Who's got it right? Are the new breed of Web 2.0 start-ups good investments now or are they over valued for what they propose to deliver? Have the three musketeers of the new web- Google, Apple, and Facebook- created such huge barriers that it will be extremely difficult for start-ups to compete? We'll try to provide some persective on these issues as we examine two recent newspaper articles which take very different points of view.
On December 3rd, the NY Times ran a front page article that caught my eye. It was titled, A Silicon Valley Bubble Shows Signs of Reinflating.
The main message of that article is that VCs, Angel Investors, and established companies are rushing to invest in "me-too" start-ups that imitate popular and succesful Web companies. The article stated that "companies producing software for social shopping, mobile photo sharing and new social networking are finding it easy to attract investors because no one wants to miss the next big thing."
For example, Yammer- a company working on enabling Twitter-like messages inside businesses- recently raised $25 million. Un-named investors reportedly put close to $30 million into a niche blogging site called Tumblr. GroupMe, a new group messaging app for cellphones, raised $9 million. Path -an iPhone app for sharing only photos on a social network limited to just 50 people- received $2.5 million. Its competitor, Picplz, scored $5 million. And those are just within the last few weeks.
Perhaps, this article was stimulated by Google's reported rejected $6B bid for Groupon- a company that has come on very strong in the last year. The implication is that many of these new web companies are worth a lot of money- but are they fairly valued?
Could this be a replay of the dot com boom, stock market mania and subsequent bust? Not exactly. This time around, there's no stock market bubble and the IPO market has been very subdued. Instead, entrepreneurs and their investors are increasingly looking to large technology companies – like Microsoft, Apple or Google- to acquire their start-up(s) for cash. Those three companies have about $90 billion in cash on their books. McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry’s midsize companies.
Yet, there are skeptics that believe the size of the prospective deals will be much smaller than those envisioned by the investors piling into these new age web start-ups.
“I think at the high end, it’s not that frothy, but there’s a lot of exuberance in the early-stage stuff,” said Chris Sacca, an ex-Google employee and current angel investor who has decided to temporarily hold off on new investments until valuations drift lower. “A lot of the valuations there don’t make a lot of sense.”
Jeff Clavier, Managing Partner at SoftTech VC said that over the next 12 to 18 months the real challenge for start-ups flush with venture cash would be proving they were worth the investment or risk having to fold their companies. Mr. Clavier told the Times, “There may not be a big implosion, but down the road there will be a bunch of blood and tears. The music is going to stop and people will realize there aren’t enough chairs for companies to get the next round of financing.”
Just a few weeks ago, San Jose Mercury columnist Chris O'Brien wrote a piece that raised caution flags for Web start-ups. Chris' article, A dark trend runs through this year's Web 2.0 tech summit expressed his conclusion from the seventh annual Web 2.0 Summit:
"That the days when the Internet was a playground for startups with unlimited potential are disappearing. Instead, we are moving into an era dominated by a handful of new Internet titans more interested in fighting each other for power and influence than in delighting users with new innovations."
Chris says the environment for startups is a lot tougher now due to the dominance of the aforementioned web giants. He states, "the struggle of the big players changes the opportunity for startups. It will be harder for a big idea like Twitter or Zynga to break through and join the elite. Instead, more startups will focus on smaller ideas like apps, or designing new features in hope they will be bought by one of the big players."
Web 2.0 Conference co-host Tim O'Reilly apparently agrees. During the conference, he said, "We're seeing something very, very different than we saw seven years ago when it was all explosive new greenfield territory. We are seeing companies that are big — some of these companies are swelling in size. We're entering a period of conflict on the Web, of intense competition."
So we have contradicting views on the prospects for Web 2.0 start ups that are pursuing new markets or market niches. The Times article implies that there may be a bubble in the valuations for many of these early stage companies. But the Mercury's Mr. O'Brien thinks that they face a stiff challenge breaking into the turf now held by the big three of Google, Apple and Facebook. Which one is correct and what's your opinion?
And on a separate subject, should we rename Silicon Valley as "Web Software Valley?" The term silicon is now clearly a misnomer as the only true dominant chip company is Intel (OK, maybe AMD which no longer has a fab).
Note that when I came to town (March 1970) this area was referred to as "Santa Clara Valley- the fruit orchard capital of the world." No kidding!