Web 2.0: Why It Could Be Different This Time

By Shanda Bahles, EDV General Partner

The hype surrounding Web 2.0 is picking up steam. Fast-talking pundits and starry-eyed entrepreneurs are hailing the arrival of Web 2.0 as The Next Big Thing in technology. Fame and riches are just around the corner for those who figure out how to capitalize on it.

It does sound a lot like 1999.

But this time could be different. Hype will always accompany new markets, but the emergence of Web 2.0, and the circumstances surrounding its development, suggest that many of the promises will come to fruition. It's really a matter of when, not if. Here are five reasons why:

1. Broadband penetration

During the Internet bubble, a lot of good ideas died because they needed always-on high bandwidth connections to be really useful, at a time when most people were accessing the Internet via dial-up modem. Today, broadband penetration in the U.S. has surpassed 50% and is higher in other countries, enabling much greater adoption of bandwidth-dependent applications.

2. Development of the application stack

In the 1990s, we were trying to build the new roadways of the Internet at the same time we were building the piers and bridges. The infrastructure had to be built before the applications could be. Today, many of the crucial building blocks of content-rich applications are in place, allowing companies to focus on building truly interesting user services.

3. Increased user sophistication

The human element is always the slowest link in the chain. In the 1990s, we all had far less experience using the web. There was no Google, people were much less inclined to shop online, and corporate use of the web was experimental.

That's certainly changed. We're almost 10 years older, more of us live online, and many young people who were pre-computer in the 1990s have grown up and are now completely immersed in the online culture. That's created a fertile breeding ground for applications offering users a combination of content, community and commerce, the holy trinity of Web 2.0.

In our portfolio, we're particularly enthused about the potential for Jigsaw Data, an online business contact marketplace, and a couple of as yet unannounced investments (yes, stealth is very in as well) to take advantage of the Web 2.0 environment.

4. The invasion of the brands

In the 1990s, major brand advertisers had not embraced the Internet as a core marketing tool. If they were dabbling in Internet advertising at all, they were doing so as a test.

Now, Internet advertising is by far the fastest growing segment of the advertising industry, and virtually all the major brands are on board. Where overall ad spending is forecast to increase in the single digits in 2006, analysts are predicting a 20-30% increase in online ad spending.

5. Fear is temporary; greed is forever

But it hasn't been that long yet. Many of the current generation of entrepreneurs and investors lived through the bubble and while they are keen to take advantage of this new wave of opportunity, they also remember the excesses of the last boom. Public market investors are also maintaining their discipline and keeping their heads -- we haven't yet seen a flood of immature Web 2.0 start-ups pushing to sell shares to an eager public.

Similarly, entrepreneurs have taken lessons from the crash. We're seeing far fewer pie-in-the-sky Internet proposals from entrepreneurs without track records. Everyone seems to understand that the bar has been raised.

At El Dorado Ventures, we're excited about the prospects for Web 2.0. We're evaluating companies every week that bring us ideas to take advantage of the changes outlined above to provide users with a dynamic, rich media experience combining content, community and commerce -- in short, web 2.0 companies. We'll have a few announcements in the first part of 2006 letting you know where we're starting to place our bets.

What We're Looking For

• Semiconductors and systems (RF, multimedia, sensors, wireless)
• Communications
  (Wireless, VOIP, IPTV)
• Software and services
  (SaaS, open source, user-generated content)
• Internet applications and services (consumer applications, infrastructure, technology-neglected industries)

El Dorado Ventures Leads $40 Million Investment in Nanosys
Nanosys, a privately held Palo Alto-based company focused on developing nanotechnology-enabled products, raised approximately $40 million in a private equity financing in November led by El Dorado Ventures. Other new investors included Masters Capital, Medtronic, Inc., and Wasatch Advisors. The round also included strong participation by Nanosys' existing investors. Nanosys plans to use the funding for the ongoing development and manufacturing scale-up of products that incorporate its proprietary, inorganic nanostructures with integrated functionality for multiple industries.

Ray Schuder Joins EDV as Senior Associate
Ray Schuder has joined El Dorado Ventures as a Senior Associate. Prior to joining EDV, Ray was a Vice President with Pequot Ventures. Previously, Ray was a Director with Silicon Valley BancVentures and a product manager with NVIDIA. He has also worked at Loudcloud and Hewlett-Packard. Ray holds five U.S. patents with one patent pending. He graduated with highest honors from UC Santa Barbara with a BS in Mechanical Engineering and earned two Masters degrees from the Stanford University Graduate School of Engineering (Mechanical Engineering and Manufacturing Systems Engineering) and an MBA from the Stanford University Graduate School of Business.

El Dorado Ventures (EDV) is a leading entrepreneur-focused, early-stage venture capital firm with a 19-year history of success. Entrepreneurs see EDV as a trusted investment partner who shares their vision and helps them succeed by providing ongoing strategic guidance and access to a wealth of industry contacts. With $750 million in capital under management, the firm invests across the information technology spectrum, from semiconductors and systems to communications, software and services, targeting both consumers and the enterprise. El Dorado's early-stage investments have included Cyras Systems, EarthLink, Efficient Networks, Novellus and NuSpeed Internet Systems. Numerous EDV portfolio companies have gone public or been acquired by major technology companies including Ciena, Cisco Systems, nVidia, Siemens, Texas Instruments and Yahoo/Inktomi.

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