After Google's deal, dotcoms are bubbling hot. What you need to know about Web 2.0.
For budding internet entrepreneurs, the moral of Google's $1.65 billion purchase of video start-up YouTube is simple: Build a real, functioning company, then sell it to a bigger one. During the dotcom bubble of the late 1990s, garage innovators could peddle imaginary businesses in initial public offerings. If an idea seemed as if it might make money someday (remember Pets.com?) that was good enough. Today's upstarts are more fully formed and are often led by wealthy veterans of the first boom. They know Google's not the only shopper. Yahoo! has spent close to $100 million for start-ups Flickr and Jumpcut, among others. Facebook may be next, with Yahoo! said to be mulling a $1 billion offer. With investors on track to inject $500 million into new Net firms this year--twice last year's total, according to a Dow Jones VentureOne report--this may be the start of a golden hunting season.
There are more than 1,000 start-ups--referred to these days as Web 2.0 companies--using a new set of tools to quickly and cheaply create sites and services that would have taken years--and millions--to build in the '90s. Many are communities for sharing links, photos and videos. Others focus on music, travel or online software. One challenge is knowing when to sell. MySpace was sold last year to News Corp. for $580 million, a figure a MySpace founder who no longer had control of the company recently called "one of the largest merger-and-acquisition scandals in U.S. history." MySpace might be worth more than $3 billion today. YouTube gained first-mover advantage with its video-sharing service. But the latest crop of Web 2.0 outfits employs varying strategies to cut past the crowd.
DO SOMETHING UNIQUE
There are plenty of good travel sites, so any new entry needs to have a better idea. Farecast.com uses fearsome computer power to predict the direction of plane fares. That helps travelers figure out the optimum time to buy a ticket. It was founded by Oren Etzioni, who created the Web's first meta-search site (it scans multiple search engines) and first shopping-comparison tool. Farecast uses an algorithm to crunch 100 billion prices in its database, then evaluates 200 attributes that affect plane fares. From those trillions of combinations, it figures out whether you should buy a ticket now or wait for prices to drop.
Etzioni originally dubbed the site Hamlet after its To Buy or Not to Buy motto. Net squatters wanted $100,000 for the hamlet.com address, though, so the outfit instead bought the more logical farecast.com for small change. In the Web's early days, it was SOP to pay millions for addresses like business.com No more. "In the '90s, start-ups were drinking Kool-Aid," Etzioni says. "Now we're drinking coffee."
Will Farecast soon land in the lap of Expedia or Travelocity? Etzioni and CEO Hugh Crean insist that they are building an independent company that can earn profits on ads (for hotel rooms, for instance) and by taking a cut of tickets bought through links on the site. But Etzioni admits the chances Farecast will end up in the hands of a Web giant within five years or so are about 50-50. CNBC pundit Jim Cramer scoffs at start-ups like Farecast as sizzle without substance. "It's like, so what? I could do that company," he says. Among Farecast's formidable Web 2.0 competitors is Kayak.com another rapidly growing travel search site with an even more muscular fare-comparison tool.
AMASS AN AUDIENCE
Just down the street from Farecast's Seattle offices, Zillow.com has generated growing buzz since it debuted last February. It offers free, instant valuations of 67 million U.S. homes. The site says most of its "Zestimates" are within 10% of the eventual selling price. Of the site's 3 million-- plus monthly visitors, more than half are repeat customers, and 54% plan to buy or sell a home within two years.
Zillow's buyers and sellers, on the cusp of a major transaction, would be a gold mine for Yahoo! or Google, either of which could capitalize on the lucrative real estate ad space. Founder and CEO Rich Barton, who made a fortune creating Expedia, concedes that Zillow has had lots of conversations with the big Web players but says he's not selling.
He can afford not to. "The first millions in seed capital came from myself and the other founders," Barton says. "We're in a position to be really patient. Nobody's come and made us a hard offer because they know I'm not interested in selling and I don't need the money." He does takes his work home, though. With guidance from Zillow, he is selling his house; it's yours for $2.9 million.
Zillow has partnership agreements with Microsoft (for satellite imagery), Yahoo! (for links on the portal's real estate site) and Google (for ads). That could set the stage for a longer-term deal--or an acquisition--down the road. Meanwhile, to tame the chaos characteristic of early start-ups, Barton has set some limits. "We have foosball and air-hockey tables," he says, "but we don't have dogs running around."
COMMUNITY=CASH
At yelp, on the other hand, founder Jeremy Stoppelman's dog Darwin romps freely around the cubicleless San Francisco office. Like YouTube, Yelp.com was started by two former PayPal whizzes in their 20s. Last month 1.5 million people visited their fledgling site to share information about local businesses in 25 major cities. Volunteer reviewers, or Yelpers, read and write about restaurants, stores and services. Yelp's founders say they were inspired by their frustration in trying to find good doctor recommendations online. Their idea was to improve on existing tools like Citysearch, which Yelp's founders call the old dog.
In building its community of reviewers, Yelp is hoping for a MySpace-like allegiance to the site's content and personalities. There's also the $15 billion that companies spend annually on local Yellow Page ads nationally to motivate their efforts. "Most local businesses--whether veterinarians, massage parlors, spas or restaurants--aren't buying Google key-words," says Peter Fenton, a partner at Benchmark Capital, which this month sank $10 million into Yelp.
The site's ability to attract small advertisers is beginning to get the big guys' attention. Neighborhood info has become a major battleground for Google and Yahoo!, which draw like numbers of local searches every month. To capitalize on the primacy of that battle, Jordan Rohan, an Internet analyst with RBC Capital Markets, suggests Yelp sell itself now.
Yelp's founders aren't in a hurry. To build team spirit, they spent last Thursday with the staff--playing croquet, followed by a cable-car ride and a nocturnal pub crawl--happy to bide their time.
TAKE ON THE TITANS
Remember the last company to take on Google? It was a little video start-up called YouTube, which out-cooled Google Video, grabbing 46% of the online video market to Google's paltry 10%. That victory catapulted founders Chad Hurley and Steven Chen from chips to caviar in just over a year.
If 30Boxes.com a Web calendar site, can similarly beat out Google's calendar, a jackpot may await. Unlike Zillow, with its 125 employees, 30 Boxes is run by exactly three people. That's it. No support staff, no assistants, no offices. And no venture capital or outside investors.
Co-founder Julie Davidson says that unlike other calendar services, 30 Boxes is focused on younger users. "They have a Facebook account, a MySpace account, a Flickr account," she says, "and they want to incorporate their social media within a calendar." Davidson sees Facebook as her site's primary competitor because they are both after the same youthful audience.
Building a user base and ad revenues from calendars may prove difficult, since Microsoft, Yahoo!, Apple and various other start-ups have free calendar offerings that are improving. But 30 Boxes' founders know a lot about working from scratch. They created and sold photo destination Webshots twice--first to Excite@home (another dotcom casualty) for $82.5 million in stock in 1999 and then, after buying it back in 2002 for $2.4 million, they retooled it and resold it to CNET for $70 million in 2004. Will they try for the hat trick? "We could go into a larger organization and bring some really fresh ideas," says Davidson. "I'm not anti-acquisition."
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