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The Web 2.0 economy hangs in limbo

Earnings are healthy, and new digital-ad networks are debuting seemingly by the day, but no one can deny that these economic times demand caution.

This post was updated at 10:11 AM on Friday with comment from's Myles Weissleder.

SAN FRANCISCO--Wednesday night was a wild one.

As part of this week's Web 2.0 Expo, the ubiquitous digital-media blog Mashable enlisted a brand-new social-media site called to sponsor its all-night bash at a cavernous nightclub called Mighty. The open bar was flowing, the dance floor was seeing plenty of attention (a rarity at a tech industry party), and young women left and right were posing for photos with snappily-dressed Mashable overlord Pete Cashmore and numerous trucker hats.

Amid the drunken revelry and pulsing electronic music, one prominent tech-industry veteran at the party was asked exactly what is. "I'll tell you what is. It's venture money getting set on fire," the jaded observer replied. Surveying the buoyant crowd, he added, "This feels a little like 1999."

The atmosphere was radically different during the day at Web 2.0 Expo, as talk of economic recession was unavoidable. TechWeb's Jennifer Pahlka, one of the expo's organizers, told attendees in a welcome address on Tuesday that she thanked them all for coming to the conference "in this time of budgets that are being scrutinized, and some bad headlines." Veteran entrepreneur Marc Andreessen was grilled in a keynote interview on his use of the term "nuclear winter" as a justification for his start-up Ning's new round of venture funding.

With investment banks going down and food prices going up, the gloomy economic forecasts have cast a dark cloud over cloud computing (and everything else getting talked about at Web 2.0). Yet tech companies like Apple, Google, and Amazon are posting healthy earnings, and despite talk of an advertising downturn, new digital-ad networks seem to be debuting by the day.

The economic attitude of the Web 2.0 Expo hangs in an awkward limbo: The tech industry relies on innovation, but no one can deny that these economic times demand caution. What's a geek to do?

Conference czar Tim O'Reilly preached a keep-on-trucking sermon in his keynote address Wednesday, admitting, "We've been kind of whipsawed lately." He also railed upon the statistics detailed in reports like one by Dow Jones VentureSource last week, which are finding that venture dollars for start-up companies are growing scarcer. Urging conference attendees to focus on innovation, he said, "If you're following the headlines you might as well stay home, because you'll be very terminally confused," he said. "You have to think about what really matters."

It's O'Reilly's job to be bullish, though it seemed a little hyperbolic when he said the times are just too crucial to be cautious. "We're at a turning point akin to literacy or the formation of cities," O'Reilly said. "This is a huge change in the way the world works."

"We're at a turning point akin to literacy or the formation of cities. This is a huge change in the way the world works."
--Web 2.0 Expo organizer Tim O'Reilly

Changing the world, sure. But it still helps to be realistic. "The recession will touch the Internet," Slide founder Max Levchin, a Web 2.0 Expo keynote speaker, told CNET in an interview. "There's no question about it."

Like Andreessen's Ning, Slide just went through a massive venture funding round, and Levchin insisted the best thing a company can do is just be smart. Slide, he told, is looking at other revenue streams besides advertising. "Trying to shift away from advertising partially and going direct to consumers is a really good idea, because it cuts out one more party from the equation," he explained. "During a recession time you don't have to worry so much about building an enormous scale, you just have to build up a loyal base of fans that pay you a little bit." He might want to tell that to Twitter, whose execs banter about scaling and growth nonstop but haven't made significant revenue, because their investors can still keep them in business for the time being.

"Nobody knows what's going to happen in the recession. It might take five years," Levchin said. "It has proven to be clever of us to raise money just before the signs of the recession started. It really is a war chest, both for acquisition and for survival."

Someone with Levchin's star power can fill that war chest, no problem. If you didn't co-found PayPal, you might be out of luck. "The VCs are definitely holding their cards a bit closer to their chests," a young dot-com entrepreneur observed at the conference, but then added that his own social-media company hadn't seen trouble pulling in investors.

Because tech bellwethers and indicators for the broader economy just aren't agreeing, no one is sure how things will play out. But if there's any precautionary measure that a concerned start-up can put in place, it's to be prepared and spend your money wisely. Some companies filling the after-hours agendas at Web 2.0 Expo opted to skip the open bars, holding "meet-ups" with cash bars instead of free-for-all affairs like and Mashable. exec Myles Weissleder said the choice to throw a party was a "strategic decision," and a better way to spread buzz about his new company than sponsoring a booth at the Web 2.0 Expo show floor. "Nobody knew about last week, and I think everybody's talking about it this week," Weissleder said in a phone interview Friday., he added, is backed by private investors rather than institutional venture capital, with seed funding "in the millions."

The divide between "strategic decision" and goofy attention-grabber remains: "I walked out of's offices with a lightsaber and 10 shirts," conference attendee Dan Tentler told me while socializing after hours on Thursday. "I walked out with 10 pounds of gear."

True, the racy adult site Zivity depends on subscriptions, not ad revenue. But did they really need to spend that venture cash on lightsabers?