I am not as familiar with west coast VCs and have not run into Peter Rip, a general partner at Crosslink Capital. In general, looking at his blog EarlyStageVC, Peter is quite well informed and intelligent – which is why I was highly surprised to see a post from him on March 21 2007 saying “Web 2.0 Over and Out”. My immediate reaction is “what are you smoking?”.

It is certainly true that the consumer web 2.0 space has engaged our sustained attention through a continuous stream of excitements for the last few years. As Peter Rip puts well in his blog:

We now know the fourth quarter of 2006 witnessed the mainstreaming of Web 2.0.  It began with the YouTube acquisition, followed by a rather incumbent-centered Web 2.0 conference, culminating with the coronation of user-generated media as Time’s Person of the Year.

However, as pointed out by Peter, “Many of us in the VC community have been quietly wondering about the state of Web 2.0 innovation. We aren’t seeing much. Startup activity remains strong, but the consumer web landscape seems to be populated with the same bodies with different skins.  Another video deal here; another social networking deal there, and social [feature] everywhere.

Ernst & Young and Dow Jones VentureOne released detailed VC investment numbers in web 2.0 recently:

$844m (£431m) was invested in Web 2.0 startups in 2006, compared to $406m (£206m) in 2005. The figures refer to worldwide investment, but $682.7m (£346m) of the total was invested in just 126 US deals. More facts and figures:

  • The US dominates the Web 2.0 space, with 126 of the 167 Web 2.0 deals involving US firms, 83% more than 2005.
  • 20 deals involved European firms in 2006, compared with four in 2005.
  • $100.5m (£51m) was invested in European Web 2.0 firms, 200% more than in 2005.
  • Seven of the deals involved French firms, with a total of $39.3m (£20m)invested in 2006.
  • Five of the deals involved UK companies, with a total of $23.4m (£11.9m) invested by VCs.
  • China had 21 Web 2.0 deals - the same number as 2005, with total investment dropping by 26%.
  • The most prolific investors in Web 2.0 worldwide were Benchmark Capital, Draper Fisher Jurvetson, Sequoia Capital, and Omidyar Network.

Given that hundreds of millions of dollars of VC money already invested into web 2.0 startups (yet a lot of them do not have a solid business model) and major successes such as YouTube and MySpace have already materialized, it not surprising that one would wonder whether web 2.0 is over and out, at least from a venture capitalist point of view.

However, it is still appalling to me that the conclusion of “web 2.0 over and out” can be drawn. In my humble opinion, Web 2.0 is still in the beginning. Though websites such as WikiPedia and Youtube have transformed the consumer web experience, the transformation of enterprise computing by web 2.0 is still just happening. Enterprise web 2.0 space is still widely open with many significant opportunities.

Speaking from an architecture point of view, web 2.0 offers individual consumers “architecture of participation” that empowers them to do more than “browsing”. From an enterprise perspective, web 2.0 offers “architecture of partition” that enables the architectural flexibility for applications for the first time in history. The technology stack of Web 2.0 brings enterprises three key building blocks ((Details are summarized at “Web 2.0 Re-examined: The Paradigm Shift, Technology Stack and Business Value”):

  • Application client container: this new category of client-side computing environment is to applications what browser is to documents.  Leveraging technologies such as Ajax, Flash, Java and possibly WPF/E, a new generation of user experience can be delivered to business applications in a web environment. Such user experiences traditionally were only possible when tightly coupled with a desktop operating system;
  • Internet Messaging Bus (IMB): IMB compensates the drawbacks of HTTP by enabling real time server push, publish/subscribe, and reliable messaging. Without changing the network infrastructure, IMB enables enterprises to deploy mission critical applications over the Internet that are only possible within the Intranet before.
  • Enterprise Mashup Server: This new category of middleware dramatically simplifies enterprise integration and enhances business agility while leveraging the web 1.0 middleware such as application servers and service oriented architecture.

Why am I appalled by the declaration that “Web 2.0 over and out”? Because “Enterprise Web 2.0” will transform how we do business and it is still in the beginning:

  1. Organizations are just waking up to social computing. Many are still trying to figure what “blogging” means to them;
  2. The majority of the business applications still run in the high friction Client/Server architecture – Web 2.0 technologies can solve this problem, but it is just  happening;
  3. Of theses applications that have moved to the web, most are based on the primitive web 1.0 “click, wait, refresh” HTML user interface. Business users that have been spoiled by web 2.0 rich experiences at home from consumer offerings are waking up to the poor treatment they have been getting from their online business applications.
  4. Software as a Service (SaaS) and On-demand computing are still just happening. Yes, SalesForce.com proved that SaaS can be very successful, but other companies have yet to make the transition.
  5. Further, delivering other kind of business functionality over the Internet beyond SaaS has high potential, but we are only seeing early examples such as the EC2 computing utility service from Amazon.com and online storage/backup services from a variety of smaller companies. There are a wide range of possibilities beyond offering software as a service – the world has yet to explore them.
  6. The enterprise web 2.0 technology stack (Application client container, Internet Messaging Bus, Enterprise Mashup Server) is still just emerging. There are quite a few vendor offerings and customer successes, but the broad market recognition and mainstream adoption are still ahead of us. The enterprise web 2.0 technology stack is important not because it has the “web 2.0” fashion, but because it solves real business problems with tangible, demonstrated ROI. These business problems are real problems that almost every enterprise faces on a daily basis and enterprises have been trying to solve for many years, still without satisfying answers historically (I can go on and on here with customer examples).

As founder of Nexaweb, I interact with enterprise customers on a regular basis. The Nexaweb experience can be served as a different angle to look at Enterprise Web 2.0. Nexaweb is an Enterprise Web 2.0 software company that provides offers an implementation of the web 2.0 technology stack: mashup server that enables cost-effective composition of SOA and legacy systems, messaging layer that offers high performance, reliable and real time communications over the Internet, and a universal client framework that delivers a rich user experience via Ajax, Java or desktop offline-accessible web application.  Nexaweb has been adopted by many global 2000 enterprises to address business challenges (such as SaaS, on demand computing, application modernization, etc), with each one of them has solid and measurable ROI.

I think Nexaweb has been doing well so far:

  • Nexaweb Platform has been deployed at a few thousand enterprises worldwide, including many household names such as EMC, Siemens, Sungard and Pepsi.
  • Nexaweb Platform has demonstrated as "being rock solid". It is powering some of the most mission critical applications today, ranging from trading, mutual fund, call center to complex system management, etc;
  • Nexaweb has done multi-million dollar transactions with customers;
  • Nexawb has achieved revenue growth by 35% quarter over quarter consecutively for many quarters;
However, from what I can see, what Nexaweb has achieved so far is tiny comparing with the opportunities in front of us. 

Enterprise web 2.0 requires serious technology. Building technology like Nexaweb has not been easy. It took us 4-5 years to get to where we are today. It is hard computer science. Peter Rip phrased this point really well in his original blog (quoted below):

“Now the hard work begins, again.  The next wave of innovation isn't going to be as easy.   The hard problems in the WWW are no longer usability or ease of everyday content creation.  These problems are solved. Digital cameras, SixApart, WordPress, and digital video cameras showed us how ease it could be.  Now the hard part is moving from Web-as-Digital-Printing-Press to true Web-as-Platform.  To make the Web a platform there has to a level of content and services interoperability that really doesn't exist today.”

Is Web 2.0 over and out? Or is it just in the beginning?

There are definitely people who share similar opinions as what Peter Rip suggested in his article. At a recent VC panel discussion in CA, moderator Tony Perkins predicted that there would be a Web 2.0 shakeout in the next 12 months, pointing to YouTube's $1.65 billion sale to Google last summer as a symptom of a potential sign of irrational exuberance about to break out. Some $844.4 million was invested in 167 Web 2.0 deals around the world last year, more than twice as much money and nearly twice as many deals as in 2005, according to Dow Jones VentureOne and Ernst & Young.

If spending is any measure of irrationality over an opportunity, he has a point. However, I think the amount of opportunities ahead of us have been shadowed by the seemingly “spending irrationality”. I am lucky to be involved with quite a few Web 2.0 companies beyond Nexaweb(such as VisibleMeasures and HeyLetsGo). I see tremendous untapped market/customer opportunities, with some in consumer web 2.0 and a lot more in Enterprise Web 2.0 space. Some of these opportunities are so close that I can almost "touch” them.

John Doerr, a partner in Kleiner Perkins Caufield & Byers, the legendary VC firm that funded such successes as Google, Amazon.com and Sun Microsystems, apparently is bullish on this subject:

"I don't see that slowing down," Doerr said.

In fact, the enterprise space is as yet uncharted territory for Web 2.0-type applications. "We need Web 2.0 applications that really move people's lives,” according to Roger McNamee, cofounder and partner of Integral Capital Partners.