Raja Jasti’s Blog - Renaissance Thinking

Andrew chen has a blog post on how most web2.0 companies may not be able to make it. But most were never going to make it.

Even during the heydays of web2.0 hysteria, I saw a problem that all advertising based web2.0 companies have to overcome if they were to survive and succeed. It is what I call Web2.0 chasm.

I could only see two types of viable web2.0 companies, each falling at the two extremes of the spectrum with a huge bottomless chasm in the middle. At one end you have youtubes, myspaces, facebooks and linkedins of the world. They have reached the critical mass required to be a viable company with hundreds of employees and weather external uncertainilites. They have enough ad inventory to be of interest to the largest online advertisers and get reasonable eCPMs. I am not necessarily talking about display ads only, but generally monetization of userbase through advertising budgets and don’t need to depend on google adsense or other ad networks.

At the other end you have web2.0 companies that cater to highly targeted niche communities that monetize well and employ only a few people (around 5 people or less in preferably less expensive geographies) and are profitable almost from the start. Some of the successful blogs would come under this category and along with other lifestyle businesses. Some of them may depend upon adsense for monetizing at least some of their inventory.

But majority of web2.0 companies (95% or more) would fall under the huge bottmoless chasm that separates the two ends of the spectrum. They do not have the critical mass to be profitable on advertising and are not small enough to get to profitability using adsense and other ad networks. Their best hope was to flip themselves to the biggies such as google, yahooe etc or to the other web2.0 companies that already crossed the chasm. This model looked ok when the hysteria was in full swing and VCs were falling over themselves to fund them. But now that the flipping option is no longer viable, the reality is dawning on them that they were walking on thin air and there is nothing that can hold them up. It is like the cartoons where the cahracter realizes that there is nothing under their feet and they do a free fall.

So what can these companies do? They first need to remember that profits equal revenues minus costs. Then they need to get to one of the two extremes of the spectrum that bookends the chasm as quickly as possible. If they are big enough they can try to cross the chasm by merging with others in the same situation. Or reorginize your business so that it can be run on a very small team preferrably located in inexpensive geographies and figure out a non-advertising business model. They better hurry!