Last week's financial markets set new grim records. The weekly Dow decline of 18.2% beat even the Great Crash of 1929 record. It is becoming obvious that the capital crunch is changing the rules of the game in technology financing. Sequoia Capital's presentation to portfolio companies tells all:

Sequoia Capital on startups and the economic downturnView SlideShare presentation or Upload your own. (tags: depression recession)

If you do not know who Sequoia is, keep in mind this is the firm that backed Google, Yahoo, PayPal and YouTube. They have been around for 30+ years and know a few things about market ups, downs and trends.

Just as remarkable is TechCrunch declaring "Ignoble End of Web 2.0"

In a recent post, after 3 years on continuous cheerleading, Michael Arrington threw Web 2.0 under the bus and identified "zeitgeist moment", marking the breaking point: "An Ignoble But Much Needed End To Web 2.0, Marked By A Party In Cyprus". A lavish party in the middle of the collapsing economy by folks whose companies are so far from turning a profit indeed brings up the worst memories of 1999. VentureBeat is even more blunt featuring the party video alongside with Nero fiddling while the Rome burns.

The party video was taken down several times over, but fortunately Loren Feldman of 1938 Media recorded some great commentary (warning, some profanity!). He makes the point as easy to understand as possible: regardless of all the talk of "changing the world", if your Web 2.0 venture is not making money by serving real paying customers, once capital get tight you are gone. The bubble was artificially propped up by VCs like Sequoia and blogs like TechCrunch, but now they see no exits in sight and are cutting bait. Just watch:

Now how does this all apply to "Health 2.o"?

I am not going to beat this dead (dying?) horse. If you paid attention to this blog over last two years you would not be surprised at this turn of event. I will just say that an "average" Health 2.0 company that gets mentioned in the news is typically orders of magnitude lower in terms of traffic, engagement and monetization than their Web 2.0 cousins. Check out my post on Revolution Health vs. MacRumors metrics. Look where Revolution Health finally ended up. Type a few URLs you like into www.compete.com. See for yourself.

But wait, we were told "The fundamentals of Health 2.0 are strong" ?!

Of course. Just ignore the economy. Any specific setbacks have nothing to do with failure for these ventures to sustain themselves through revenues and profits. You just have to wave a magic wand and they will start making money out of thin air and not have to rely on venture investment which is quickly drying up. Read Sequoia's slides - VCs demand profitability now. Drama 2.0 puts it best:

For those who that have been relying on hype and bullshit, one word: pray if you haven’t already found greater fools. For those who have real businesses that make real money: things may get ugly but if you know what you’re doing and act wisely, you have as good a shot as any at seeing your business through.

The media coverage over next few months would be interesting to watch. As I said time and again, Web 2.0 is becoming just as toxic as dotcom (or subprime mortgages and credit default swaps). Conventional wisdom takes a while to form but this process is picking up pace. You can take a guess what will happen with derivative (copycat) ideas, like Health 2.o. Rest assured, the true innovations will do well.

But if you believe economy will have no impact on Health 2.0, I got some oceanfront real estate in Las Vegas for you.

UPDATE: If you find Sequoia's presentation too technical and boring, fortunately there is a translation into plain language - as if told by a fictional VC firm. Warning, sarcasm ahead and it gets better as you read on:

Whiner Jerkins All Hands 10/13/08 - Get more Business Plans