Rapid experimentation, not irrational exuberance

BubbleI’ve read literally hundreds of articles and attended several panels during the past year all based around the question of whether we are in a Web 2.0 “bubble” or not. Is all the money being thrown at web businesses these days essentially a duplicate of the Web 1.0 bubble which so many us were swept up in?

My opinion has settled on “NO,” for a few reasons.

Money. There is money on the web this time. Google is making tons of it. Making money on the web is a tangible thing in 2.0, not based on theories generated by technophiles and marketers (Disclaimer: I am both). It’s not irrational to pursue a piece of that pie.

Failing Cheap. If you look at the amount of money spent on starting web businesses and the proportion of that money that is wasted in failure, it’s not out of line with what happens in the real world. The mistake people make is to think about it in terms of the number of failed businesses they see, not in terms of the money that’s failing. Web businesses have very low barriers to entry – that is, they take very little money to start capital-wise and the expertise to start them is easy to hire or even to obtain for free (ownership stake). This is in contrast to other types of physical businesses that require lots of seed money and niche expertise – manufacturing, retail, or even mom-and-pop restauranteuring. A failed web business, in most cases, probably burned through less than $300K, which compared to the Web 1.0 cost of failure (often $30 MM instead of $300K) is a true bargain.

Web 1.0 hangover. Most of the people who sit around worrying about if we are in another bubble, and talking/blogging about a potential doomsday, are people who were in the first one and have scars. While that experience no doubt has been positive in making them more rational businesspeople, it can also cause a risk aversion that can be very limiting. Startups are very risky by nature (see my second point about lots of failure), so a lot of folks who were the most traumatized find it hard to approach the situation with much optimism these days.

This period in the Internet’s history is a period of rapid, rational growth – where lots of bets will be placed and many will fail. But some will succeed too, and it’s by focusing on those success stories, and the sound business fundamentals behind them, that we can avoid the urge to panic. What do you think?

Photo Credit: dopiaza
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