Web 2.0 Manages to Sober Up

martini.jpegA couple of weeks ago, Edelman marketing strategist Steve Rubel declared the Web 2.0 world to be skunk drunk on its own Kool Aid. But I’ve seen signs of sobriety recently. Kleiner Perkins has said no more Web 2.0 startups. Teqlo shut down abruptly once investors were no longer willing to fund their continued search for a workable strategy. HiveLive is finding success not by giving away services, but by selling them.
Are we heading for a crushing hangover? Maybe not. Having learned from the mistakes of the dot-com years, and having found a newly efficient climate for creating web businesses, it could be that we’re not as drunk as we seem this time around — endless conferences and multibillion-dollar acquisitions notwithstanding.

What’s the reason for the new sobriety? Maybe the credit crunch has spooked people. Even though Web 2.0 startups require very little capital, and thus aren’t directly affected by gyrations in the interbank lending market, the space could be hit hard by contractions in online advertising. Yesterday’s slide in tech stock prices made it clear that tech can’t wall itself off from broad economic conditions.
A “get real” moment for social web tools
But fortunately, this doesn’t look like a bubble popping so much as a get-real moment for social web tools. This version of the web revolution doesn’t economically support a bubble, DEMO Conference Executive Producer Chris Shipley told me. “Companies don’t need a ton of money to succeed. Smart VCs and smart investors are looking to back highly efficient business models,” she said. She predicted we’ll see a social and investor backlash against the idea that you can invest in Web 2.0. “It’s a communications dynamic, a social dynamic. But investors should be funding businesses.”
In a blog post about what’s next for Web 2.0, Shipley makes a case that the next stage won’t be focused on reflective logos, silly names, and Ajax for Ajax’s sake:

The past year for Web 2.0 has been a marvelous ride. But the better news is that the next few years are going to be even better. Strip away the trivial and you’ll see that the concepts of the Social Web are fundamentally changing the way people work and play together. Pull back the face of Web 2.0 and you’ll see a new paradigm for computing: a highly distributed information architecture that distributes not just data, but also the power and authority to leverage it. It’s a highly distributed information architecture that requires substantial innovation in infrastructure, technology, security, and services to support it.

We’re not that wasted
Here’s a bit of evidence that we’re nowhere near as smashed as we were in 1999. Union Square Ventures VC Fred Wilson is running a series of blog posts looking at venture fund performance statistics since 1990, and has created a chart showing how many venture funds existed reported returns at different points in time. According to Cambridge Associates, the number of venture funds reporting returns today is comparable to the number that existed reporting returns in 1995… not 1999, when there was a deluge of new funds.
Chart showing number of venture funds, 1990 to 2006
The Cambridge numbers even show a decrease in the number of funds in 2006 compared to 2005. [Note that’s for number of funds reporting returns not number of funds raised; VC Data Junky comments that the number of funds 2006 is actually up slightly from 2005 (230 funds vs 228 respectively).]
Granted, there are still plenty of crazy things happening: media companies acquiring web properties at blood vessel-bursting prices, established tech companies making PR announcements made mainly of plans rather than actual products, and conference after conference where startups can show off their ideas.
Still, it seems that some people in the Web 2.0 community are starting to say, “No more drinks, I’ve had enough.” And maybe this time we won’t wake up with a bad hangover.