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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Web 2.0 – Building Features or Value?

Comments (8)

I didn’t go to Web 2.0 – I hate attending conferences (although I enjoy speaking at them) and try my hardest to avoid them.  I’ll go if the conference is relatively convenient to my travels and I’m speaking (like I did at WeMedia – I was already in NY for other stuff), but generally I enjoy hearing about what’s going on from a distance through blogs (it is Web 2.0 after all, right?), the web, and the people from companies I’m invested in that attend.  Then – I like to sit in front of my computer and actually play around with the stuff. 

The most profound thing I read this week was from Fred Wilson.  Read it slowly and carefully.  Jason Calacanis’ What now? post is also important – read the seventh paragraph twice (the one that starts “Mark Cuban …”; BTW – congrats Jason on your sale to AOL.)

The overwhelming attempt at pattern matching from 2001 (Bubble this, bubble that) completely misses the point.  There were a number of very successful companies founded between 1999 and 2001 that didn’t implode when the bubble popped, with entrepreneurs who kept their heads down, built real businesses, and then started to reap the gains in 2003 and 2004 when the markets became more receptive to younger tech companies, especially ones that had built business engines that generated real positive cash flow (e.g. long term economic value).

My favorite example of this that I was involved in was Service Magic – a company we funded in 1999.  The company found themselves in a market segment that raised over $300m of VC money and had several early IPOs that raised even more money.  The entrepreneurs – Mike Beaudoin and Rodney Rice – were extraordinarily focused on figuring out how to build value into their business, obsessed with solving the fundamental calculus of how to make money in their market segment, and then implementing and scaling up a business that did this.  By 2003 they were the unambiguous leader in their market, most of their competitors has evaporated, and they were generating cash at a ferocious rate (I remember having regular “holy smokes – what amazing numbers” moments.)  In 2004, they were acquired by IAC, who very respectfully valued what they had accomplished.

So much of what I’m seeing in Web 2.0 are – at best – what Fred calls “second derivatives.”  VCs are once again throwing money at this stuff just to “get in the game” – I saw a quote somewhere from a VC that said something to the effect of “if the company can’t identify its four likely acquirers, I’m not interested in it.”  This is craziness and – like all irrational things – will end badly for many VCs (and unfortunately for the entrepreneurs they back.) 

This isn’t an attempt to throw cold water on the current enthusiasm around web-based applications.  I think it’s extremely exciting, a ton of fun to be involved in, and hugely interesting to play with.  However, there is a big difference between building companies that have value vs. simply creating incremental features.  As you look at your business, think about where the fundamental value is.  If the answer is “I’m just hoping to get bought by GAMEY” (one of Google / AOL / Microsoft / eBay / Yahoo), think harder.

  • http://www.kernelmustard.com Steve Dispensa

    I think your analysis is right on. My company has seen increased interest from the venture community lately as a result of the Web 2.0 hype. Fundamentally, though, you just have to build a business that will be successful on its own merits. Trying to over-generalize into a trend that you can then blindly follow is not, by itself, a formula for success.

    One of my board members is fond of saying that “you have to build a business like you plan on running forever, or else you’ll probably get to.” I don’t think he invented the saying, but he applied it to his own company – Verio, which he founded in his garage – and did pretty well for himself.

  • Jan Leeman

    Just a comment on ServiceMagic. I co-founded and co-ran ImproveNet, a ServiceMagic competitor, from 1995 through the IPO in 2000. I greatly admire the success of Service Magic. I know from first-hand experience that the referral business is hard and time consuming to understand. Of course the payoff in figuring it all out is that Service Magic has built a durable, profitable, and important business.

  • http://blog.tomevslin.com/2005/10/bubble_20_intro.html Fractals of Change

    Bubble 2.0 – Introduction

    Bubble 2.0 may be upon us. Lots of smart people who were at the Web 2.0 Conference in San Francisco last week think so and they ought to know. See Fred Wilson here, Brad Feld here, and Om Malik here. New companies are forming like mushrooms in the wood…

  • http://blog.tomevslin.com/2005/10/bubble_20_intro.html Fractals of Change

    Bubble 2.0 – Introduction

    Bubble 2.0 may be upon us. Lots of smart people who were at the Web 2.0 Conference in San Francisco last week think so and they ought to know. See Fred Wilson here, Brad Feld here, and Om Malik here. New companies are forming like mushrooms in the wood…

  • http://hitchhiker.blogsome.com/2005/10/11/this-time-its-different/ Hitchhiker's Gu

    This Time Its Different . . .

    This time, its different . . . but the outcome will be the same for entrepreneurs . . .
    After 6 months of seeing my friends go off and start their own companies I wondered like everyone else if this time, its really different or is it just a bubble ….

  • http://hitchhiker.blogsome.com/2005/10/11/this-time-its-different/ Hitchhiker’s Guide to 650

    This Time Its Different . . .

    This time, its different . . . but the outcome will be the same for entrepreneurs . . .
    After 6 months of seeing my friends go off and start their own companies I wondered like everyone else if this time, its really different or is it just a bubble ….

  • http://blog.tomevslin.com/2005/10/bubble_20_intro.html Fractals of Change

    Bubble 2.0 – Introduction

    Bubble 2.0 may be upon us. Lots of smart people who were at the Web 2.0 Conference in San Francisco last week think so and they ought to know. See Fred Wilson here, Brad Feld here, and Om Malik here. New companies are forming like mushrooms in the wood…

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