Web 2.0 Bubble? A Debate


Is there a web 2.0 bubble? If you read this blog regularly, you know what I think. Now the Wall Street Journal has two VCs debating the issue.Todd Dagres, the naysayer, makes the following argument:

Web 2.0 is a bubble for 3 reasons: 1) There is far too much money chasing Web 2.0 deals. Too much money means too many companies getting funded at higher valuations. 2) There are virtually no barriers to entry in Web 2.0 and therefore the ability to develop a unique solution and sustain a competitive advantage is virtually nil. Therefore, it's difficult for Web 2.0 companies to build long term value. 3) There is very little liquidity in the market for Web 2.0 companies. The Dow was recently at a high and still no liquidity. Without liquidity, Web 2.0 companies must rely on acquisitions to achieve liquidity and this will put a lid on the potential exit options and ultimate valuations of these companies. In short, they will be playing a musical chairs game in which there are far too many players and too few chairs.

David Hornik never responds to the problems of low barriers to entry and no sustainable competitive advantage. And when he lists Digg as an example of innovation, I just have to laugh. Digg is a great demonstration of the idea that popularity does not equal quality.

Then Dagres makes this great point:

By the way, the combined cash flow of Spot Runner, LinkedIn and Facebook is less than that of one Costco store.

The problem with web 2.0 is that low barriers to entry means a lower quality of entrepreneurs overall. Add to that a target market that is smaller than most people realize and what you get is a handful of techies getting millions of dollars to build websites that only a handful of techies want to use – all so they can play the Google acquisition lottery.

  • It definitely seems to be turning into a “dime a dozen” scenario in which this niche is more and more crowded every day. As this continues, it’s going to be harder for Web 2.0 companies to escape tags such as, “Oh, it’s another one of those.”

    Great topic. Thanks for posting it.


  • The web2.0 phenomenon is a bubble, but it’s a healthy one. As you said: it has “low barriers to entry”. A healthy bubble will have plenty of bootstrapped businesses vying for internet marketshare trying to become the next big thing. The negativity associated with the term “internet bubble” is because the last one was overfunded.