For budding internet entrepreneurs, the moral of Google's $1.65 billion purchase of video start-up YouTube is simple: Build a real, functioning company, then sell it to a bigger one. During the dotcom bubble of the late 1990s, garage innovators could peddle imaginary businesses in initial public offerings. If an idea seemed as if it might make money someday (remember Pets.com?) that was good enough. Today's upstarts are more fully formed and are often led by wealthy veterans of the first boom. They know Google's not the only shopper. Yahoo! has spent close to $100 million for start-ups Flickr and Jumpcut, among others. Facebook may be next, with Yahoo! said to be mulling a $1 billion offer. With investors on track to inject $500 million into new Net firms this year--twice last year's total, according to a Dow Jones VentureOne report--this may be the start of a golden hunting season.
There are more than 1,000 start-ups--referred to these days as Web 2.0 companies--using a new set of tools to quickly and cheaply create sites and services that would have taken years--and millions--to build in the '90s. Many are communities for sharing links, photos and videos. Others focus on music, travel or online software. One challenge is knowing when to sell. MySpace was sold last year to News Corp. for $580 million, a figure a MySpace founder who no longer had control of the company recently called "one of the largest merger-and-acquisition scandals in U.S. history." MySpace might be worth more than $3 billion today. YouTube gained first-mover advantage with its video-sharing service. But the latest crop of Web 2.0 outfits employs varying strategies to cut past the crowd.
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There are plenty of good travel sites, so any new entry needs to have a better idea. Farecast.com uses fearsome computer power to predict the direction of plane fares. That helps travelers figure out the optimum time to buy a ticket. It was founded by Oren Etzioni, who created the Web's first meta-search site (it scans multiple search engines) and first shopping-comparison tool. Farecast uses an algorithm to crunch 100 billion prices in its database, then evaluates 200 attributes that affect plane fares. From those trillions of combinations, it figures out whether you should buy a ticket now or wait for prices to drop.
Etzioni originally dubbed the site Hamlet after its To Buy or Not to Buy motto. Net squatters wanted $100,000 for the hamlet.com address, though, so the outfit instead bought the more logical farecast.com for small change. In the Web's early days, it was SOP to pay millions for addresses like business.com No more. "In the '90s, start-ups were drinking Kool-Aid," Etzioni says. "Now we're drinking coffee."