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Web services startups: can they grow big? (XML In Transit).

Article Excerpt
You must have seen them--they're everywhere. Despite the market climate, Web services startups are popping up like mushrooms after rain. With no time to lose, these companies are readying themselves to take on the industry gorillas. Who's going to win?

Much has been written about the evolution of the Web services industry, particularly with respect to the big players like Microsoft and IBM. We've all been told countless times how Web services are good for established platform vendors ranging from application server companies to integration and process management vendors. One interesting question is often evaded, however: How can startups make money in this world?

Matter of Perspective

I wish I had all the answers. I don't, of course. However, my experience does give me a certain perspective. I've been part of the Web services "revolution" since before it had that name and we were just starting to experiment with XML for distributed application integration back in 1998. I've been involved with standards development in that space for several years (SOAR, JAX-RPC, etc.). I've lived through the Internet platform battles and I see a lot of similarities between those days and what's happening now with Web services. And now, as a venture capitalist, I have the luxury of talking to a never-ending streak of entrepreneurs trying to change the world with Web services.

Good VCs stay sharp because they're in constant contact with people who are smarter than they are. Now, having met with dozens of Web services startups and industry pundits, I feel I understand the space much more broadly than when I was at Allaire and Macromedia. Not having a corporate agenda through which to view the world is indeed eye opening. This is the perspective I hope to bring to this and future installments of XML in Transit.

Growing Big

It would be nearly impossible to talk in general about opportunities for all types of startups in the Web services space. Some type of filter needs to be applied. From my perspective as a VC, the filter I apply has to do with the magnitude of the opportunity. Venture-backed companies have to meet certain stringent performance requirements. VCs take on so much risk investing in startups that they have to be compensated with very significant returns. After several years of helping a company grow, a VC looks to make a five- to ten-fold return on investment.

Here's an example. Imagine that it takes your...

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