Investing in a web based company is not what it used to be. The factors that are different from 10 years ago is that it is at least ten times cheaper to build & host good software software, and it is 10 times harder to get revenue from traffic.
Productivity of web-based software is incredibly high these days, and computing, storage, and bandwidth is incredibly cheap. That means that any half-savvy software developer with an old Linux box and a high-speed connection can develop a web-based software application, and/or copy somebody else's (without looking at the source code). From an investor's perspective it means there is much less competitive advantage in being an early mover, mainly because the entry barriers are low. From the founder's point of view, it means that they can bring the company much further along without taking on investment and expensive executives mandated by the VC. If the founder does decide to take on investment, it can be at a much higher valuation.
Traffic is very hard to acquire. SEO is hard work compared to 10 years ago. You have to work hard to tweak your messages to be in tune with popular searches. Big splashy launches and press releases don't have the same impact because anybody can do it now. It's cheap. Paying off bloggers to write nice articles about you to acquire traffic doesn't work because everybody does it, and it is often quite obvious in the prose when "independent" bloggers are being paid to write about a company. And when you acquire traffic, it is harder to convert it because everybody is doing exactly the same thing.
There are far fewer "network-effect" opportunities (where the value of an application is proportional to the square of the number of users) than there were 10 years ago. Google, Skype, Facebook,Amazon, eBay, et al have taken those. VCs like network-effect opportunities because it lets them get quadratic gain for linear investment.
Cultivating valuable relationships with paying customers one by one is just as hard, but much cheaper. That is much easier to today because you can offer "free" versions of your software while you build trust with your prospects. When they convert it lasts. But this is not a network-effect, and not going to produce the financial gains that VCs need. But it does offer the opportunity of a prosperous business for a web entrepreneur.
I don't think that VCs have abandoned these kinds of businesses, but they are looking for businesses with network effects with high entry barriers. Those are much harder to find today which is why there is less VC investment.
