The Shakeout: Starting to Happen

This LA Times article reflects something I’m starting to hear and see directly — funders and boards walking away from startups when they don’t see a near-term, reasonable exit:

In recent months, some start-up technology companies have died or gone into comas after running out of money, a possible early sign that the resurgence in venture investment may be coming to an end.

This has been going on for a little while in local: Backfence, InsiderPages, JudysBook, Edgeio, among others. It marks the return to an era of “business models” (from a focus on eyeballs/traffic) and is troubling for local, which takes more time and patience to succeed. To use a pretentious wine analogy, if the broader Internet is a Cabernet, then local is Pinot Noir (sorry about that).

I argued previously that this site would go from a catalog of Web 2.0 companies to the “Web 2.0 graveyard” as most of these startups would fail to gain adoption and run out of money. Accordingly, this year, stretching into 2009, will be a critical one for new startups and relatively young Internet companies.

13 Responses to “The Shakeout: Starting to Happen”

  1. Chas Says:

    It’s true that the “Build it and they will come” theory was proven wrong, then proven right with web 2.0, and will be proven wrong again. At some point, a formula will come from analysis of successful ventures and the winners will have done good and the losers faults exposed.

    In the meantime, there is a lot of guessworkology.

  2. Greg Sterling Says:

    It’s really tough to “make a living” as a destination unless you have massive traffic. Most of these Web 2.0 sites, notwithstanding the rise of the widget and Facebook, have aspirations of being destinations. Exchanges and uber ad networks may help some of these sites, but you have to cross a certain traffic threshold before you can make money.

  3. troy Says:

    The Internet has made the barriers to entry very low unlike somebody wanting to start a new car company. All you need is a cute URL, attend a few conferences, create a business model that only needs to be different, try to generate some buzz on blogs like this, and hope somebody will buy you out. And you can do all this in your Mom’s basement.

  4. Greg Sterling Says:

    Maybe, if you’re really lucky. But the M&A frenzy that took out some of these businesses over the last couple years is going too cool for the foreseeable future.

  5. Local SEO Guide Says:

    Greg.

    Perhaps blogging really is “unsustainable” when you can’t even come up with the right wine analogy. A little research would have shown that local is more like a Sagrantino di Montefalco – “the biggest and most complex”, “Goes on and on” & “Best after 2009”.

  6. frontporchforum Says:

    Greg… why not small local online businesses?

    Many, if not most, industries start from a collection of mom and pop businesses. E.g., every town had a general store for more than a century. Then Sam Walton came along with his one store, then two, then… global domination. Same story with Ray Kroc’s hamburgers and whoever started Jiffy Lube. And while huge international chain retailers, fast food restaurants and oil changers command a lot of the economy, the small mom and pops taken in sum are still a huge part of country.

    So why with the internet do people expect new online industries to go from zero to global domination? Google did it. And some others. I’m no historian, but maybe Google is like Ford Motor Co… solving a huge problem well and growing huge quickly. But most of our economy just isn’t like this… why expect it with the online world?

    That said, there are loads of small, local online successes emerging that are locally owned and operated and focused on their home geography. I guess the big dot.com gamblers and people who write about them don’t find this very exciting… that’s understandable. It’s more exciting to watch someone burn through $10M in VC money chasing some grand scheme on the national/global stage and then flame out, rather than tracking a 100 small local efforts, some of which will fail, some of which will succeed in modest ways, and a few that will hit a home run.

    While traditional media has always been focused on the WalMart stories over small local ones, the internet was supposed to deliver a new decentralized view… shining lights on thousands of stories instead of just intensifying the spotlight on the same old stuff. Still waiting on that. -Michael Wood-Lewis

  7. Dave Schappell Says:

    Greg — have you compiled any information on the size of the startups that have succeeded/failed/continued in the startup space. We’re concerned about the trend as well, and are trying to counter the ill-fate by keeping the core team (and burn) as small/low as possible, to afford us the longest possible runway to build a user base that loves our product. We’re nearing launch, and are both excited, and terrified πŸ™‚

    Would love to know if you’ve seen any differences between <10 people orgs, 10-25, 25-100, etc.

    Thanks,

    Dave

  8. Start Ups: Is Your SEO Plan Ready On Day One? Says:

    […] Greg Sterling’s post today on the LA Times article about a shakeout for Internet start-ups should be a 3am wake up call for start-up CEOs. And one of their first calls should be to a SEO […]

  9. John Clifford Says:

    Well some startups like smugmug.com built a long term financially successful business by charging a fee for a premium service compared to all the free photosharing websites like Flickr. It you build a startup to deliver a unique value that people are willing to pay for you it limits the risk of running out of money with an advertising supported or free to premium upgrade business model. In local advertising the yellow pages don’t give much for free and a local search marketing or local advertising directory the delivers results could grow to profitability without large VC investments. What do you think of the 50 million invested in ReachLocal ?

  10. Greg Sterling Says:

    I’m all in favor of trying to get consumers to pay where that can be accomplished — though it’s very tough. I think the subscription model must be reexamined in a difficult environment. However everyone as been conditioned to expect everything to be ad supported. So there’s a real bind for business models online. B2B is probably most fertile in terms of paid services (user pays) as an alternative to advertising, although they ultimately often amount to the same thing.

    Re ReachLocal — that’s lots of money. The company needs to hit a “home run.” It’s doing well with ad sales from what I understand and the “recession” may actually wind up helping them.

  11. Greg Sterling Says:

    Dave:

    There’s objective staffing needs to get the job done and then how leanly you can run the org. I don’t have any data but the leaner the better I’d say.

  12. Dave Schappell Says:

    Thanks for the responses/thoughts — we’re focused on keeping the core team at <10 for as long as possible — not sure that even qualifies as small, officially, but it’s just hard to accomplish even the beginnings of scalable software without a few great devs, a UI person, a front-end web dev, and a few of us non-techs πŸ™‚ But, we continue to outsource anything non-core, to keep the core burn as low as possible — we’re just looking forward to launching, to see if we strike a chord, even if just in our first market, to prove/improve the model and invest in expansion.

    Thanks for the great blog — always enjoy reading,

    Dave

  13. misanthropy today Says:

    Hi Greg-

    I came over from Local SEO Guide’s Blog.

    I wrote a rather silly “rules for startups” post that was somewhat popular in the blogosphere here:

    http://www.misanthropytoday.com/2008/03/10/rules-for-startups/

    And I wanted to add a little bit:

    @Troy– starting an internet company is not that simple. Its annoying when people with your attitude come to the tech world with $100k and the idea that this stuff is all real easy and lucrative. I’ve actually seen people with this “gold rush” mentality get pretty far, but only by sheer luck and riding the backs of giants. It’s a shame, but the industry promotes the idea that anyone can do it. Oh well.

    To the topic:

    I think we will see a lot of startups dying. I don’t think a site necessarily needs a business model at the outset. Look at flickr, their subscription service started to take off later and is only for Pro members but the product is so good anyone who REALLY uses it will pay $10 a year no problem.

    In other words, as long as your product is popular enough, some slick MBAs will be able to squeeze some dollars out of it– somehow.

    Except for:
    – Napster
    – Friendster

    Pretty much anything with the -ster suffix.

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