With all the talk about who’s getting acquired by whom, which new startup is being featured on Techcrunch, and the holy grail that is online advertising I’d like to reign in with a dose of REALITY. I know this is an odd concept to us caught up in the Web 2.0 hype but sometimes it’s better to know a little something before devoting your Saturday nights to coding. So here they are, the Top 10 Reasons that Web 2.0 Startups crash and burn:

1. Failure to recognize the importance of Monetization
Um…why would you ever start a business without figuring out how it’s going to make money?! Seriously do you think that guy that owns the donut shop didn’t think through how much donuts cost, the equipment costs, rent, etc? It seems that every Web 2.0 company is so focused on impressions and popularity that they forget about everything else, like bandwidth costs! If the product or service you are offering isn’t worth buying then it’s probably not a good product. If Google wasn’t free, people would still pay to use their service.

2. You believe your own Hype
This one in particular is frustrating. It seems like when ever a Web 2.0 company gets covered by Techcrunch or Mashable the founders immediately think they’ve got it made. While getting coverage by these major Tech sources is an accomplishment and great free publicity it’s not the end all be all. What’s going to happen, often referred to the Techcrunch effect, is you will end up with 30,000 new registered users in one day that want to see what you’re all about. Then….in two weeks you’ll have 30,000 registered users and 5 active users, and 2 of those are your sisters. Keep innovating, keep investing in thoughtful and new ideas, keep moving the needle. Don’t believe your own hype, you’re a startup, you’re not making money, you haven’t accomplished sh*t yet.

3. Subtraction by Expansion
If your little startup is making money with just you, your buddy, and your dog spud then keep it that way until you absolutely must expand. There is no reason to hire mediocre talent in a hurry (trust me at this point of your startup you can only afford mediocre talent). You can definitely submarine your potentially successful startup by taking on unnecessary headcount. Hire interns, they are just as good as college grads and they work for almost nothing. There are online affiliates out there that make 10x more money than your little startup, and it’s just one dude in a garage on a broke down Dell. If he can make it work you can.

4. Failure to realize what you are
If you make a Myspace widget, get over it, that’s what you do. You aren’t some grand invention, I mean yeah slideshows are great and all but seriously lets get real. The sooner you realize what you are they sooner you can decide if what you are doing can be a stand alone business or you should be knocking on Rupert Murdoch’s door asking him to buy your Photo widget…

5. Myspace bans you
Ok you’re pretty much screwed if the Myspace overlords decide to ban your little company. Most likely you’ve based your entire site around traffic mana from Myspace, and if they decide to lay the hammer down (ala Imeem) you’re pretty much done. Their are only so many Photobuckets out there.

Next up reasons 6-10 why Web 2.0 Startups fail.

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