Does Web 2.0 bubble have a silver lining?

Not all of today's Web start-ups will survive. But the relatively low cost of getting one going means Web services are being developed fast.

Hundreds of technology executives and investors will congregate this week to take the quickening pulse of Internet entrepreneurship.

At the third annual Web 2.0 Conference in San Francisco, dozens of industry players will gather to break down topics like Internet infrastructure, Net neutrality, mashups, data protection and the future of video. Among those on hand at the city's Palace Hotel will be CEO Jeff Bezos; Facebook CEO Mark Zuckerberg; Lotus Notes creator Ray Ozzie; and Marissa Mayer, vice president of search products and user experience at Google.

For industry players, many of whom lived through the dot-com crash, the surging wave of new Web companies and the corresponding media buzz can mean only one thing: an investment bubble where too much money is chasing too few good ideas.

But for any similarities to the late '90s Internet craze, today's Web 2.0 buildup is a kinder, gentler bubble, say entrepreneurs and investors. Yes, the flourishing Web start-up scene will create some train wrecks. But because people can start companies for relatively small sums compared to the tens of millions doled out during the dot-com heyday, the crashes won't hurt as many.

Along the way, some Web companies will endure and make online software (also called software as a service), more compelling and viable for consumers and businesses, say entrepreneurs and investors, an admittedly optimistic bunch.

"A lot of companies will fail, without a doubt," said Joe Kraus, who co-founded Web portal Excite in the mid-1990s and JotSpot, a wiki company that Google acquired last week. "But users really benefit because the innovation space is being explored a lot more quickly."

Acquisitions by Google and other Web heavyweights like Yahoo and Microsoft are helping to fuel entrepreneurial creativity.

The purchase price of privately held JotSpot was not disclosed, but Google last month bought 20-month-old video-sharing site YouTube for an eye-popping $1.65 billion in stock.

"A lot of companies will fail, without a doubt. But users really benefit because the innovation space is being explored a lot more quickly."
--Joe Kraus, co-founder of Excite and JotSpot

Big-dollar acquisitions may remind people of the public stock market entries of many profitless dot-coms in the 1990s. But people say new online business models are more mature, and give today's Web start-ups a better shot at longevity.

Automated Web advertising is more sophisticated and monthly subscriptions to hosted applications are proving themselves out, particularly to business customers at companies like

"Business model innovation is the biggest difference between Internet phase one and Internet phase two," said Brad Silverberg, a former Microsoft executive and partner at venture capital firm Ignition Partners. "It used to be everything was about eyeballs but there was no way to monetize it. Today there is and that's why this is more durable."

Silverberg argued that new software companies will not be able to enter the packaged software market, which will be dominated by incumbents like Microsoft and Adobe. Instead, the race among crafty entrepreneurs is to deliver a hosted service that strikes a chord with consumers or business customers.

Two geeks in a garage
Activity in Web-related start-ups is on the rise. The number of "Web 2.0" investments from venture companies rose to more than 130 in the third quarter of this year, compared to 107 in the same period last year, according to the National Venture Capital Association and PricewaterhouseCoopers.

A number of technical advances, such as the Web development technique AJAX and wide-scale adoption of broadband Internet connections, are allowing software engineers to build more compelling online applications.

New businesses today have access to free open-source software, relatively cheap hardware and powerful development tools. With more Web sites providing programmatic access to outsiders, developers can also build mashup applications that combine information from multiple Web sites.

Add it all up and the money and effort to launch a Web company has gone down substantially, compared to only a few years ago--a shift with implications for both entrepreneurs and their financial backers.

Featured Video