Everyone is aware of the critical lessons learned in the internet boom of the late 1990’s and the subsequent bursting of the bubble within a short few years. However, nobody is so acutely aware as the chastened group of venture capital investors who clamored to provide funding to the new economy only to lose their investments with no prospect of recovery.

Recently, however, the market has witnessed a return in investment interest in certain web-based businesses. The questions now arise as to what forms the basis of a successful internet business and what are the available and most productive methods to finance such ventures?

The first message is that the days of Webvan.com are over. In its short existence between 1999 and 2000, this online grocer managed to raise US$375 million in an IPO, hire 2,000 employees and achieve a peak valuation of US$1.2 billion. When the company failed, it became apparent that its underlying business model was flawed and its growth unwarranted based on any reasoned business model.

The successful web-based companies emerging today are much wiser and, while leveraging the unique business aspects provided by the internet, do not ignore sound business strategy and planning. Proven concepts to monetize business opportunities based on the internet has further raised venture capital interest. This rise in interest is accompanied by an increase in available venture capital funding; 2005 saw the most venture capital raised since 2000.

There are certain categories of web businesses that are attracting the most investor attention. These include consumer internet companies with content focused on connecting people, social networking, blogging, entertainment, online games, photo sharing, internet phone companies, video and niche retail. Many sites generate revenue through advertising and companies selling internet advertising are also generating interest. Whatever the area, income production is key.

While the rise in profitable internet-based business models and the increase in venture capital appears an obvious match, a number of factors are converging that mean that web businesses may not be dependent on the capital now chasing them. The largest differentiating factor compared to the previous internet boom is the significant reduction in costs especially in memory, storage and bandwidth as well as cheap open-source software and offshore programming providers.

Internet businesses are therefore now able to grow to a substantial size utilizing traditional start-up funding sources such as personal funds and borrowings or smaller scale investments from individuals. In addition, the previous business model of obtaining large scale venture funding and aiming for a later IPO exit is now not always the company’s aim. Many businesses are looking for earlier, quick sales to large internet brands such as Google, Yahoo or Microsoft’s MSN service.

The scale of resurgence of the internet business model and the resulting investor interest has been large enough to earn the label “Web 2.0”. However, in this version, the reality may be that while profit potentials are higher and risks are lower, venture capital providers may not be given as many opportunities to participate.