Free 2.0: Don’t blame the VCs

A New York-based entrepreneur named Hank Williams has a guest post over at Silicon Alley Insider about how the tech economy is being ruined by the “freetards” (although he doesn’t use that term). In a nutshell, Hank believes all the venture-backed startups that are littering the Web with their free apps are ruining it for hard-working guys like him, who just want to make an honest dollar by providing a quality service in return for actual money.

This is an appealing story — but is it true? There’s no question that a lot of Web-based services are going the free route, and there is a certain segment of the VC world that believes you need to build something up to a large enough scale first, and then find ways to monetize it. But is this really something that VC’s invented and have forced onto the tech startup market? Hardly. If anything, it is a phenomenon that has grown out of the reality of what it costs to run a Web business.

Why are so many things free? Henry Blodget suggests an answer in his comment on Hank’s post at SIA: because they can be. In other words, things — primarily services, information and so on — used to cost a lot because of the nature of those businesses, embedded costs, etc. Now, a large proportion of those costs have been removed. Does that mean everything can be free? No. But many things can come pretty darn close. And once the value of that service or content has been established, then it’s a lot easier to start either advertising around it or charging money for it.

This is the essence of the “freemium” approach. Give people some of what you have for nothing, and see if they like it. If they do, then offer them more for a fee. It works for SmugMug.com, it works for 37Signals.com and other companies. Did Craigslist choose to offer its services for free because its VC backers forced it to? No. It did so because Craig wanted to do it that way — and because he could do it that way. Only when it had become obvious how valuable it was did he start to charge for certain things, and then only in a limited way, and still the company makes close to $100-million a year with virtually no more effort than when it was free.

That is the power of the “free” model — it’s not some kind of snake-oil trick that VCs desperate for an exit have foisted on Web startups. While that may be happening, it certainly isn’t to blame for the entire Web-based freemium approach, and it has nothing to do with whether Hank Williams gets paid an honest wage for an honest day’s work.

Update: See Hank’s comment below. Don MacAskill of SmugMug also has a thoughtful response, in which he notes that lots of industries have a stratification between commodity (i.e. free) and premium brands — and also notes that SmugMug actually benefits from the free services that compete with it. For what it’s worth, I think Alan’s “Freetardis” offer at Broadstuff is hilarious.

Kleiner: Web 2.0 is so over, dude

So a partner at Kleiner Perkins, one of the premier Silicon Valley investment firms, has apparently told Tom Foremski of Silicon Valley Watcher that they have “no interest in funding Web 2.0 companies any more.” For Web 2.0 devotees, this is a little like King Arthur telling you he’s really not that hot on the whole Grail thing any more, and you can stop looking now.

I wasn’t really aware of Kleiner Perkins doing all that much investing in Web 2.0 companies, actually. I always thought of them as playing in the big leagues — the Googles, the Ciscos, etc. But whatever. I guess the party is over now, right? Kleiner has taken away the punch bowl. All those startup CEOs hoping to get rich quick can go back to working at Kinko’s or whatever they were doing before Web 2.0 came along.

As far as I’m concerned, if KP’s comment means less money flowing into questionable startups with no business plan and a stupid name that’s missing a bunch of vowels, I’m all for that. I’m going to side with Tim O’Reilly, who posted a comment on Tom’s blog saying:

“If a company needs to identify itself as a “Web 2.0″ company rather than describing the problem they are solving, or the opportunity they are creating, then they are just playing the buzzword game, and aren’t worth investing in.”

If that’s what the Kleiner Perkins guy meant when he told Tom that they’re not interested in financing Web 2.0 companies any more, then I think he’s into something.

Damn — only got 2 times my money

Mike Arrington has a post up at TechCrunch about Parakey, the embryonic startup that featured Mozilla whiz-kid Blake Ross as a co-founder. According to Mike, some of the VCs who put money into Parakey are miffed that they only got cash after Facebook bought Parakey, while Ross and his co-founder got Facebook stock, which could be worth millions. Says Mike:

The acquisition price, say two sources close to the deal, was paid in cash and was “less than $4 million,” providing investors with just a 2x return on their investment.

This is how bizarre things are in Silicon Valley: Venture capitalists put money into an early-stage startup, and double their money in just six months, while the guy who sells his company gets no money at all — just stock in a company that might someday be bought or go public with a (theoretically) multibillion-dollar valuation. And the VCs are the ones who are pissed.

Facebook app fund not such a bad idea

There’s lots of skepticism out there about stodgy venture-capital fund Bay Partners creating a special investment vehicle for Facebook apps, called AppFactory. Om’s post is entitled “Bonkers By The Bay,” which pretty much sums up his point of view on the idea — that it’s a dumb move by a VC firm that has been swept up in the Facebook hysteria, and that it’s dumb in part because it means building a business on a proprietary platform.

blowing-bubbles1.jpgOthers are similarly skeptical — Ashkan Karbasfrooshan of HipMojo, for example, can barely contain his derision for the idea. And the biggest criticism centers around whether Facebook apps are monetizable at all, something that venture capitalist Andrew Chen talked about in very skeptical terms in a recent interview with Inside Facebook. But Mike Arrington, who has no small amount of experience in the startup game himself, seems to think that building apps based on the Facebook platform isn’t such a bad idea at all, since it allows a startup to build and test something relatively quickly and cheaply (the guy behind the Bay venture, Salil Deshpande, responds multiple times in Mike’s comments).

For what it’s worth, I think Bay Partners is making a smart move. We’re talking about a relative pipsqueak of a fund in dollar terms — up to fifty investments worth $25,000 to $250,000 (but most likely far less). That’s pretty close to a rounding error in VC terms. Will any of them work out? Who knows. But it’s possible that one or two could become something real, using Facebook as a springboard, and that seems like a small chance worth taking, along the lines of what Google Ventures and Y Combinator are doing.

The solution is, well… Obvious

Evan Williams — founder of Blogger and of the podcasting startup formerly known as Odeo — took a lot of heat from certain sections of the blogosphere awhile back, after standing up at the Future of Web Apps conference in San Francisco and freely admitting that he had screwed up with Odeo in a whole bunch of different ways. Among them, he said, were “raising too much money too early,” “trying to do too much” and “not listening to my gut.”

In hindsight, that was kind of a red flag (or white flag, depending on your perspective) about Evan’s intentions toward Odeo. So it’s not that surprising to hear he and some other members of the team have bought out their venture backers and taken the company back in house, renaming it Obvious Corp. And while Evan has taken some flack for blowing it with Odeo and/or not knowing what he really wanted to do when he grew up, like Fred Wilson I think he should be congratulated.

odeo

From what details we can gather from Om and others, the VCs who backed the company have been “made whole” (to use the curiously Biblical term favoured by Wall Street types), and now Evan and his team can concentrate on doing more experimental things. Will any of them work out? Who knows. But they should be congratulated for knowing when to change the playbook.

Evan has some thoughts here, and one of his former investors has some thoughts here.