• Financial Times, Tuesday, May 27, 2008 9:15 AM

Web 2.0 sites like YouTube and Facebook may have brought about significant changes in the way people interact online, but they're widespread use hasn't translated into revenue. Add to that the looming possibility of a U.S. recession, and the good times may soon be over for Silicon Valley venture capitalists and entrepreneurs.

"These are challenging macro-economic conditions," admits Shawn Hardin, chief executive of Flock, a social Web browser. Venture capitalist Roger Lee adds, "There is going to be a shake-out here in the next year or two," meaning many of these Web 2.0 companies will start to disappear as Silicon Valley optimism dries up.

Given the bleak economic picture, it's surprising that the cash hasn't already dried up. Just this past week, Hardin's company Flock raised $15 million in VC financing. It has zero revenues. Another example of a popular startup with no revenue model is Twitter, a so-called microblogging service that lets users post short messages about what they're doing at any given moment. Despite the glaring lack of revenues, most analysts agree that the trend towards social online behavior will last. "The capabilities that are coming with Web 2.0 are very profound," said Devin Wenig, head of the markets division of Thomson Reuters. "The Valley is usually right, and it's usually early."

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