I had an enjoyable lunch with Jeff Jarvis today catching up on a number of things and brainstorming about value in the next generation web. During the conversation I vented a little frustration at the use of buzz words and bubble-like mentality with terms like Web 2.0. I am starting to get extremely tired and frustrated about every pitch that I see now where a company claims they are a Web 2.0 company and lists their principal reasons for being Web 2.0. It reminds me of the mid-90s when everyone said they were an Internet company and sprinkled their pitch with wild growth expectations from Jupiter Communications. Or when everyone said they were a Java company when Java was the cool buzzword. Frankly I do not care if you are Web 2.0, Web 1.0, etc. All I care about is what your service or product does, why it is valuable to the end user, why it is uniquely different from the competition, what the barriers to entry are, and how you plan on reaching your customers and how you will ultimately make money. Don’t start your pitch with Web 2.0 ecochamber talk. In fact as Jeff and I discussed several companies and ideas, we concluded that most of them were just features and not companies. And as Jeff states, when small is the new big, then it poses problems for VCs as well.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features. As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people. Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing. I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient. It is no wonder why VCs are quite excited about next generation web companies. All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble. As you see from Tim’s map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money. Start talking about how you are going to create a defensible barrier to entry. Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage. Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues. While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s. We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble. But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs). What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash. Let’s focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.