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Google dangles needle over Web Bubble 2.0

And no one notices

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Open...and Shut Back in the bad ol' days of Microsoft's dominance, many a venture capitalist was scared off from an investment because of the looming possibility that Microsoft might enter the startup's market.

But as the startup landscape shifted to web-oriented technology, startups and the VCs who love them appear to have forgotten to invent a bogeyman. Despite Facebook's heft in social networking and Google's shadow over most everything else, VCs continue to throw money into Bubble 2.0.

Will Google come back to haunt them?

Google isn't alone, of course, in casting a shadow over the Valley. Facebook and Twitter also exercise outsized influence on Silicon Valley's talent pool. As alluring as the picture of a Valley filled with risk-seeking developers may be, the reality is that most seem to want to work at an established giant.

Those that remain find themselves pressured to capitulate early and sell out to Google or Facebook in a talent acquisition. The clearest sign to me that we're in the midst of a serious bubble is how crazy the M&A market is. Anyone with a skilled web/server engineering team has likely had an offer from each of the web giants. Perhaps several.

But while a $20 million paycheck for a year's work isn't something to sniff at, it's also not going to get a VC's interest up. It's therefore often a race to see whether Google et al. or the VCs will "fund" a startup first. While Microsoft put startups out of business, Google and Co. buy startups out of business.

And yet VCs don't seem to fret too much about Google.

But they should, because Google dominates more than the market for Silicon Valley talent. Google, as Simit Patel points out, also has great potential to wreak havoc on would-be web entrepreneurs' business models.

Google, after all, dominates the online advertising market, which feeds many of the most promising web companies. And though Facebook seems to have been able to grow beyond Google's grasp, Patel is right to ask the question: "how far can any of these companies grow in terms of real profits before running into Google's turf?"

Can these startups grow users? Sure. Sales and profits? Perhaps not so much.

Not with Google content to use its advertising dollars to fuel a number of other unprofitable products, which often put the hurt on competitive offerings from startups and giants alike.

And yet VCs seem content to continue funding startups in the shadow of Google. Perhaps this is because, as Nicolas Vandenberghe, a vice president at LightSquared, speculates, there are "lower barriers to entry and [they have] longer illusions of success." In other words, it's cheap to have a go at a Google-threatened market, but it's also cheap enough to continue fueling a flawed startup that there's no real downside to trying to do so.

In Microsoft's day, failure was expensive and absolute. In Google's, everyone can pretend to be The Next Facebook, even if very, very few will make it – one, in fact.

Maybe it's a consumer services versus enterprise software thing. Or maybe it's that VCs see in Facebook, Groupon, and Twitter companies that have managed to thrive despite Google's interest in their markets.

As with Apple, the idea of direct competition with Google doesn't always match reality. As Mike Elgan argues, Google's advertising business model is very different from Apple's hardware business model, and leaves room for lots of cooperation between the two.

Even so, with web-related investing at a 10-year high, some argue that it's simply not sustainable due to the paltry number of exits. VCs may believe that there's gold investing in Google's shadow, but the exits don't yet prove that thesis.

Whether it's because Google (and its peers) are squashing competitive startups or buying them out, perhaps a healthy dose of Microsoft-era fear should prompt more VCs' investment decisions.

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears two times a week on The Register.

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