Web 2.0 drives venture capitalists crazy

Investors are struggling to buy into the user-driven Internet because the companies leading the charge simply don't need their money

Venture capitalists can't work out how to profit from the rising popularity of Web 2.0 services, the UK Technology Innovation & Growth Forum heard on Monday.

Victor Basta, partner at Arma Partners — an investment banking advisory firm — told the conference that investors are struggling to get a stake in today's user-driven Internet services.

"Web 2.0 is bedevilling venture capitalists — they can't invest in these companies because they were profitable from day one. VCs want to give them capital, but the companies don't need it," said Basta.

In the dot-com boom of the 1990s, venture capitalists threw money at technology start-ups which offered the promise of great success but which were often years away from generating significant revenues.

The Web 2.0 boom is being driven by Internet services such as online photo-sharing site Flickr and bookmark-sharing site Del.icio.us. Last year, Yahoo paid an estimated $30m each for both sites.

"In the few deals we have seen, companies have paid very generous sums of money for what was pretty nascent technology," claimed Basta, who believes that companies who succeed in the Web 2.0 environment could have excellent financial prospects. "These businesses can make 40 percent pre-tax profits very easily," she added.

The UK Technology Innovation and Growth Forum is organised by the European Technology Forum, a sister company to ZDNet UK.