The main reason there are so many look-alike startups is that they keep getting funded. Several possible explanations that would explain the phenomenon:

1) Investors are hoping that the first company to do something will not always be the most successful one. Their company could have the late-mover advantage (e.g., Facebook vs Friendster). Or they could just get lucky. YouTube was not the first video startup, but to a large extent they got lucky with timing, technology (video support in Flash), etc.

2) Investors are wary of completely new markets. Imagine Twitter going to VCs back in the day and pitching a service that's kinda like a blog, but you can only use 140 characters. Nobody would take it seriously. At some point in time, Twitter was already hot and had proven the market, but investors would still risk funding a startup that could out-Twitter Twitter. Worked for Jaiku.

3) If you look outside of Silicon Valley, many of the startups have very very tiny market share. In SV, Google Docs has already won, but a survey I read showed that only 0.5% of the US population uses an online office suite regularly. So, investors think, the game is far from over. Add Europe and Asia, and things look even worse.

4) Investors expect to have 80% of their investments fail, but have a 10x return on the other 20%.

5) More and more Web 2.0 companies rely on marketing rather than impressive technology and new solutions. People that started companies like PayPal are now making Flash slide shows (no offense). It's ridiculously hard to start a PayPal clone, but it's very easy to start a slide show site, so more people are trying. The Facebook widget 'economy' exacerbated the problem. Undoubtedly some of those will make a lot of money, but I think it is bad for the startup ecosystem in general.

6) There's a bubble. Stop asking questions, get the money, and run. :)

I often see the same idea start up over and over again. If the entire market for that area is growing, I guess there is room for a couple players in the space.

An example would be HotOrNot clones on facebook or any embeddable site, (Friends For Sale, AddHer). These apps seem to be taking off even though they are really similiar to the existing hot or not.

Sometimes innovation isn't everything, good viral ideas can go pretty far.

There is no limit to the number of companies that can be started. There is a Darwinian process at work that culls the old and dying, and new and ineffective companies from the herd. It is only a matter of time before someone does make a better bug tracking system with a great cash flow.

Young lions challenge the old alpha males for dominance of the lion pride. Startups challenge and overtake the old companies for dominance in the business. Startups often win unless they get acquired by the old, and there are many other startups that die. That's the way the business works. There are precious few companies that have been able to stay on top for more than 10-20 years. Natural selection is a very powerful force in the startup economy.

There are always weaknesses in existing products which allow nimble startups to gain a foothold and launch a company. It's also much easier to build a product when you don't have 10,000 users pinging you with feature requests and bug fixes.

Do the existing products in your industry have great reporting engines? If not, make that the highlight of your product. The 10% of the industry that needs more reporting functionality will flock to you.

The devil is in the details.

Personally I'm not sure what I think, but your question is the exact reason why so many newspapers proclaim this as a "Tech Bubble" -- too many companies making similar projects. The market isn't running out of room perhaps, just it needs to shake off the incompetent or repetitive services in order to keep moving.

The other thing to keep in mind is that at one point or another, most startups end up being unsuccessful. Very few actually end up to be profitable enough for an entrepreneur to retire on, which is usually the goal of a Web 2.0 entrepreneur.

I'm not sure I get your question. Is there room for a better bug tracking system? You bet. I haven't found one with an awesome UI, powerful reporting mechanism and support to adapt to the workflow of big companies.

Interesting. My question was more in general. I read things about how you need to differentiate yourself but I see no obvious differentiation in many new software companies. But, it is interesting that you mention you haven't found any really good bug tracking packages. I know there are a ton of players in the game, are they just incrementally better than the last?

"I see no obvious differentiation in many new software companies"

Right. Don't forget that the key words are, "I see".

There's plenty you don't see. Anyone still in stealth mode. And those still not understood by the sheep who call themselves journalists. And don't forget, the best is always less than 10% of the rest.

Patience. Patience. Many of us here are working at it.

I actually used to develop on a bug tracking system. I've used dozens.

I've never found one that was any good, and the majority of engineers and managers always complained about them. Either they're slow, unwieldy, complicated, feature light, bad at reporting, don't integrate with source control, integrate too much with source control, etc.

I have a cynical view about them now and pretty much put-up with whatever I have. Since I know they're all pretty bad and it's impossible to please everyone, my expectations have been lowered.

Someone who used to also develop on bug tracking software told me to check out JIRA, but I'm skeptical as always:

http://www.atlassian.com/software/jira/

I like Jira. We use it to track pre-release software defects and it is quick to do commonly used functions like searching, screenshots, commenting on issues (no, it doesn't integrate with our CVS but we don't need it to). Once the software is released, per protocol, an issue with the software has to be tracked through our Siebel CRM solution (ugh, ugh). Jira compared to Siebel in terms of developer friendliness/usability - no contest.

I'm not very pleased with Jira. We've had constant issues with it being slow or going down. Jira has a lot of features but most of the time it gets in my way.

The good news about JIRA is it has a decent API so you can probably write your own tools and reporting on top and not have to put up with their crap UI.