Web Boom 2.0

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Technology, San Francisco Bay Area old-timers tell me, blooms in four-year cycles. When I first moved here in 2002 to edit a biz-tech magazine, that was still open to debate. The dotcom bubble had burst, and 9/11 had squelched whatever was left of the old irrational exuberance. You didn't have to look at a balance sheet to see that the gold rush had up and gone. Silicon Valley was lined with tattered for lease signs, traffic flowed smoothly on Highway 101, and you could eat virtually anywhere without a reservation. Although lots of people were out of work, the ex-dotcommies I met were calmly unemployed, acting more like kids waiting for the next pickup softball game than anxious, self-doubting adults.

That should have been the tip-off. Now, four years later, most of my neighbors are employed—this time, at thriving Web 2.0 start-ups. Rush-hour traffic is getting worse, and you need a dinner reservation everywhere but the In-N-Out Burger (and there the lines are pretty long). The Bay Area is a relentlessly optimistic place, but even in this climate, it feels like springtime for business once more. And that naturally prompts the technorati out here to ask, Are we entering another bubble?

The way I see it, the answer is a resounding "no, but..." The Web is taking off again, but not in the same way. Here are five things that make this boom different from the last:

1. PAIN. Most of us probably won't get hurt this time. Then again, most of us won't get rich either. The dotcom run-up was a public bubble, funded by Wall Street, and this is a private one, financed by venture capital. Today's venture-capital investments, especially in Web 2.0 companies, tend to be nanopotatoes compared with their mega dotcom-era investments. That's partly what made the dotcom bubble so wrenching. Through initial public offerings, it fleeced a credulous public, whose money propped up companies that should never have been in business. Remember when day trading, not baseball, was the great American pastime? I doubt most of you can name three IPOs from the past five years. That's because the most common business model now is "build to flip"—start a small company and quickly sell it to the highest bidder. Ideally, the buyer is Google, Microsoft, Yahoo! or AOL, the sugar daddies of Web 2.0.

2. PROFIT. Start-ups want to be profitable, fast. Too many first-generation dotcoms thought they were Amazon's Jeff Bezos (Time's 1999 Person of the Year), who, in the early days, famously used to deflect questions about profitability. (It took eight years after the website was launched to turn a profit.) But he had a real business plan, unlike too many ipo-fueled dotcom-era companies, which too often had neither users nor a path to profitability. Nowadays Web 2.0 companies want to be profitable—or at least show that they have huge numbers of users—ASAP. Why? Because otherwise none of the sugar daddies will buy them.

3. BILL GATES. Who's he? This time it's mostly about Google. Some pundits go even further and assert that the whole Web 2.0 phenomenon is entirely dependent on Google. Dave Winer, who helped popularize blogging, podcasting and RSS, argues (on his blog) that most successful Web 2.0 start-ups are little more than "after markets" for Google, meaning that without Google, there would be less opportunity to sell their content. These new companies thrive, he writes, by "acting as sales reps for Google ads."

4. FOOD. This time there's no such thing as a free lunch. "I'll know it's a bubble when I can eat for free," says my pal Om Malik. Malik's a blogger and Business 2.0 columnist who has been covering Web 2.0 since its inception. Back then, he said, he could go three months without buying dinner—San Francisco was one big movable feast, with a buffet of dotcom parties every night. Now he gets just two or three invites a week.

5. BURN RATE. Web 2.0 companies don't live large; they live small. Under the old model, start-ups took a ton of IPO money, then quickly burned through it by hiring too many people and supplying them with Foosball tables. Web 2.0 start-ups are monastic by comparison—and the smartest of them get you, the user, to do all the work. Malik's commercial venture, a tech blog called GigaOm, has only four paid employees and no office. Malik works out of his one-bedroom apartment. When he needs to see his customers, he meets them at the nearest Starbucks.

Last time, everyone knew we were living in a bubble, but few got out before it was too late. This time, writes Winer, it will be easy to tell when to head for the exits: "Google stock will crash. That's how we'll know." Which, according to the four-year rule, should happen any day now.