Well, 2006 is a thing of the past and I am finally getting around to posting some thoughts on Yodel Anecdotal — it’s about time!! My topic: start-ups.

I spend a lot of time meeting entrepreneurs and evaluating new business ideas in my role to find big ideas for Yahoo!’s future. Last year proved to be an exciting time to be an entrepreneur in Silicon Valley, working on the next generation of potentially life-changing Internet services. Back at the Web 2.0 conference, for example, more than 200 start-ups tried to get into the Launch Pad workshop. My top picks among the presenters were Sphere (blog discovery tool) and TimeBridge (easy meeting scheduling). I was also impressed by Microsoft Live Labs fellow Gary Flake’s very cool demo of Photosynth, which allows you to fly through a 3-D scene built from your own photos. I don’t see a clear business model there, but it definitely has a wow factor.

In the past few months, I’ve seen some very creative companies working on new web services, such as Mashery, which helps developers “power your API,” and Mybloglog, a community-building service for publishers and developers. I also like WidgetBox and Clearspring, which are developing widget marketplaces and syndication services to go after the long tail of publishers — bloggers and social networking sites such as MySpace. While there’s a big opportunity to provide these kinds of web services to publishers and developers, monetization needs to be integrated from day one. I don’t always see that done well.

Silicon Valley isn’t the only hotbed of innovation these days. I’ve spent lots of time recently with entrepreneurs from India, China, Korea, Scandinavia and Eastern Europe and I continue to be amazed at the level and quality of ingenuity in these countries. Korea pioneers the leading innovations in the world of digital gaming. Scandinavia is producing some of the most interesting new community-based services (both web and mobile). Israel and Eastern Europe are coming out with new disruptive communications products. In fact, I just spoke in Israel to 200 local entrepreneurs who are working on the next generation of web and mobile services. The passion and energy of Israeli entrepreneurs always blows me away — it’s hard to believe that such a small country can produce so much talent and innovation.

What makes today’s environment different from the 1996-2000 cycle? Entrepreneurs are operating in an environment where the capital required to start and run a new business is much lower, thanks to open source, web services, and outsourcing. Companies like Yahoo! are providing developers with a toolkit of services and API’s that enables them to take advantage of existing technologies as well as outsource monetization infrastructure and sales so developers can focus on technological invention. Web services from Yahoo!, Amazon, eBay, Microsoft, Google, as well as many small companies are enabling innovation to take place much faster and more cheaply than ever before.

Consumers are also much savvier about discovering — and building — innovative new services. Electronic word of mouth is creating large audiences with minimal marketing expenditures. With the new architecture of participation, consumers are playing a significant role in improving the quality of services they use, not only through customer feedback, but through contribution of content and metadata such as ratings, reviews, tags, video/photo posting etc. This reduces the cost of content creation and editorial because consumers are directly contributing to the product experience to make it better for the next person who comes along.

Discovery of information has also improved since consumers can find what they’re looking for not only through the usual search tools but also through their networks of friends. For example, Sphere helps you find new content related to a blog post, while Mybloglog can help you discover new content by becoming a “fan” of other people who share your interests. Digg, Flickr, del.icio.us, and Technorati are better-known examples that are socializing the Web. Yahoo! just acquired Wretch, a very fast-growing social networking service in Taiwan that is used by over 60% of that country’s Internet population. Users have uploaded more than 500 million photos and posted more than 70 million blog entries — an impressive level of participation for any community service.

There appears be to plenty of money available for start-ups from venture capitalists. Venture capital investments are on track to reach $32 billion in 2006, with about $8B of that going to Silicon Valley companies. China and India are attracting a substantial share, as are emerging sectors such as clean technology. Entrepreneurs with good teams and a good ideas have lots more places to go raise money than in the past few years.

Some people speculate about whether we’re entering another bubble. In the dot.com heyday, an abundance of startup money was also available. But many companies didn’t focus on creating sustainable stand-alone operations; they developed product features rather than businesses. There was a red-hot IPO market for Internet start-ups. And the primary source of income was an advertising market fueled by venture capital funding. Things are different this time:

1. There is a robust Internet advertising market (estimated at over $30 billion globally in 2006) with the global Fortune 1000 making the Internet an integral part of their marketing plans.
2. The cost to start companies is lower than ever (see above).
3. The IPO market for Internet start-ups is much more modest.
4. Incumbent players such as Yahoo!, Google, Amazon and eBay are big and strong.

There’s no shortage of visionary talent out there. Yahoo! has been fortunate to attract through acquisition some of this generation’s brightest entrepreneurs, helping them realize their vision as part of the Yahoo! family — people like Flickr’s Stewart Butterfield and Caterina Fake, del.icio.us‘ Joshua Schachter, Upcoming.org’s Andy Baio, Konfabulator’s Arlo Rose, Jumpcut’s Ryan Cunningham and Mike Folgner, and, most recently, Bix’s Mike Speiser. These smaller start-ups are a key part of our acquisition strategy — modest investments from which we’ve generated great value through great talent, great technology, and great traffic. We’ll continue to survey the emerging landscape for great ideas.

I don’t know how 2007 will play out. But Web innovation is alive and well and I’m more excited than ever about the opportunities for entrepreneurs, companies like Yahoo! and, therefore, all of you out there.

Happy New Year!

Toby Coppel
Senior Vice President, Corporate Development

Photo from armisteadbooker.