Web 2.0: Cashing in

Startups — and the money men who fund them — are looking to cash in on Web 2.0.

The concept is amorphous but the hype around it is huge, and entrepreneurs running new ventures are quick to explain how their technology amplifies or exploits the benefits of Web 2.0 principles.

“We see ourselves acting as a bridge, between the idea of harnessing word of mouth — one of the ‘clouds’ in Web 2.0 that we focus on — and helping companies build a real business around that,” says Sam Decker, the vice president of marketing and products at Bazaarvoice Inc. in Austin, Texas. Launched in January with US$4 million in venture-capital backing, Bazaarvoice is developing a hosted application to help businesses build buzz around products by capturing the Internet version of “word of mouth.” The company’s software will let customers share notes on specific attributes of retail merchandise and will help clients mine data from that user feedback.

Bazaarvoice sees itself as part of the social Web phenomenon, an essential element in the Web 2.0 vision. From the user perspective, the social-technology evolution “is really an extension of the concept of Web ‘communities’ that came up in the 90s,” Decker says.

Web 2.0 companies (and companies that aspire to be seen as such) are also experimenting with new models for software pricing, development and deployment. Open-source and hosted, “on demand” software projects continue to fascinate investors. European venture-capital firm Index Ventures is backing open-source developers Pentaho Corp., which makes business-intelligence applications, and Sugar CRM, which offers sales management software. Both companies allow users to download most of their code for free. “Using the Net as a delivery mechanism for software solutions is on the rise,” says Bernard Dallé, a London-based general partner for Index Ventures.

“Flexibility is key,” agrees Warren Weiss, a general partner at Foundation Capital LLC. “Companies are trying to lower the cost of entry for customers and letting users try applications before they really commit a lot of money to them,” he said.

That’s a philosophy boutique development shop 37signals LLC enthusiastically backs. Its collection of Web applications for consumers and small businesses all include basic versions available at no cost. “We think it’s very important to give something away for free so that people will try it,” says company founder Jason Fried. “The products should be the sales pitch.”

37signals’ unorthodox marketing slogan sums up its development ethos: “Our products do less than the competition.” The unusual approach has been a hit with users: the company is profitable and its software draws raves from geek cognoscenti. 37signals looks to strip out unnecessary functionality and offer users fast, lightweight, elegant applications — the same sort of design mentality that helped the iPod and Google.com take off.

While some startups hope that positioning themselves as Web 2.0 pioneers will pay off in large valuations or rich acquisition deals, 37signals prefers staying small and independent. The company has a staff of less than a dozen employees. Like the tiny teams behind Flickr and del.icio.us, 37signals maintains that innovative development doesn’t require extravagant resources. “Being small doesn’t mean we can’t have a big impact,” Fried said. “Our vision is to change the way people think about software.”