The surprising news about SearchFox's demise got me thinking about the Web 2.0 "cycle". Among the key things that has spawned the proliferation of Web 2.0 applications/services is the low cost of development and distribution. It is possible to launch a new, cool service with an investment of less than $1-million using some hot-shot programmers and the viral marketing on the Web. This has made it easy for many entrepreneurs to jump into the game because the barriers to entry are low. The downside is competition is fierce in many markets. At the same time, far too many Web 2.0 launch their business plans with half-baked or no business plans - which gives them little staying power if competition intensifies unless they are lucky enough to be acquired by Google, Yahoo or Microsoft (this is not a business plan, folks!). The RSS editing and reader is a perfect example of the "easy come, easy go" Web 2.0 environment. There are probably hundreds of editors and readers in the market, and more (such as David Winer's RSS aggregator) on the way. For the most part, I don't see much of a business model for editors or readers. How many of them actually charge a monthly subscription fee or user licenses? And competition is so strong, it is difficult - at least for the time being - to operate with healthy margins, let alone raise prices. This is why you will see a flurry of "sorry, we're going out of business" announcements from hundreds of Web 2.0 companies in 2006. Many of them will fail to raise more venture capital and/or will be unsuccessful in attracting a takeover offer and/or will not have a good enough business or business plan to get enough users to pay for their service/application. SearchFox, I'm afraid, is just going to be the tip of the iceberg so enjoy many of these Web 2.0 services while you can.
Update: Some other Web 2.0 categories I just don't understand from a business/investment perspective are calendars and to-do lists such as Rememberthemilk, 30 Boxes, Trumba, Zimbra and Airset. They are definitely cool but how do they intend on making enough money to create a viable business?
More...Strategic Board has a good summary on why VCs are conflicted about Web 2.0 start-ups, while Dion Hincliffe looks why Web 3.0 will need to include revenue sources - be they advertising, subscriptions or transaction commissions.