raise money just before the signs of the recession started. It really is a war chest, both for acquisition and for survival."

Someone with Levchin's star power can fill that war chest, no problem. If you didn't co-found PayPal, you might be out of luck. "The VCs are definitely holding their cards a bit closer to their chests," a young dot-com entrepreneur observed at the conference, but then added that his own social-media company hadn't seen trouble pulling in investors.

Because tech bellwethers and indicators for the broader economy just aren't agreeing, no one is sure how things will play out. But if there's any precautionary measure that a concerned start-up can put in place, it's to be prepared and spend your money wisely. Some companies filling the after-hours agendas at Web 2.0 Expo opted to skip the open bars, holding "meet-ups" with cash bars instead of free-for-all affairs like Chi.mp and Mashable.

Chi.mp exec Myles Weissleder said the choice to throw a party was a "strategic decision," and a better way to spread buzz about his new company than sponsoring a booth at the Web 2.0 Expo show floor. "Nobody knew about Chi.mp last week, and I think everybody's talking about it this week," Weissleder said in a phone interview Friday. Chi.mp, he added, is backed by private investors rather than institutional venture capital, with seed funding "in the millions."

The divide between "strategic decision" and goofy attention-grabber remains: "I walked out of Zivity.com's offices with a lightsaber and 10 shirts," conference attendee Dan Tentler told me while socializing after hours on Thursday. "I walked out with 10 pounds of gear."

True, the racy adult site Zivity depends on subscriptions, not ad revenue. But did they really need to spend that venture cash on lightsabers?

[scdecade]

The gov't has gone feral

The prevailing policies tend towards violence. Uncertainty combined with violence combined with serving a gov't intent on its own sensory satiation above all else adds up to stagnation. Who would release their creative energy into this hornets nest? Some people will do so regardless but the best people will not. Wisdom in policy has vanished. Something has to give first. That's how I read the Karma.

I bet this reads like a crazy person wrote it. Maybe they did.

[andrew.mager]

CNET, why do you make me put subject lines in my comments. That is so weird

I see a "Web 2 bust" coming soon. VCs are gonna get pickier with a recession.

What's wrong with lightsabers? :)

[bmirabito]

Great article!

It does feel a lot like the irrational exhuberance of the 90's. There is so much hype around Web 2.0, but no clear ROI. At a recent Shop.org Marketing Workshop, one of the speakers said, "You can't think of it terms of ROI."

I wrote a recent blog post myself about the futile race for the "next new thing," and how entire industries can get caught up.

Seems to me we all need to get back to basics, particularly in light of the economy, as your post points out.

[Frymaster]

CNET - Render A Tags

Unrendered code is just embarrassing.

[Frymaster]

What He Said About Subject Lines!

Ah, lightsabers and t-shirts, reminds me of the late 90s. What was the term...? "Burn Rate" Those who do not learn from history... And so, Bubble 2.0. But thanks for the tchochkes

[azareus]

eyes can deceive you

Luke: With the blast shield down, I can't even see. how am I supposed to fight?
Obi-Wan: Your eyes can deceive you. Don't trust them. Stretch out with your feelings.
Han: Hokey Religions and ancient weapons are no match for a good cluster at your side, kid.

[Chaz1001]

Reminder Box

I'd like to see the developers come up with a membership logo for all sights accepting money that reminds you that your subscription is still in effect and you don't accidently resubscribe on your credit card ending up in being charged twice.
passwords and status are my major problems using the internet. Like a secure sight logo, a membership confirmed logo would go a long way.

[desmondhaynes]

don't put chimps and monkeys in same bucket

you talk of web 2.0 in the same breath - there are successes around. while the drunken bash made good reading, i am sure not all companies are like that.

many will fall out - sure - but not all.
and you know which ones are hot, dont you?
-D
http://techwatch.reviewk.com/2008/04/do-you-twitter-hell-no/

[pieterjansegers]

I'm afraid too...

I'm afraid that we'll experience a new net bubble: microblogging.

Although Twitter, Jaiku, Pownce and Tumblr will survive in my opinion, I'm doubting many others will unless the opt for a specialization in public (an other language, an other functionality, ...).

"Creating just another microblog" isn't good enough anymore to conquer an audience ...

Pieter Jansegers
http://microblogs.ning.com

[azareus]

hire an economist to find out!

yes, there was a pre-ipo co. in 1999 based in palo alto that had a 'staff economist.'

this person's job (employee one-hundred-something) was to think big thoughts.

the co. had approx $32,000 in revenue for the quarter when it went public., reaching a market cap of over $400 million within a month, then merged wither another look-alike in an $800 million deal.

the stock held up, through levitation, then died after approx 20 months in the 9/11 debacle, like all internet hanger-ons.

the vc's and founders made millions - alas, not billions...

this Trimalchian revelry is not quite to that level, but it's getting close. who knows what will happen if microsoft consummates the microhoo deal unless google buys yahoo to form 'goo' the ultimate sticky eyeball experience

[WeCanDoBIZ]

Maybe a shake-out is needed

Whn you start seeing people getting money when they have no clear reveneue plan and when you hear people saying ROI doesn't matter, you know it's time for a short, hard slap.

There is no doubt in my mind that stupid money is being thrown at some Web 2.0 companies - stupid amounts by stupid people who think that they've found a way to dodge basic economics. They hadn't in 1999 and they haven't now.

The recession is a red herring in this context; it is market realities that will actually shake this thing out. Don't think all Web 2.0 companies will be victims though - there are actually some genuinely good businesses here. Hopefully the whole shake-out will leave more sensible investment opportunity for the ones that are still standing afterwards.

Ian Hendry
WeCanDo.BIZ
http://www.wecando.biz

[YankeePoodle]

success failure ratio

For every one successful effort there would be 10s or more companies that would be failures. That is true in most of the businesses, and the web/internet is not an exception. Web2.0 bubble is no way comparable with the .com bubble, but there will be lot of blood-letting that would happen as in every business cycle. I am sure that there are many wonderful players that would survive if the Web2.0 bubble busts. Some just go home and others will scale down to survive.

The scenario for Web2.0 companies is not as bad as project, but they will take hit because of the existing economical conditions.