Bubble 2.0 – Introduction

Bubble 2.0 may be upon us.  Lots of smart people who were at the Web 2.0 Conference in San Francisco last week think so and they ought to know.  See Fred Wilson here, Brad Feld here, and Om Malik here. New companies are forming like mushrooms in the woods after a rainy week; VC money is flowing.  Buyouts like the eBay-Skype deal are making people’s mouths water in a way they haven’t since the juicy days of soaring IPOs in 1998 and 1999.

This is not all bad.  Real value gets created by capital sucked into by tremendous inflow of an inflating bubble.  The subsequent collapse – and there will be one – blows away the excesses and leaves the strongest new companies standing almost alone.  Nothing great is created without irrational exuberance as I blogged here in my very first post.

The safe thing to do is nothing.  Most people who invest in Bubble 2.0 will lose money.  This true in all lotteries and in all bubbles.  But some people will make money: lots of it.  There are four principal ways to invest in Bubble 2.0 if you are so inclined.

1. Start a company.

This is always the most risky.  But there is money available,  If you have a good idea (and what entrepreneur doesn’t), this is a good time to get funding.  Of course, in order to get funding you will have to explain how your company fits into the paradigms of Bubble – I mean Web, of course – 2.0.  See future blogs for some hints.

2. Be an angel investor

If you are wealthy enough to put from $100,000 to half a million into a startup AND if you know the entrepreneur(s) well, both you and the entrepreneurs can benefit from an early stage investment which keeps the company from having to look for VC money too soon.  Some of my best friends are VCs and I have nothing against them; but, the more tangible a company is when they invest, the less share of the company they will demand in return.  As a potential angel investor, you should believe that, if things go well, the VCs will pay at least three times as much for each share of the company they buy than you paid when you made your angel investment.

3. Invest in a VC Fund which Invests in Bubble 2.0

There is no such thing as a small (less than $100,000) investment in a VC fund and many have even larger minimums.  Moreover VC funds are only open to “sophisticated investors” – a legal term.  Chances are that if you are eligible to invest in VC funds, you already are being solicited and know how to. However, BE VERY CAREFUL of a fund which is just now raising money to invest in Web 2.0 stuff.  They are late to the party.  There is a real risk that they will invest either at unrealistic prices or in me-too or just foolish companies by the time they get their money committed.

4. Invest in existing public companies which will benefit from Bubble 2.0

For most people who want to be in the game, this is the right alternative. The companies which emerged strong from Rubble 1.0 have a good chance to be players in Bubble 2.0.  I would look at Amazon, eBay, Google (but it may be overpriced right now), Microsoft (don’t underestimate their ability to embrace and devour even if they’ve gotten big and slow), Yahoo.

Over the next week or so I’ll be blogging about some of the Bubble 2.0 themes that I think will create opportunity and determine success.  These include Reed’s Law (even more powerful than Metcalfe’s Law), the “long tail”, RSS and blogs, and wireless access.

For a thorough discussion of what Web 2.0 is and isn’t, see Tim O’Reilly’s blog here including comments and trackbacks.

Update: I posted here on the supply side of the Long Tail.