Exclusive Interview With The Man Behind Drama 2.0

I’ve been speaking with this "Drama 2.0" character for a while now. In fact, I was the one who performed the upgrade from Drama 1.0 to the current Drama 2.0. We believe it’s a he and that he lives somewhere on an island. His advice on the Drama 2.0 blog is typically excellent and is well worth a read. Uncov wishes they were Drama. I tried tracing the emails I sent to him but after the 4th hop over Antartica, the trace goes cold. Here’s our interview transcript. Read it once and get the content, and then read it backwards to try to find any hidden messages please.

Allen: Let’s start with a brief bio.

Drama 2.0: I expected you to ask for something like this. The two questions I get most are "Who are you?" and "How old are you?"

Drama 2.0 is a highly-successful businessman and connoisseur. He’s basically Web 2.0’s Keyser Söze. Constantly traveling the globe in search of opportunity, he has a penchant for the finer things in life and the faster things in life.

The man behind Drama 2.0 is as charismatic and charming as his alter ego, but has a tighter grip on his indulgences. Right now, he is an entrepreneur running some sort of company that might or might not succeed. Through his extensive business dabblings over the years, voracious reading habit and graduate degree from the School of Hard Knocks, he has acquired the wisdom that he distributes to the world through Drama 2.0.

Since I know bloggers love an exclusive and I’ve been disappointed that some people apparently think I’m an old man, I will officially reveal my age on Center Networks: I am older than 25 and younger than 28.

Allen: What do you view as 3 trends that will be hot in 2008?

Drama 2.0: Besides Drama 2.0?

1. I think online video will continue to be hot. While I’m not convinced that the substance matches the hype and that the WGA strike is going to do for online video what some bloggers have predicted it will do, I am excited by the opportunities for professional original online video content and don’t think there will be any shortage of activity in the space.

2. I anticipate that revenue will become a lot more important to startups as the economic situation gets tougher. In my opinion, a recession in the United States is inevitable. I’ve discussed the problems this poses for advertising-dependent businesses and therefore I think "revenue" is going to be fashionable again in 2008. When it comes to the type of things that can drive revenue for consumer Internet startups, I’m actually a fan of virtual goods. Over $2 billion/year is now spent on these items and while it seems silly on the surface, once you recognize that, for better or worse, an increasing number of people find that their online identities are just as important as their offline identities, you’ll realize that the same psychology that drives the purchase of $1,000 hand bags and $700 jeans can drive the virtual goods market pretty far.

3. I like niches because I think far too many startups are attacking the mainstream market. There’s a finite amount of room for winners there but I still see a lot of room for solid niche plays. It’s important to note, however, that a solid niche play does not entail creating a generic MySpace clone for sci-fi lovers or a generic Digg clone for activists. Niches have to be done well by people who understand the niche.

Allen: Which big companies will succeed in 2008?

Drama 2.0: I’m assuming you’re not looking for answers like Schlumberger (SLB), which makes this difficult. I think 2008 is going to be a challenging year for big technology companies because the economic landscape in general is going to be challenging. Quite honestly, there’s no major technology company that I’d feel compelled to hold shares of right now.

Allen: Which ones will flop?

Drama 2.0: While I don’t think the heavyweights are going to crumble, I do believe that a consumer-led economic slowdown is going to have a notable impact on a lot of companies. Google, for instance, has been overvalued for some time and is vulnerable to recession in my opinion.

I do anticipate that we’ll start seeing a lot more little flops as an increasing number of VC-backed startups that have failed to develop into viable businesses start to run out of cash. The truth is that far too much money was invested in startups chasing the same dream. Take online video: dozens of startups, many of which have no differentiation whatsoever, received funding, some of it sizable. VCs looked at YouTube and threw far too much money at online video plays because their funds had to have some presence in the market. The outcome of this is inevitable. Personally, I think it will be entertaining to watch.

Allen: Do you see any major acquisitions this year? If so, who?

Drama 2.0: You’re really putting me on the spot here with all of these predictions! Are you sure this interview isn’t part of some conspiracy to make me look like a complete idiot? Admittedly I might be one so I’ll continue to bite. In the Web 2.0 space, we obviously have a number of "hot" startups like Digg and Plaxo that are being shopped by investment banks and there are rumors circulating about a big IAC acquisition of Flixter. I would not be surprised if some of the recognizable first and second-tier Web 2.0 startups get bought for hefty sums, even though I think these properties are way too expensive and offer little long-term value to a buyer.

If the economy gets as bad as I think it will, I expect the overall trend will be for big companies looking to acquire to continue to seek out promising early-stage startups that they can purchase inexpensively. Big acquisitions should be reserved for startups with big revenues and/or potentially lucrative proprietary technologies that are defensible.

Allen: Sum up the general state of the online advertising market.

Drama 2.0: Lots of hype, lots of potential, far less substance. The potential is real but I think publishers have to deliver more for advertisers if this potential is to be fully realized. Despite all of the hype, online advertising really isn’t delivering knockout results for most advertisers. In fact, some of the results advertisers have reported on hyped properties like Facebook are quite atrocious.

On the startup side of this equation, the most dishonest part of the hype is that there’s this huge and growing pie of advertiser cash up for grabs and that every Web 2.0 startup can get enough of it to build a great business. The truth is that a relatively small number of big properties and networks are getting most of that cash and the proportion they get is only likely to increase the bigger the pie gets.

Allen: What suggestions do you have for someone just getting started with their service or product online?

Drama 2.0: Well, before you even build a new service or product, I think it makes sense to have an honest dialog with yourself and/or your team. I see so many new ventures where it’s clear that the people behind them really didn’t put a whole lot of thought into answering the basics, such as:

• What is our target market and what’s the real size of this market?
• What problem are we solving?
• How are we going to acquire users or customers?
• How are we eventually going to make enough money to create a self-sustaining business?
• How are we going to differentiate ourselves?
• How can we build something defensible?

Unfortunately, far too many ventures don’t have answers to these questions or the answers they do have are not satisfactory. For instance, I do not believe that "viral marketing" and "word-of-mouth" are realistic marketing strategies for new ventures.

Every battle is won before it is ever fought and in the business world, this means that before you launch, you have given some serious thought to what you’re doing and have some idea about how you need to execute.

Allen: MySpace or Facebook?

Drama 2.0: MySpace. MySpace users are just a whole lot more interesting. Facebook is boring. I don’t know if that’s because the design is about as bland as Mark Zuckerberg’s personality or if Facebook is just the social network that everybody taking Paxil uses. In any case, until my fake profile on Facebook starts getting daily messages (like the ones I get on MySpace) from women who want to do live webcam chats with me, I think I’ll stick with Tom.

Allen: What tips do you have for those seeking VC funding?

Drama 2.0: Don’t. In general, I believe VC funding is a huge mistake for most Internet startups and if some companies spent as much time actually building their businesses as they do making the rounds on Sand Hill Road, they’d be far further along in their development. While there are certainly some situations where raising money makes sense and is necessary to further grow an already-growing business (with revenues), contrary to the beliefs of many entrepreneurs, taking money from VCs usually doesn’t solve your problems and actually creates quite a few of them. I’ve discussed this topic a lot on my blog and I agree with Mark Cuban: most companies need more brains, not more capital.

I’m a fan of the bootstrap model for building a company, and in the consumer Internet space, I think most viable companies have the ability to get to where they need to go with little more than angel funding (if necessary). Personally, I think it’s wise to consider that if you can’t get a business off the ground with your own resources and scale that business using revenues, starting your own company might not be the right path.

For companies that do decide to go down the VC route, my only real advice is "caveat emptor." Recognize that in a number of key areas, the VC’s interests are not going to be aligned with yours and that this can play a major role in whether your company succeeds or fails. Also recognize that spiels about the knowledge and relationships VCs give you access to is, at best, oversold, and at worst, pure bullshit. Most VCs are not entrepreneurs so thinking that they’re going to bring a lot more to the table than their (expensive) capital is like thinking that your dentist can advise you on the embarrassing festering wart you have on your thigh.

Allen: What country do you make your residence in?

Drama 2.0: I don’t know yet. I’ll be sure to let everyone know when I decide. South America looks good right now, but the Mediterranean is tempting too.

Allen: 1945 Chateau d’Yquem or 1945 Chateau Mouton-Rothschild?

Drama 2.0: d’Yquem hands down, although I’d honestly prefer the ’76.

Allen: Which feeds are you reading these days?

Drama 2.0: I’m a closet luddite and I don’t have a feed reader. The tech blogs that I load up manually in Netscape 7.0 on a regular basis are Center Networks (Allen Stern is the man), TechCrunch, Mashable, GigaOm and the best tech blog of all – The Drama 2.0 Show (damn that guy is good).

Thanks for your time Drama 2.0!