Not with a bang but a whimper

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How many web 2.0 companies can you name? I can probably think of about 10. The ones that pop to the top of my mind include flickr, digg and youtube.

According to there are over 1,200 companies that call themselves ‘web 2.0’. The true number is probably a lot higher than that. There are 54 bookmarking services alone. I recognise one name in that list ( Digg isn’t on there. The others don’t ring a bell.

When we estimate the chances of something happening we’re not rational beings. We don’t coldly analyse the probabilities. Instead, we’re biased towards vivid, easily imaginable outcomes.  If asked whether murder or diabetes is a more common way to die, we say murder. We’re more worried about our flight than the drive to the airport. We’re wrong on both counts.

We also tend to exaggerate the similarity of things in the same groups. If two items share one characteristic then we assume they share others too. I’m an ex-software engineer. Bill Gates is an ex-software engineer. Therefore I can expect to duplicate his successes. That definitely doesn’t follow.

We’re seeing a similar thing with Web 2.0 sites. When we think ‘Web 2.0’, we think of Digg, the vivid and easily generated example. We don’t think of the other 53 social bookmarking sites that will fizzle out and die. We see superficial similarities between Digg and our site, and draw incorrect conclusions (hey! We both use Ajax! We both use the word ‘social’ to describe ourselves!  Therefore my site will be a success too!).

We can see the same cognitive biases when we think about startup failures. How many internet startups in the 1990s failed? Like me, you’ll probably come up with a figure based on the easily imaginable, high profile failures of the era (think webvan and In reality, the five year survival rate of companies receiving VC money in the late 1990s was close to 50%. That’s actually pretty good.

Several things happened in the last bust. A few companies lost spectacular sums of money. More companies lost a few million dollars of VC money. Some companies just lost the savings of friends and family. Others – a significant proportion – struggled on, changed and somehow survived. It’s the dramatic implosions of the first group that we remember and that colour our perception of the bust.

So what will happen this time round? Will the web 2.0 boom lead to a bust? The eye watering and eye catching investments of the last boom are missing, so there won’t be a spectacular bust. On the other hand, almost all of those 54 social bookmarking sites will quietly fizzle out or morph into other, hopefully more sustainable, businesses.

Web 2.0 will die not with a bang but a whimper.