Web 2.0's Startup Fever

Software toolkits and cheap hardware have led to the comeback of the garage startup. But this time the boom is more rational.

If you're Web-literate, you can organize more and more of your life around Web-based tools and services given away by a host of young startups. You can keep your social calendar at Eventful or Upcoming, organize your to-do items at Gootodo, store a gigabyte's worth of documents at Box.net, read the news (or write your own) at Newsvine, find hours of video entertainment at YouTube or JumpCut, create and share Web bookmarks at Diigo, create podcasts and audio memos at Odeo, publish blogs at Wordpress or Xanga, and share your photos at Flickr or Buzznet -- or Riya or Bubbleshare or Zooomr. All for free. And that's just the beginning of the list.

This explosion of new Web sites -- a phenomenon often dubbed "Web 2.0" -- is great for all kinds of Internet users. But how long can this new crop of startups survive without charging for their products?

The answer, in some cases, may be not long. Simply put, many of these outfits, much like their dot-com predecessors in the late 1990s, don't have business models. The most common revenue source in the Web 2.0 world is contextual advertising -- but, as some analysts point out, the nickels and dimes earned when visitors click on ads provided by the likes of Google's AdWords barely bring in enough to cover the costs of Web server hardware. Consequently, some industry watchers believe that a shakeout is likely within the next 12 to 24 months.

The winnowing of Web 2.0 won't be as bloody as the dot-com crash of 2000-2001, though, simply because these companies never accepted much venture funding and have far fewer employees. What's more, the underlying technologies won't disappear -- more likely, failing companies will be bought up by slightly larger competitors in a wave of consolidation.

Nevertheless, there are simply too many new Web-based software services -- 300 and counting, according to some analysts -- chasing too few users for all of them to prosper, say observers such as Rafat Ali, editor and publisher of digital-media news site PaidContent.org. "Will 90 percent of these companies be around two years from now? Probably not," he says. "Everybody knows that, because we've been through that once before. But at least there are germs of innovation, which the bigger companies can take in."

The oversupply of Web 2.0 startups is partly due to the much lower overhead needed to sustain a modern Web business. Innovations such as Ruby on Rails, a software toolkit for building database-backed websites using AJAX (Asynchronous Javascript and XML) interfaces that resemble sophisticated desktop applications, make it easy for a small team of programmers to build advanced Web-based services, while the costs of Web server hardware and Internet bandwidth continue to drop.

"Way too many startups are created each day, because the barrier has been lowered to a bare minimum," says Jeff Clavier, managing partner at SoftTech Venture Consulting, a Palo Alto, CA, firm that works with early-stage startups. "Anybody who has the money to rent a server for $100-200 per month can actually write a Web 2.0 application, put it up, start sharing, and make a name for themselves. So there is not a dot-com type bubble, but there is a 'geek founding' bubble."