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| Beyond YouTube: VCs Dogpile into Web 2.0 |
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| November 20, 2006 | Red Herring |
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By Sunshine Mugrabi
Is too much money chasing too few deals these days? Recent statistics show that venture investment is rebounding to levels that come within spitting distance of the boom years, especially in the hot consumer Internet space.
In the first three quarters of 2006, $455 million was raised for Web 2.0 companies—more than twice the amount that had been raised in the first three quarters of 2005, according to Dow Jones VentureOne and Ernst & Young, which released the figures earlier this month.
Much of the investment went to the space known as consumer Internet, where the next YouTubes and MySpaces could dwell. Of the $1.63 billion invested in technology by VCs in the United States during the first three quarters of 2006, 28 percent went to companies in this field. Yet, many VCs dismiss the idea that this is a sign of a new bubble.
"As long as I’ve been in this business, too much money has been chasing too few deals,” says Shanda Bahles, general partner at El Dorado Ventures of Menlo Park, California. In her view, the “lemming effect”—in which VCs all rush toward the same hot space—is inevitable.
The very thing that’s contributing to the current boomlet is also its Achilles heel. What with open source, outsourcing, and other cost-cutting opportunities, it’s getting cheaper and easier to launch a Web 2.0 company.
Chip Meakam, general partner of Kodiak Venture Partners of Waltham, Massachusetts, says that in an environment like this one, it’s not easy to spot the breakout winners. “You have to... make sure you’re investing and not gambling,” he says. Well put, but is there a clear difference? |
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