It started at the end of 2006, with a lively debate in the WSJ between two VCs on whether there is a Web 2.0 investment bubble. Todd Dagres of Spark Capital argues that Web 2.0 is a venture bubble because too much capital is driving up valuations in spite of low entry barriers, and because there are few prospects for exits. Fellow blogger David Hornik of August Capital makes the counterpoint that while there may be many fundings, not that much capital is being deployed and the fall-out rate among Web 2.0 startups is no different than in other segments of technology.
Michael Arrington of TechCrunch has revived the deadpool of failed companies (very reminiscent of the first bubble's www.fuckedcompany.com), and Web 2.0 startup casualties are clearly mounting. But he also believes that this is natural churn, and that there is no bubble. Lower running costs mean that companies can stay alive for longer to seek out the right business models, without draining 10s of millions of dollars of VC. He sees this as a structural step-change in how technology companies are financed and evolve, which will lead to a net improvement in "liquidity" for this market: companies will be faster to succeed or fail, and they will do both with less capital.
Fred Wilson of Union Square Ventures analyses the capital requirement of Web startups today in comparison to their Web 1.0 predecessors, picking up one of my favourite themes -- capital efficiency. He acknowledges that initial capital requirements have come down permanently, and that this changes the equation for early-stage VCs. But long-term success still requires significant investment in sales & marketing and delivery, which means there is an ongoing role for professional investors at all stages of a company's life. Most of the capital a company needs is consumed in those later stages.
Finally, Tom Evslin in his blog, Fractals of Change, argues convincingly that all these Web 2.0 startups using the same guerilla marketing tactics have raised the noise level so high that traffic generation is once again difficult. Getting mentioned in blogs, listed in mashup directories, or setting up a stealth beta programme is now hard too and -- guess what -- requires more financial investment. Now that everyone knows the same tricks, the game has been raised again. Once more, the free lunch is elusive...
I'm holding out for the capital markets reception for Web 2.0 companies -- will there be acquirers or an IPO market for the select few? Whether there was/is an investment bubble will be determined by whether these exit markets materialise.