Web 2.0 will not reach its potential until those associated with it stop the irrational thinking.

The problems with bringing the promise of Web 2.0 to the larger market has NOTHING to do with edgy web site design, anticonsumptioning, VCs, inverted triangles of community involvement, or any of the other ridiculous reasons that I’ve recently read.

It’s ironic, but the irrational thought of Web 2.0′s thought-leaders is the very thing holding back Web 2.0.

Web 2.0 holds great promise. It’s impacting many segments, forcing companies and entire industries to adapt, change, or disappear. But don’t let the promise of Web 2.0 distort your entire perspective of reality. The problem with bringing Web 2.0 to market is, sorry geeks and others reaching for a complex explanation, a business 1.0 problem.

You can dress business 1.0 words up with Web 2.0 lexicon (“flocked”,”ninged”), but the issues and challenges remain unchanged, remain completely business 1.0, and are fundamental problems that arise during commercialization of any product within any market segment.

Flocked? Flock was actually Segway’d, and Segway was actually, etc. The idea that a product wasn’t valued by the end user isn’t a new one. A start-up needs to validate end-user needs during the commercializing stage or else it will fail. There is nothing revolutionary about this thought but that doesn’t change it’s veracity. The same goes for usability (“Ninged”).

This is the commecialization stage: It’s the (validating of) value, stupid.

A start-up needs to validate, test, challenge, and explore many issues during the commercialization phase, and Web 2.0′s thought-leader’s irrational thoughts are steering Web 2.0 ventures from this simple truth. (Why? Not the subject of this post… but partly because the thought leaders are geeks, and partly because the thought leaders are consultants (gasp!)).

The irrational thought that is most ridiculously wrong? The notion that building Web 2.0 businesses without a potential revenue stream is a long-term sustainable strategy. Lots of dicussion on this lately, so maybe the tide is changing. Web 2.0 businesses may be many things, but they’re still businesses and it’s probably unhealthy for the long-term viability of your venture to forget this. I don’t know where this thought started, how it grew, and why it persists. The one reason that pops into my mind is that “Web 2.0 is about being evil free” and “business = evil”.

If the nuns have come to terms with the necessity of money and traditional business practices, I hope Web 2.0 can as well.

[note: getting a conversation to the top of tech.memeorandum on "Disrupting Commercialization" will not make the task any easier, change what's required, or cure the nuns dependance on money. It will, however, allow the irrational thinking to continue.]

[note 2: JS, thank you for wonderful nun annecdote]

Can anyone direct me to an innovation that failed as a product but was successfully repositioned as a feature and licensed into an existing product?

Anything would be great, and something within software would be a homerun. Hit me up with an email, or post the info in the comments.

(is there a name for a technology that is licensed into, and becomes a nice feature of, an existing product?)

101 Vista 03,
originally uploaded by fraserkelton.

Headed north on the 101. What a beautiful drive. Downtown Santa Barbara was a great little place and Solvang was a blast. More pics up on my flickr page. I took some video while driving as well (maybe not the safest) – I’ll post those later on.

If you’re in LA and you have a free day, I highly recommend the trip north.

Stowe Boyd argued this week that increasingly tech entrepreneurs do not need the traditional VC value-add (cash) and therefore the entrepreneur needs a new source for the other values a VC provides – advice, contacts, etc. Stowe proposed a fresh thought that stimulated a lot of debate: advisory capital. Fred Wilson responded saying that “capitalism works for a reason” and without cash on the line it won’t be possible to “completely replace the role of the VC”.

I have issue with both Stowe and Fred’s arguement – not for what they debate, but for what they fail to discuss.

Stowe argues that VCs can’t/won’t support start-ups with incubator-like services. Fred claims that VCs are vital for reasons other than nontraditional VC value-adds. (Fred, you don’t explicitly discuss your thoughts on a VC adding non-traditional VC value to a firm, which is the underlying idea of Stowe’s arguement. Where’s your mind on that?).

Why can’t an innovative VC firm compete, and gain a competitive advantage by realizing this trend in tech start-ups and adjust their service offering to fill the gap?

An advisor is capable of adding value, in a select area of focus. Why can’t a VC build this value-add into their team? Many start-ups assemble multiple advisory boards – technology focused, strategy focused, etc. – and a well built VC firm, capable of filling many of the necessary needs, would add additional value due to the fact that the entrepreneur would only have to seek out one “advisor” to fill many needs.

It seems to me that a VC firm could add additional value, at a lower transaction cost (search/negotiate/…) than a traditional advisor could. (+ provide value that an advisor could not supply: having support structures to handle tedious office tasks, provide off-shoring support, etc.)

The question that will undoubtably be asked by my fine readers is: why would a VC bother to provide services like these?

Well, that’s a good question. And here’s a good answer.

The answer: because it will add a competitive advantage – allowing the VC to acquire equity, in increasingly more attractive start-ups, at increasingly cheaper rates.

David Hsu, from The Wharton School, published a paper in the Journal of Finance, in August 2004, titled “What Do Entrepreneurs Pay for Venture Capital Affiliation?”. It’s an academic article – here’s the summary:

“In the minds of entrepreneurs working to grow their fledgling technology companies, the intangibles brought to the table by their investors – experience and contacts – often are worth more than money itself… David found that offers from more reputable venture capitalists are three times more likely to be accepted by entrepreneurial companies and that, on average, these favored investors acquire start-up equity in the companies at a 10-14% discount.”

“Reputation” is defined as the intangibles brought to the table by the investor, and are mainly limited, with respect to the study, to experience and contacts. Fair enough. But wouldn’t a VC strengthen their “reputation”, in the eyes of an entrepreneur, by providing advisor-like/incubator-like services at a level beyond what a traditional advisor could provide? Wouldn’t a VC strengthen their “reputation” by providing services in addition to “nontraditional VC value-adds”?

And wouldn’t the stronger reputation become a competitive advantage – allowing the VC to increase the likelyhood of being accepted by the entrepreneurial firm and lowering the cost of equity? I think so.

[Bonus # 1: Many thanks to Daniel for the help with this post - the comment on Fred's post and the friendly email reminding me about the discussion. Again, reaffirming my thoughts.]

[Bonus # 2: Cem came close to touching on my issue in his post and humourously must have posted before reading Fred's response]

[Bonus # 3: I'm off to Santa Barbara tomorrow for a nice break from this crazy business trip. I wrote this post while listening to Ryan Adams' Cold Roses album and warming up for tomorrow by drinking some chardonnay from the Santa Barbara region - if my arguement gets confusing at the end, it's due to the quality of the wine]

People are in such a rush to respond to his/her great thoughts that they get the name incorrect. If that’s a rule my vote is for Kent Newsome. See here and here.

Sorry again Kent. Keep putting out great content and everyone will know your name shortly.