Web 2.0 Leading to Dot Com Bust 2.0 - The UpStream

Web 2.0 Leading to Dot Com Bust 2.0

posted Sunday Jul 29, 2012 by Scott Ertz

Web 2.0 Leading to Dot Com Bust 2.0

Zynga's incredibly low earnings have started the conversation among analysts that we started nearly 18 months ago: is Web 2.0 about to collapse? Based on stock prices for many of the large, public companies, it is starting to look like Web 2.0 is about to become dot com bust 2.0.

Zynga has seen a stock from from a high of $15 to a low of just under $5. Facebook seems to have given up on its stock, watching it fall faster than a skydiver. Netflix has been affected, with a stock drop over the past few months, despite work to prevent customer losses. Groupon's failure has been legendary. Even Digg failed to fetch a decent price. The only giant in the industry succeeding is LinkedIn, and they are doing it well.

So, how does this affect us in the short run and also the long run? Hit the break for some answers.

In the short term, the people primarily affected are companies pitching social-based projects to investors. Nick Zaharias, an independent investment consultant, said,

For future deals that are pitched as social deals, they're not going to pay up. The multiples are going to be far, far lower.

That seems reasonable. As investors are losing their shirts in social deals, minus LinkedIn, they will become less inclined to throw money at companies blindly. This is a part of the investment business, but something that was not applied to Dot Com companies in the late 90s and again was not applied to services like Twitter this time around.

If this trend continues, my guess is that within the next 18 months most social companies will not have the cash to keep operating, at least not at the ridiculous scale they are today. Many of these companies, led by Facebook, spend billion of dollars of investor money to purchase smaller companies in order to bring their developers into the fold. Those types of practices will certainly have to stop as cash becomes more and more scarce. Smaller companies, instead of being picked up for 9 and 10 digits, will close their doors.

Only time will tell, but my guess is that investors will prevent themselves from being destroyed by the Internet again. What are your thoughts? Is social ending or just hitting growing pains? Continue the conversation in the comments.

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