25 startups to watch

(Business 2.0 Magazine) -- Twelve months have passed since we introduced the first Next Net 25 - our picks for the Web 2.0 wannabes most likely to break out of the pack. The moment seemed propitious: Hardware was cheap, broadband was ubiquitous, software was open-source, and venture capitalists were once again flooding Silicon Valley with ready cash.

Many of our choices were prescient: Digg, Trulia, Technorati, JotSpot, Writely. (The last two were snapped up by Google (Charts).) But one of the 25 succeeded even beyond our most bubble-icious expectations: YouTube, purchased in October by Google for a game-changing $1.65 billion. Web 2.0, for better or worse, had gone mainstream.

TWO'S NOT ENOUGH: Niklas Zennstrom (above) and Janus Friis have disrupted the Internet playing field before: first with Kazaa, then with Skype. Now the twosome are betting that Joost is the future of online television.

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That made choosing this year's Next Net 25 particularly dicey.

Wave that kind of scratch around and you don't know who's going to show up at your door. This year's field is chockablock with "me too" companies, and the bar for startups has been set even higher, in terms of both what customers expect and the kind of return on their investments the angels and venture capitalists want to see.

This means that, for many, 2007 is going to be a make-or-break year. "There has been enough time now to determine if there is something there," says David Hornik, a partner with August Capital and an Internet startup specialist. "For a lot of companies, the answer will be no." (Hence the rise of F---edCompany 2.0 sites like TechCrunch's DeadPool and Valleywag's Deathwatch.)

While the VC spigot is still open, funding will be harder to come by as investors focus on the bets they've already made. "I will probably be making fewer investments in 2007," says Jeff Clavier, a Palo Alto-based angel investor. "It's too frothy already."

The blessings of Web 2.0 - the low cost and relative ease with which you can start a company - turn out also to be a curse. If you can launch a startup in your bedroom, so can the genius in the apartment down the hall.

Here's a reality check: There are already more than 200 video sites trolling the Web for viewers. Most will not even come close to billion-dollar buyouts; more likely they'll end up as feature buttons in someone else's service - if they're lucky. "Your barrier to launching is low, but your barrier to success is high," says Bill Nguyen, CEO of music site Lala. "People are really going to feel that this year."

The losers are likely to be those companies that try to make money by pouring old-media wine into the new Web bottles. The winners will be the players that invent new ways to tap into what the Web brings to the party: instant feedback, instant analysis, and the collective wisdom of a billion users.

So who looks best positioned to succeed in the class of 2007?

Click here to meet the pick of the litter in five categories that embody the spirit of the Next Net: social media, video, mobile, online advertising, and enterprise applications. We scoured the field, talking to investors and entrepreneurs about companies whose business plans best illuminate where the Web is headed and where the most lucrative opportunities lie.