Web 2.0's Startup Fever

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These new companies have a few ways to subsist, typically advertising, charging extra for "premium" services, and collecting affiliate fees for driving shoppers to sites like Amazon. But ask a Web 2.0 CEO about his company's business model, and he's as likely as not to say "contextual advertising." The advertising model, usually through Google's AdWords program, seems to be the most common gambit. It's the planned or existing main revenue source for dozens of Web 2.0 startups, such as new photo-sharing site Riya, which plans to display ads related to the subjects in its users' photographs.

But consultant Clavier and others say that early-stage companies should see AdWords as a minor, transitional revenue source. "There's nothing wrong with being ad-supported, but you can't assume that AdWords will get you all the way to building a big company," says Clavier.

Companies can survive the Web 2.0 boom, Ali says, by doing one of two things. They can attract the interest of larger companies, who buy a technology and bring in its developers rather than developing their own version. Flickr, Delicious, WebJay, Konfabulator, and Upcoming, for instance, have all been acquired by Yahoo. Or else startups must acquire so many users that they gain an insurmountable lead over competitors, as YouTube seems likely to do in the video downloading market. Or they can do both, of course, like MySpace, which has more than 50 million users and was purchased in July 2005 by Rupert Murdoch's News Corp.

But others argue that even the less successful Web 2.0 companies will be able to survive on their current revenue sources -- mainly because they have simple needs. "The vast majority of these companies do not need revenue -- because they don't have any expenses," says Seth Godin, a Web marketing strategist and author of the widely read Permission Marketing. "The people are doing it for love or in their spare time."

Three months ago Godin launched his own Web 2.0 company, Squidoo, a kind of "citizen's Web directory," where experts in areas from video blogging to vegetarianism publish "lenses," or guides to the best related content on the Web. Squidoo earns money through a combination of Google AdWords ads and Amazon affiliate fees: it advertises links to items on Amazon or eBay and is paid a commission whenever a click on one of the links leads to a purchase.

The company splits these affiliate commissions, and most of the subject experts ("lensmasters") donate their take directly to charity, Godin says. "Most Squidoo lensmasters aren't in it for the money."

Not surprisingly, Godin is a dissenting voice in the chorus of experts predicting a mini-crash. But he does acknowledge that some Web 2.0 companies will fall by the wayside. "I don't think we're going to see the shakeout we saw at the end of the other bubble, because there are different rules now. But I believe that some of these companies have delusions of grandeur in terms of how big and how profitable they are going to get," he says. "You can't have 30 profitable companies in a business where only two can be moneymakers."