Toys, Secrets, and Cycles: Lessons from the 2000s
0xe11B
June 27th, 2022

I started my internet career in the early 2000s during the dot-com bust. It's hard to picture this now, but the internet was a thing that people used only intermittently, to check email or plan travel or do some research. The average internet user spent about 30 minutes a day online, compared to about 7 hours today. To use the internet, you had to sit down in front of a desktop PC and "log on" (most people still had dial-up), nothing like the always-on, high-speed mobile internet we use today. In 2001, Amazon's stock price hit an all-time low, with a market cap of $2.2B, about 1/500th of what it is today. A prominent research firm published a study asking Americans if they'd adopt broadband and the majority said no. Email was the most popular internet use case and they didn’t see the need to make it faster. The National Academy of Sciences ranked the internet 13th in its list of great inventions over the last 100 years, beneath radio and telephones. The mainstream consensus was that the internet was a cool invention, but had limited use cases, and probably wasn't a good place to build a business.

At the same time, there was a small but growing movement of developers and founders who were excited about the idea that the internet could be more than a read-only medium – that it could allow anyone to create and publish, to not only read but also write, as we said back then. This movement became known as web 2. The runner up name was read-write web. (These are not after-the-fact terms: there were prominent publications and conferences that used them.)

The key web 2 concepts were: letting users publish whatever they want (“user generated content” was a buzzword), social graphs, APIs and mashups (what we'd call composability today), defaulting profiles and photos to public vs private, and tagging over hierarchical navigation, among other things. There were also technical innovations. A seemingly simple but important one was web pages that updated dynamically without reloading the page, what was usually called Ajax and is now just the way people expect web apps to work. There were mobile devices that could access the open web but they were extremely niche (I was an avid Sidekick user).

One striking thing about that period was the contrast between what smart founders and engineers talked about at dinner and on weekends and what the mainstream tech world took seriously during work days. For example, one popular mainstream trend was enterprise security appliances, which were basically servers preloaded with security software. Many of the very same people would go to work and talk about the “serious” products, and then go to dinner, or hang out on the weekends, and talk about consumer internet products and web 2. It was the most interesting thing happening in tech. But generally, the view was, web 2 products were toys that couldn't be real businesses. They were hobbies, and not something you would take seriously during the workday.

One lesson for me, which took me some time to learn, and that eventually led to some blog posts I wrote, including “The next thing big thing will start out looking like a toy” and “What the smartest people do on the weekend is what everyone else will do during the week in ten years,” is that there's a strong correlation between rich product design spaces and what smart people find interesting. Web 2 was captivating, and led to so many dinner and weekend conversations, because there were so many novel product design possibilities. What if you took this feature and that feature and combined them? What if you applied this design pattern to a different context? What original product concepts would be invented next? This is what got people so excited. In contrast, the “serious stuff,” security appliances and such, seemed much more limited in their possibilities.

Another striking thing about that period was how small and passionate the web 2 community was. I remember in 2004 going to what I think might have been the first New York Tech meetup. The whole group fit in a small room in Meetup’s headquarters. People demoed software they had created and talked late into the evening. I still have friends from that period. Sometimes I get asked how I first met old friends like Fred Wilson and Alexis Ohanian. The simple answer is there just weren't that many people, especially on the east coast, who were interested in these topics. We all knew each other. It was a real community. I have one old friend Alex Rampell (who now works with me at a16z) who I met in 2003 because a friend of mine was at a dinner party and afterwards said “Hey, I met someone else who's interested in consumer internet.” It was that rare. But people were very focused and excited. The feeling was that a revolution was brewing. We knew a secret and the rest of the world hadn't figured it out yet.

As for me, I was working on my own web 2 startup called SiteAdvisor. Around 2003, when my co-founders and I started developing the concept, web security threats were spiraling out of control. Most people used PCs with Internet Explorer, and problems like phishing and spyware were widespread. The idea for SiteAdvisor was that we’d start off with a tool that would warn users about security threats like phishing and spyware, and then, over time, applying web 2 concepts like user-generated reviews, layer on more subjective judgements (similar to what TrustPilot seems to do today). This staged approach was common at the time, a strategy I later characterized as “Come for the tool, stay for the network.” We built APIs and encouraged mashups and did most of our marketing through SEO.

2005 was a big year for web 2 because of two acquisitions, Flickr and Delicious, both by Yahoo. The dollar values were small by today’s standards, something like $30M each, but it was an important signal. The assumption up until then was that web 2 was a fun hobby, a way to build cool stuff, but not something that would produce real businesses. Yahoo was considered a savvy company, and said they were making web 2 a core part of their strategy.

As I recall, that was the point when web 2 started transitioning from a niche cult movement into mainstream tech. Some of the early web 2 founders successfully made the transition. In other cases new entrepreneurs came along who built on the work of the early enthusiasts. The basis of competition switched from creative idea generation to disciplined execution. You had to decide whether you wanted to be the idealistic band at the indy bar or be pragmatic — potentially making compromises — and play in stadiums.

By 2007, things were looking up for web 2. Among other things, Facebook passed 10M users, Twitter was growing and had just gotten VC funded, and Google acquired YouTube. Then the 2008 financial crisis hit, which was a gut check for entrepreneurs. Tech funding dried up, and a lot of smart people said we were on the verge of another great depression.

The financial downturn was a difficult time for many people. But from a startup perspective, the 2008-11 era turned out to be a golden age. Apple released the iPhone app store in 2008 and by 2009 talented founders were pouring in. The mobile app revolution was in full swing. Almost all of today’s top mobile apps were created by companies founded between 2009 and 2011, including Uber, Venmo, Snap, and Instagram. In retrospect, there was a convergence of three powerful trends: social media (by then that word was replacing web 2), cloud computing (which would enable the apps to scale server side), and the rise of smartphones. Independent product design spaces are multiplicative: even if social, cloud, and mobile each improved linearly, the combination could improve exponentially.

I made the chart below to summarize how I've come to think about product and financial cycles. The key idea is that product and financial cycles evolve mostly independently. The top of the chart shows the Nasdaq index as a rough proxy for financial sentiment. Financial sentiment fluctuates unpredictably and sometimes wildly.

The next row shows the years that iconic startups or products were created. The timing is mostly dictated by product cycles, which are shown in the bottom row. Product cycles follow their own internal logic and tend to be more predictable than financial cycles. They begin with the incubation phase when enthusiasts explore ideas on nights and weekends and build products that are mostly used by other enthusiasts. The growth phase arrives when the right mix of technology, talent, and community knowledge comes together to enable the products to go mainstream. (I show the biggest tech cycles in the chart, but smaller, offshoot tech cycles happen as well, including web 2 in the 2000s, and things like fintech and SaaS in the 2010s.)

Financial cycles and product cycles
Financial cycles and product cycles

Tech is very different today than in the 2000s. A handful of tech incumbents dominate the internet, exerting vast economic and cultural influence. In the 2000s, web 2 was mostly ignored or dismissed as techies talking about trivialities. Today, entrenched interests aggressively respond to new movements that might someday threaten them. But the same creative patterns that happened in the 2000s live on today, driven by enthusiasts who see possibilities where others don’t. You just need to know where to look. My belief is that the best place to look is crypto and web 3.

From my vantage point, today’s negative financial sentiment most closely resembles 2008. If we are headed for a prolonged downturn, there are some tactical lessons from the 2008 era, namely preserving capital and staying focused on your long-term vision. The strategic lesson is to keep your eyes squarely focused on the product cycle. Things that look interesting to smart people usually do so because they are rich with product possibilities. These possibilities eventually become reality. Toys become must-have tools. Weekend hobbies become mainstream activities. Cynics sound smart but optimists build the future.

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