VC Enthusiasm for Web 2.0 Startups Slowing

By Reuters -  |  Posted 2008-03-18 Print this article Print

Venture capital funding for Web-based technologies is starting to show signs of a slow down, according to a report.

SAN FRANCISCO, March 18 (Reuters) - The flow of venture capital into the social networks, blogs and other interactive applications that make up so-called Web 2.0 is starting to slow, indicating the business is maturing.

Venture capital deals involving Web 2.0 companies -- such as Facebook, hi5 and Rock You!, a maker of slideshow and other applications for social networks -- grew by 25 percent in 2007 from the previous year, from 143 deals to 178 deals.

For each of the prior four years, VC investment in these companies had doubled, according to the Dow Jones VentureSource report.

But while venture funding is slowing, social networks and their ilk are getting more attention from established technology and media companies and institutional investors.

Startup companies, particularly in the technology sector, rely on venture capital firms for initial funding. These firms bet on the future of the company and hope to cash out by selling the startup to an established company or another investor, or taking it public.

Time Warner Inc's AOL Internet division, for example, recently bought Bebo, one of Britain's most popular social networking sites, for $850 million.

Last year, VC and other investors poured $1.34 billion into Web 2.0 startups, according to the report. But 22 percent, or nearly $300 million, of that money went into the popular social network Facebook.

Facebook, a Palo Alto, Calif.-based startup with 67 million active users, raised $240 million from software giant Microsoft Corp in 2007. It also raised an additional $60 million from individual investors worldwide.

Ning, a startup built by Netscape founder Marc Andreessen that lets people create their own niche social networks, received $44 million from several sources, including institutional investor Legg Mason.

The median venture capital investment in Web 2.0 companies was $5 million in 2007, compared with a median VC investment of $7.6 million in all industries, the report said.

These startups, which largely rely on advertising revenue, may struggle this year, said Jessica Canning, director of global research at Dow Jones VentureSource.

A slumping economy and a slowdown in online advertising rates will challenge these startups' ability to make money, Canning said.

But investors are still placing higher values on Web 2.0 companies, the report said. The median value for such a company rose by $4 million to $10 million last year, although it continues to be lower than the industry-wide median valuation of $16 million for VC-backed companies.

Earlier this year, Slide Inc, a startup that lets people create their own photo slideshows for social networks, raised $50 million from investors, which valued the company at $500 million, according to various press reports.

(Editing by Derek Caney)


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