I do tire of the 'but where are your patents?' question for starting a Web 2.0 business. Complexity barriers and web 2.0 are antithetical. Then there is the 'how much ad revenue can you generate? Isn't that impossible in today's market?"
That is a better question. Not to be dull, but:
1. The VC approach relies on the Buffet Complexity Barrier to Competition. Thus, the VC looks for IP or other secret sauce. The VC wants a quick return because the heart of this and hedge fund investing is quick turnaround investing in the 4 for 1 range.
2. There is no complexity barrier in ANY content market. The music industry can explain this one to you, but essentially it is an 'any idiot can do it' market. So the content industry relies on the promotion or amplification of talent and the keiretsu of managed acts and events. Think of this as the control of resources for resources.
Note that recently Sony/RCA/Columbia Music announced and implemented a blogging policy. They don't accept CD submissions. They want musicians/composers/bands who blog and sign up on their VOX site. It is the single most interesting change in the music business in 100 years. The gates are finally blown open. That doesn't mean the politics aren't still there. They are possibly worse but they are finally accessible. This is the music industry recognizing the need to support the resources for acquiring resources at network speeds.
3. When a technology emerges, one can ride the wave until it becomes common and by that point must be large enough or well-connected enough to sustain operations to repay investors. Otherwise the churn is exactly as has been described elsewhere regardless of the size or age of the operation. Ask any mid to lower level employee of a stable company purchased by equity investors. The cruelty and the cost-cutting are legendary.
This is the result of squeezing for vig.
On the other hand, it is not impossible or even incredibly risky to run a content-based business if one takes the network or keiretsu approach. It is very hard work for those who do not have a good network of contacts for the production of the content with access to the customers for content of a given type. That is the key:
content has a type based on the associations of the customers.
Until you identify a content-type network, you don't have a Web 2.0 business. This isn't just figuring out the abstract network, but the actual members of more than one instance of it.
There is no dominance possible because by its nature such networks are quite flat. What you look for is reach. This isn't a hard idea because it is a matter of identifying the connectors, the information sinks, the producers, consumers and modifiers, then providing useful utilities that speed up or reduce the work load for every component that can effectively use a computer form or page. You don't necessarily produce content: you hook up those that do and then compete fairly for those services. VCs hate this idea. Customers love it. The money is made in maintenance and it is dammed good income if you survive.
You can also produce the content, but that is a separate business. It is not of necessity NOT a Web 2.0 business, but that is a topic for a different blog. See my other blog.
The hard part is building it to the point of getting the exponential or power law effect. A LOT of little pieces have to be assembled first and those without subject matter expertise are advised to get people who have it and to be sure that their expertise is reasonably global but immediately local. That is where the real risk is. Some content markets are entirely local by the very business rules for processing the content.
All said, it's the network, stupid, meaning, until you have identified an organic content network, meaning a network of information trading relationships, all of the cpm figuring you do, the ad relationships and so on, are so much dreaming. It isn't about getting rich quick. That is the way the Mafia does business and they are mostly sloppy, ineffective and culturally insane. Earn it by product for value. It's old fashioned but stable and grows proportionally to sane returns.
We don't all want to be pirates.