Bubble or normal failure scenario?

Michael Arrington has an interesting post today "Bubble, bubble, bubble". Michael makes some excellent points; 1)This isn't really a bubble, 2)Failure proves the system is working properly by letting off steam, 3) VCs understand that most companies fail so they are making lots of first round investments but very few follow on investments...only the good ones.

I wrote a post last month "Web Boom 2.0 - Is it different this time?" In that post I argued that it is different this time...but the end result will be the same. All booms eventually go bust.

The big difference between the Dot Com Bubble and Web 2.0 is who gets hurt when the bubble bursts. During the Dot Com Bubble many of the companies went IPO and small investors bought the stock. That crash hurt millions of small investors.

Web 2.0 companies are not public. It is the professional VCs who get hurt when these companies fail. The VCs expect failures and moderate their investments accordingly. They will make lots of small gambles (first round) and only "double down" on the good ones in a second round investment. The VCs have always known that one or two winners pays for the other 5 or 6 losers and leaves lots of profit.

The other difference is that Web 2.0 companies are MUCH cheaper to finance and build. So the failures are much smaller. Again, the VCs invest rational amounts, and pull the plug when they see it isn't going to work.

Painful as it is for some, small failures are a good sign that the market is working as it should. Back in the bubble days failures went public or raised more VC money. Today they quietly go out of business. That is the way the capitalist system should work.

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Comments

[Dick Deluxe]

The common thread to me will be the investment into derivative or faulty ideas by investors who don't either do their homework or truly understand the continuing implications of Moore's law!

While the 2.0 tech stuff is fun (and not really new....) I'm stunned by how many unimaginative copy cat style companies are "emerging". Especially I expect a lot of the mashup type sites to go nowhere-adding a map to a for rent sign is not a business model in my view.