Where’s Web 2.0?

Greater Boston venture capitalists are seeking the second wave of Internet start-ups, based on Web content, social networking, digital media

Reprinted From The Boston Globe by Robert Weisman, Globe Staff

Boston, Mass, August 7, 2006

Venture capitalist Michael Hirshland, general partner at Polaris Venture Partners in Waltham, has devoted the past two years to hunting for investments in what is arguably the hottest field in technology today: the second wave of Internet start-ups known as Web 2.0.

Unfortunately for his family and for the high-tech industry in Greater Boston, he has spent much of that time on airplanes.

“Truthfully, I have found a proportionately much larger set of opportunities coming to me from other areas,” conceded Hirshland, who blogs about Web 2.0 and other trends under the moniker VCMike. “If I look at my last three or four deals, they were in Los Angeles, New York, San Francisco, and San Francisco.”

While the Boston area was a hub of first-generation Internet activity, second only to Silicon Valley, the new crop of Internet content, digital media, social networking, and other Web 2.0 companies has a more modest presence here. That is starting to change, however.

A surge in venture capital funding for Web 2.0 in the first half of 2006 has fueled start-ups like SimpleTuition Inc. of Newton, which offers Web-based services to simplify the process of applying for college financial aid, and InnoCentive Inc. of Andover, which provides an online forum for scientists to collaborate, along with better-known out-of-state ventures like Internet cartoon parody site JibJab Media Inc. of Santa Monica, Calif., and the social networking site Meetup Inc. of New York.

Still, the Boston area has yet to spawn the anchor companies of the Web 2.0 era, as it did in the roaring 1990s during the first flowering of the Internet, such as Web portal Lycos Inc. of Waltham and Internet incubator CMGI Inc. of Andover. While many West Coast venture firms have returned to the Internet enthusiastically in recent years, venture capitalists here have invested more heavily in fields like life sciences, enterprise software, networking, and wireless technology.

“There’s still no Web 2.0 brand name in the Boston market,” said Kelly P. Conlin, chief executive of NameMedia Inc. in Waltham, a company that has quietly amassed more than 650,000 Internet domain names and is working to monetize its websites through advertising. “I think there’s some intriguing companies, but no one’s made it through the gateway. I don’t think the totems of the earlier era have been replaced yet. We certainly have that ambition.”

Unlike the dot-coms of the late 1990s, many of which counted on the proliferation of online eyeballs to overcome shaky business models, Web 2.0 companies aspire to profits, cash flow, and recurring revenue. Their embrace of new technologies and open-source software like Ajax, enabling the creation of richer Internet interfaces, has dramatically lowered operating costs. And they have sought to spice up static content with interactive and multimedia technologies Ч like weblogs, wikis, or podcasts Ч that enable two-way conversations.

“What the Web allows you to do is have second-to-second information about user interactions,” said NameMedia’s Conlin. “Every click is information, and that information can drive your business.”

Venture investing in the Internet space peaked at $6.4 billion nationally in 2000 and plunged to $254.8 million in 2003, before starting to climb back, according to figures from the National Venture Capital Association. In the first six months of this year, Internet start-ups raised $415.8 million in venture funds, nearly as much as in all 2005. Here in New England, first-half outlays to Internet content companies totaled $13.2 million, compared to $17.2 million for all last year.

The revival of interest in Internet companies can be traced in part to the celebrated initial public offering of Internet search provider Google Inc. of Mountain View, Calif., which raised $1.6 billion in August 2004.

“Google is the poster child for Web 2.0,” said Larry S. Bohn, managing director at General Catalyst Partners in Cambridge. “That’s the company that’s helped define the next generation of user interfaces.”

Since the Google offering, however, venture investors have been disappointed by the dearth of successful exits by Web 2.0 start-ups that have gone public or have been sold to established companies. An exception was MySpace.com, the popular social-networking site snapped up last year by Fox Interactive Media for $580 million.

The search for niches that can generate substantial paydays for their venture backers is intensifying as many traditional high-tech sectors, like computers and software, have matured.

Ian B. Carver, executive director of the entrepreneurial services center of PricewaterhouseCoopers in Cambridge, said many executives driving the growth of Web 2.0 companies in Silicon Valley are veterans of the big Internet companies, from Yahoo Inc. to eBay Inc. to Amazon.com, that dot the West Coast. “It comes back to the entrepreneurial base and where the entrepreneurs are,” he said.

Another factor that may be holding back the second Internet wave in Boston is the more conservative temperament of many venture capitalists here, Carver suggested. “I don’t know if the venture community here is convinced of a Web 2.0 business model that’s robust enough that they can really make money and grow rapidly,” he said.

Venture capitalists like Hirshland and Bohn think it’s only a matter of time before the Boston area spawns its own Web 2.0 giants. “I think there will be some very big Web 2.0 successes in the Boston area,” Hirshland said.

Fox’s acquisition of MySpace is helping venture investors warm to Web 2.0 companies, Bohn said.

“There’s definitely been a sea change over the past year,” he said. “If you go back two or three years ago, there was much more concern about investing in speculative revenue models. Now you’re starting to see some very fast growth in these Web 2.0 companies and some good exits. There are some good opportunities to build businesses.”

© Copyright 2006 Globe Newspaper Company.