I’ve recently become convinced that the Web 2.0 bubble, long thought nonexistent, is now upon us. However, it wasn’t the recent rash of implausibly extravagant fundings or the wonderfully humorous “Top Ten Lies of Web 2.0” piece that turned me; rather, it was some old-fashioned thinking about how information flows through markets.
Recently, the Wall Street Journal ran a much-blogged ode to Michael Arrington, founder of the Techcrunch blog. The piece was filled with the requisite kingmaker fluff (“Like a latter-day Henry Blodget”), but what really got me thinking was the following passage:
Start-up iVentster Inc.’s gaming site, XuQa.com, got a positive review in September on TechCrunch. Afterward, two Japanese investors showed up at iVentster’s San Francisco office, saying they had learned about the company on TechCrunch. “We were definitely surprised,” says iVentster co-founder Ali Moiz. “If somebody travels that far and comes to see you because they saw you on a blog, it makes you think about how many people read that blog.”
In a nutshell, venture capitalists saw an Arrington recommendation, and acted upon it. In the client-starved VC market, this isn’t so surprising or shocking, is it? Perhaps these were just junior VC’s trying to drum up some leads – something that is a requisite even in an industry as vaunted and elite as venture capital.
Web 2.0 is unique. Because of low barriers to entry, more market entrants are producing more ideas. How much funding does it take to create a Web 2.0 company? Joshua Schachter spun up del.icio.us in his spare time. The founders of Meebo financed the company on their credit cards.
However, venture capitalists have long relied on barriers to entry to produce a feeder network – one that would screen and lithimus test ideas. For a company to get an audience with a VC, the founders had to have a track record, and possibly some angel funding – they had to carry some validation. To get this validation required knowing people, making deals, securing funds to develop technology – y’know, business stuff. However, in Web 2.0, the “business stuff” isn’t a barrier to entry – skill is the only barrier. College students can create immensely popular websites from their dorm room. A small regional project can become an huge sensation without a bloated staff. There are many more examples like this.
If the feeder isn’t relevant anymore, how do the sellers of finance begin to make decisions about who to fund? As it turns out, they’re using the same networks we are – blogs. If you look at a random venture capital blog, you’ll (generally) see the same blogs in the blogroll. VC’s love to read and link to the A-list, and therein lies the problem.
In the real world, businesses rely on third party information to make important decisions. Reuters, for example, is a company that derives 85% of its revenue from selling information to corporations. Many, many firms sell specialized intelligence on market sectors (investment firms, research firms, etc). There is an enormous industry built around the selling of trustworthy information. This industry doesn’t exist for Web 2.0.
How much can we really expect from these bloggers? How many Web 2.o sites can one person master? Look at how many sites Techcrunch or Mashable review – how in-depth can the understanding of the reviewed sites possibly be? These people are only human – and to expect complete understanding of all things Web 2.0 is too much to ask from even these proclaimed gurus. They are going to get stuff wrong, and quite likely, they are going to get stuff wrong frequently.
The dynamics of the A-list now serve the filtering purpose formerly relegated to the financial barriers to entry companies used to face. To get that audience with a VC, one needs the stamp of approval from the A-list. But can we trust the A-list? Do we really expect Michael Arrington to understand the mindset of an 18 year old college student? These A-listers are probably giving it their best shot, but they fall short of the mark in providing the type of information that financial decisions should be based upon.
The Web 2.0 bubble exists because information access is controlled by a few. The wisdom of crowds has promoted the A-list to the top – but as Terrell Russell states “Our wisdom of crowds sometimes presents itself as the yelling of the loudest.” Arrington and Malik aren’t yelling – they don’t need to – but they are unfortunately getting to speak for market segments outside their expertise. That this information is relied upon by investors has fueled the bubble that will only continue to get worse.
So what is the solution? Do we need a Reuters for Web 2.0? O’Reilly has recently stepped up to provide such a service, selling the Web 2.0 report for $375. This is a small step, and it is likely we’ll see more like it in the future. The true challenge for venture firms will be broadening their scope of information seeking. As long as Web 2.0 is geographically dispersed, and college students in a dorm room are sitting on billion dollar ideas, it will be very useful for firms to spend a significant amount of effort collecting better data. Using the A-list as a filter is being lazy – and the bubbly investments you get from it will be your punishment.
Fred Stutzman is a doctoral student, researcher and teaching fellow at the University of North Carolina at Chapel Hill's School of Information and Library Science. He studies how people use social media.
This post leaves me with a lot to think about and mull over–always a good sign. I saw someone trying to make a timeline of social networking infrastructure the other day (danah boyd, zephoria.org) and it just reminded me of how much noise there is when we’re talking about web 2.0.
Which trickles down to my other point, the one I keep yelling across the internet to anyone who will listen: most of the people writing about facebook (I use facebook because it is a more segregated demographic than even say, MySpace) do not understand the users. Social networking being about the users, this is a fairly dangerous set-up. I’m not saying everyone is way-off –they’re just not spot-on.
Before I invested in hypothetical social networking IPO xyz I’d want to talk to the users, because there is more to the dynamic than meets the eye–shifty undercurrents of sorts. I know this because I’m a teenager and I spend hour after hour day after day with people who use these products constantly. It’s even different if you ask my sister, three years younger, and her friends. And I’ll say it again: it’s worth asking our opinion.
Of course, it would be silly to peg financial decisions upon a narrow cross-section of a very fickle group of emotionally unstable young people. Perhaps moreso than just listening to Arrington. But it’s all about perspective.
Maybe a decentralized reuters -edited- by legitimate people could work nicely? Less digg and more slashdot. Except, professional. How cliche–I’ve no clues.
The Web 2.0 bubble exists because information access is controlled by a few.
Close but not enough. What really makes the bubble a bubble is the Echo Chamber effect. A listers read A listers, link to A listers and will gladly repeat completely unconfirmed rumors as half fact after reading them on some other A lister’s blog. All you have to do is take a look at techmeme. Or ponder the thinking process behind Arrington’s thought process in this crunch notes post. It’s that self-reinforcing cycle that causes a bubble, as you can see with the facebook valuation rumor cycle (‘reputable sources say…’ meaning a blog quoting some other blog) or the rolling stone fluff piece.
Sam – I couldn’t agree more. I’d like to think that I understand the users of SNS, but the vastness and nuance of even this subset of Web 2.0 escapes me and all of the analysts looking at the area. If we can’t master our subset, how can we expect these Web 2.0 oracles to know all? It simply can’t happen.
And this gets to Eran’s point – but the reality is that people only have so much time and inclination to find good information. The people reading my blog might dig really deep to cut through the BS, but most people out there want their information in convenient, easily digestable chunks. And that’s what the Web 2.0 bloggers give – little microchunks of information that keep people interested and give them something to talk about.
Of course, when we start talking with bad information or a viewpoint colored by ineptness on behalf of the blogger, that bad information cycle begins and spirals. This happens all the time, and I’d wager that most of the time bloggers aren’t there to point out the problems and correct the misrepresentations like they did with Facebook feeds.
Thanks for the thoughtful comments…good stuff.
I don’t think we’re yet in the “bubble” phase, because in a bubble phase you find almost no one believing that you’re in a bubble phase. In a true bubble, if you say “things seem a bit overpriced” you are laughed right off the stage. “Yeah, kid, you’re just jealous cuz you didn’t make 500% over the past 2 years like we did” (what I was told in late 1990 by Sun Microsystems and EMC investors on SiliconInvestor.com).
I think we’re actually in the best possible situation: where the market is “climbing a wall of worry.”
The day when I no longer see “worried” experts (like you, and many others), when even most of them have thrown in the towel and admitted that the market just ain’t gonna quit, when I again see people who never made a stock market investment prior to 6 months ago being proclaimed “geniuses” … the day when application of standard stock market capitalization calculations says that “this company’s sales will have to grow by 30% for the next infinity years, for today’s market price to be a good deal…” (as was the case for SUNW, EMC, and others around January 2000)…
We’re not in a 2000-style bubble. We’re in the broader, slower moving wave that applies the new technology across the entire global economy in a slow-rising wave.
That’s my take on it, anyway!
oops: of course, I really meant “in late 1999 by Sun Microsystems and EMC investors on SiliconInvestor.com” in my previous comment…
Hi Fred,
I’m curious… do you think there are any A-list bloggers who actually do understand social networks/media?
BTW, we should meet up sometime… I’m sure we’d have much to discuss.
oops, that last comment was from me.
Robert – definitely. I think there are lots of A-list bloggers who strongly understand their sectors. However, it is the perception that bloggers are oracles in a sense – that because they understand a sector means they understand all sectors – that is where the trouble lies. Techcrunch critiques photo sharing sites, productivity sites, music trading sites, social networks, and much more. Can we expect Techcrunch to really be in the midset of the users who actually heavily use these services? No – and that is the problem. However, this is really a case of caveat lector – if the readers and financiers are not smart enough to expand their scope of inquiry outside of the A-list and to the specialists, it is really their fault.