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I've been online since 1971 and I like to smoothe the way for everyone else. Among other things I co-founded Sympatico, the world's first easy-to-use Internet service (and Canada's largest).

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Saturday, December 16, 2006

Great expectations then; deflated expectations now

On Wednesday I attended the Toronto Venture Group’s monthly breakfast talk. Mark Evans of b5media spoke on the topic “Two Solitudes: The real differences between running an Internet start-up now and during the dot-com boom.” You can see the posts linked to by Mark for summaries, as well as one by Tom Purves, but I’d like to focus on the phrase that Mark emphasized: It’s all about the chairs.

The chairs he refers to are those used by the typical startup during the two periods: thousand-dollar Aeron chairs then, cheap but acceptable ones now. They symbolize the respectively free-spending and frugal ways.

Why the change? Since the tanking of the market for tech stocks starting in 2000, the expectations of riches and the accompanying appetite for risk have been greatly diminished. But that doesn’t fully explain it, not with the skyrocketing price of Google stock and the sale of YouTube for US$1.65 billion.

Part of the answer is that costs are much lower now (for a number of reasons). But that can’t be the whole story, because lower costs imply higher profits, not lower. I think the key difference is that the Web 2.0 startups expect much smaller revenues than the dot-coms did, and have set their expectations of potential wealth accordingly.

An Entrepreneur 2.0 probably wouldn’t mind getting rich by selling the company, but doesn’t see the probability of that as particularly high. So spending is kept low in order to keep the business going, and these people are very smart at doing that. Mark spoke of how at b5media they use Skype to avoid paying significant long-distance telephone charges, and how they work from home to avoid paying for office space — something that they can do effectively because I’m sure they use the Internet to its fullest advantage for online collaboration etc.

In addition to having a frontier spirit, Web 2.0 entrepreneurs are those most capable of using Web 2.0 tools to keep costs minimal, and those most willing to help work out the bugs. Methods they use now that turn out to work effectively will be copied by companies in other industries to cut their own costs. And when costs decrease in any competitive industry, so do prices. Deflation 2.0™.

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