This time, its different . . . but the outcome will be the same for entrepreneurs . . .

After 6 months of seeing my friends go off and start their own companies I wondered like everyone else if this time, its really different or is it just a bubble . . . knowing that its almost impossible to predict the future especially with regards to market adoption, I wont sit on my ass and pretend to know better than people who are more qualified than I am . . . (Fred Wilson, Brad Feld, Tom, Alarm Clock, BubbleGeneration, Genuine VC, David Gibbons, Blodget?!)

I know that the weakness of “web 2.0” companies are the very “superiority” of their business models. In exchange for long-term scalabilities, these companies sacrificed short-term applicability. Put it another way, while “virtualness” is great once critical mass is achieved, the lack of value proposition until scale will cause many of these companies to fail . . . the value proposition of buying a book online is quite transparent . . . but the value proposition of writing a book, publishing a book, and reading a book .. all online is much harder to articulate and market to joe schmo.

On the other hand, to balance the increase in market risk, the execution risk for these ventures are significantly lower. As small as my sample size is, the people that are leaving to pursue their entrepreneurial are experienced builder of Internet applications. . . Back in 1998 no one really knew how to build web apps. . . we cobbled together software development paradigms and adjusted it as we went hoping to come up with the right recipe. 7 years later, companies like eBay, Yahoo, MSFT, who have went through countless iterations of the web product development cycle have produced a generation of developers and product managers that have no problem articulating a vision and execute to produce a user friendly product.

What this means is a potential gold mine for VC’s. Instead of funding execution and market risk, many VC’s have either invested minimal amount at the concept stage or waited until beta is produced to invest.

In the end, the ratio of successful companies to failed companies will be the same as another other boom . . .be it railroads, minicomputers, pc’s, the internet, web 1.0, 2.0 . . . (Hsu’s Law . . .not! ) But this time, VC’s would have put in less money and taken less risk to get the same amount of return. Unfortunately, entrepreneurs would have taken the same risk (quit their job, lived off savings) . . . to get the same success probability. Unless they bootstrapped the company (and thus acted as the financier themselves), someone else would have captured the shift in the value creation in web 2.0 world.