Interchangeable Web 2.0 – Too much web in common

I was going to post on this article in today’s WSJ, but Paul beat me to it. The WSJ doesn’t call out the underlying problem, but points to a surface problem in today’s web companies…at least, for the VCs that invest in them.

Namely, what happens when you invest in Company X to do Service/Product A, and it shifts to do Service/Product B? And that change conflicts with one of your other portfolio companies?:

hen venture capitalist Peter Rip put money into two young Internet companies, he thought he was buying into two entirely different businesses. Riya Inc. was a digital-photo-sharing site while Vast.com Inc. was an online classified-ad site that made money by generating leads for online advertisers.

The next year, in 2006, Riya changed course, and now Mr. Rip wonders if he has a conflict of interest on his hands. Late last year, Riya launched a comparison-shopping Web site that makes money by producing sales leads for online retailers.

“I thought I had invested in two totally different start-ups,” says Mr. Rip, a general partner at Crosslink Capital in San Francisco. “But all of a sudden, I’m sitting on the boards of two companies that are both doing lead generation.”

What the article doesn’t call out, but which is the subtext in the article, is that VCs are in this dilemma precisely because web companies are often somewhat generic. It’s like the dot-com bust all over again. Companies are launching to take advantage of the web (filling the Web 2.0 Conference in droves), but about the only thing they understand is the web, not the actual product/service they’re delivering.

And so when they fail at their service (for which they often have no domain knowledge), they morph to Yet Another Web Service. Which will also likely fail. Because of a lack of domain knowledge.

VCs: Here’s some free advice. Invest in companies that actually do some THING. Not open source, generically. (We’ve seen enough over-hyped open source companies fade away and die because they thought open source was a core competency – it’s not. Open source is a strong complement to a product, but it’s not a replacement for a winning product that solves a real customer need.) Not the web, generically. But a specific product or service with a team that has experience doing that product or service in a different context or the same context.

Otherwise, you get what you pay for.