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Web 2.0 startups shouldn’t bother seeking VC money, according to Neil Sequeira of General Catalyst Partners, because “there have not yet been these type of exits that generated venture capital type returns”.

Neil is a VC who made these comments at the AjaxWorld Expo in California, but I’m not sure he’s entirely correct in his observations.

After all, Rupert Murdoch shelled out more than half a billion dollars for MySpace, which despite boasting all manner of design and usability issues, is totally Web 2.0 (in that MySpace is user-generated to the Nth degree, which partly explains some of the usability issues!).

Whenever we talk about MySpace we tend to mention some of the other social networking sites, such as Bebo, which the ever-savvy Benchmark Capital recently took a $15m slice of. My bet is that it will see a very favourable return.

Then there’s Facebook, another social networking site, which despite generating just one quarter of MySpace’s traffic may be acquired for twice as much as Murdoch paid for MySpace. Facebook has about $40m in VC funding, from investors including Greylock Partners.

Some well-respected VCs, including Fred Wilson, believe that Facebook could generate returns for a buyer such as Yahoo, at a whopping valuation of $1bn. Yahoo is rumoured to be looking closely at Facebook and Fred, who happens to be a Yahoo shareholder, believes they should buy it.

Former Dragon’s Den dragon Doug Richards disagrees with Fred. In last week’s NMA he said: “Yahoo may not get the return on investment that it expects should it buy Facebook. One of these sites will publicly issue, then there will be realism.”  All of which sounds a little bearish to me.

At any rate, and despite Neil’s assertions to the contrary, plenty of other Web 2.0 startups have attracted significant VC money, especially those companies classified as ‘disruptive’, and especially in the US (it seems that Europe is still about 18 months behind the investment curve).

For example, there is Zillow, which has amassed an incredible $57m of funding. Zillow provides real estate values on 67m homes and is proving popular among buyers and sellers. Property owners can also use the service to get an indicative valuation on their property. Traditional real estate agents are understandably nervous.

Another real estate focused site is the wonderful Trulia, which remains one of my favourite Google Maps mashups. Trulia recently underwent a beautiful redesign and expanded its range to cover the whole of the US (when it launched the company focused on property in California). It has attracted at least $8m in funding from Accel Partners.

There are other property listings sites that have had no problem in engaging VCs, such as MyNewPlace, which is a US-focused apartment rentals site. It bagged $20m from a squadron of VCs, including Sutter Hill Ventures and Split Rock Partners.

Meanwhile in the recruitment arena Jobster has swelled its coffers with $50m of funding. Jobster aggregates listings from a range of recruitment websites, such as Monster and Craigslist. And it has already started acquiring companies with that war chest (it bought Jobby, another startup, a few months ago). Surely a worried newspaper group is going to come along and make Jobster a healthy offer before too long?

I guess that's the killer question. Are any of these companies going to be acquired, and by whom, and for how much? Back to Neil Sequeira, who argues that Web 2.0 acquisitions are going through for “relatively modest sums”. 

He points to Yahoo, which has bought Del.icio.us and Flickr, the latter being – in my view – the best web app since Google. Sources suggest that both sites cost Yahoo less than $70m, so we’re not talking about MySpace-level megadeals here. But I do wonder what those sites would sell for in today’s market. My feeling is that Flickr is almost certainly worth more than the rumoured $35m Yahoo paid for it.

Sure, these are reasonably modest sums, but then look again at Facebook. The most recent funding round lured investors into the fray at a pre-money valuation of $525m, so there is certainly a belief among some VCs that big money deals may be on the horizon. If Facebook does sell for $1bn then its investors will have done rather well, especially those who jumped onboard when the valuation was (much) lower.

I think VCs should be approached if your Web 2.0 startup is a real business, and is a business that scales well. Assuming that you want VC money, of course.

A final cautionary note: Zillow has already scaled up significantly, and now employs about 120 personnel, a headcount number that certainly gives me the fear. In 2001 I used to write stories about companies "haemhorraging cash" or "hosing the remaining cash against the wall". Let's hope that this VC money is being wisely spent and that companies like Zillow don't overdilute on cashburn issues.

Chris Lake

Published 4 October, 2006 by Chris Lake

Chris Lake is CEO at EmpiricalProof, and former Director of Content at Econsultancy. Follow him on Twitter, Google+ or connect via Linkedin.

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