Are new web start-ups more Me 2.0 than Web 2.0, and is this deterring investors?

25 Sep 2008

The surge of copycat firms signals a change in the tech industry’s lifecycle.

Watching the nervous entrepreneurs standing in front of the panel on Dragon’s Den can be a nerve-wracking experience – it is not always obvious which ones may succeed and which are destined for the start-up graveyard.

The web space is even harder to predict. The low-entry barrier typical of the internet-based business model means a good idea need not die from lack of start-up capital, but this in turn leads to hundreds of companies pitching almost identical ideas.

An investor will find it difficult to pick a winner to back when faced with 20 YouTube-a-likes that ostensibly do the exact same thing, reckons Dermot Berkery, venture capitalist with Delta Partners.

“The new web space is different: with cheap existing technology and contacts via LinkedIn, a product can be put together and a good user base built in a short space of time and thus attract investment. As a result of this, they are now ten-a-penny.

“This is the wrong way round from the normal venture capital (VC) model – clearly people should be getting money before they need it,

so you have all these companies with venture capitalists investing almost on the back of prior success.”

Berkery thinks that in certain categories in the web space, the copycats don’t stand a chance: “We’ve looked at many social networks and, to be honest, by the time they came across our radar that game was finished because the established ones were there. It’s pretty hard to see someone creating a new social network that attracts vast amounts of users.”

This does not necessarily spell doom and gloom in the web space, although it does point to a lack of exciting, innovative ideas that were the hallmark of Web 2.0 – the social, connected web which gave us the likes of MySpace, Bebo, YouTube and Skype, among others.

So what is happening that we are now seeing a glut of copycats and no shiny new Googles or Facebooks?

The web space, like any other industry, is organic and has a distinct ecosystem and lifecycle associated with it, explains Niall Larkin, CEO of Relevant M, a start-up in Dublin’s Digital Hub which develops online social tools.

“Innovation comes in waves, and a successful wave is sublimated into the mainstream. The Web 2.0 space was very innovative in the beginning; full of pioneers and mavericks.

“There is now a lot of Me 2.0 because Web 2.0 peaked when a lot of people realised they could do it as well. People who were great cheerleaders for the early wave of innovators are now riding the corporate wave: to me this is a sign that this phase of the web has come full circle,” says Larkin.

Ray Walsh, senior development advisor with Enterprise Ireland, is of the opinion that there are certainly many more start-ups in the web space, but  also that there are plenty of fresh, exciting ones worth investing in.

“Compared to 2006/2007, we’re definitely getting more companies in the web space applying for funding. Enterprise Ireland invested in 15 internet-related companies last year, and the types of firms that were approved were a good mixture.

These firms included social networking site BlastBeat, online payment firm 3V, music television firm MuzuTV, and digital music firm CatchFM.

While there is nothing wrong with start-ups having similar services, they must come to market with a unique angle or offering: “There has to be a key differentiation and an ability to build a solid user base, and then they need to work out how to monetise that,” says Walsh.

So how can you copy something like Facebook and have a key differentiate? From Walsh’s point of view, a niche play can be very successful as long as it is salient to market needs, like a social networking site that measures your carbon footprint.

“It is actually good to see many others in the same space. It is confirmation that you are playing in the right market,” says Walsh.

However, as with all industries, there are exceptions to the rule. Irish company PollDaddy creates online polls and surveys. It took on the leader

in this space, SurveyMonkey, directly and has been able to take a sizeable chunk of the market.

Someone who has been on Dragon’s Den can speak from experience when it comes to success in a niche market. Although could be viewed as another social networking or video site, it has a key differentiation: networking for foodies and blow-by-blow cooking demonstrations with the ability for users to add their own Nigella Lawson moments if they wish.

Niall Harbison, co-founder and successful chef in his own right, came away from Dragon’s Den with a lot more investor interest due to media exposure, and the site’s niche play is serving up success.

Because there are so many web start-ups out there, Harbison thinks the VC community is definitely benefiting: “A crazy amount of people are chasing the big prize, but there are brilliant ideas out there which are hugely effective. I think wise investors will see there is a huge amount of bargains to be had, if they catch them in time.”

By Marie Boran