VC Enthusiasm for Web 2.0 Startups Slowing

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

Venture capital deals involving Web 2.0 companies — such as Facebook, hi5and 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 178deals.

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

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

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

Time Warner Inc’s AOL Internet division,for example, recently bought Bebo, one of Britain’s most popular socialnetworking 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 moneywent 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 alsoraised an additional $60 million from individual investors worldwide.

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

The median venture capital investment in Web 2.0 companies was $5 million in2007, 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 thisyear, said Jessica Canning, director of global research at Dow JonesVentureSource.

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

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

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

(Editingby Derek Caney)