What are venture capitalists looking for? If you are a startup entrepreneur looking for funding, it’s always a good idea to know what investment themes a VC is interested and tailor your pitch to those themes. Yesterday morning, I saw presentations from three venture firms—Union Square Ventures, DFJ Gotham Ventures, and First Round Capital—at an event hosted by the Media Kitchen. Each of the presenters outlined some of the themes their venture firms are trying to ride. They all boil down to structural change in one form or another.
One common theme everyone seemed excited about is that, after years of hope and anticipation, the mobile Web finally seems within reach. The rise of the iPhone and the work on Android hold out the promise for a mobile Web that doesn’t suck,” as DFJ Gotham partner Thatcher Bell puts it. By that, he means a fully functioning mobile Web that is open to developers so that they can create the same types of experiences on cell phones that they are creating on PCs. Another common theme is the continued personalization of content, commerce, and advertising. And data-driven startups that make sense of the deluge of information and media now available to everyone are also likely to get a hearing from these VCs.
Albert Wenger, a partner at Union Square Ventures, notes that we might be a little bit ahead of ourselves in the hype cycle (see slide above), but that the impact of some of the changes we are just now seeing now on the Web will eventually catch up to the hype. The structural changes and other shifts that Union Square likes to invest in include:
The decline of the firm and the rise of one-to-one commerce
Merging of cyberspace and real space
Unified identity (across different sites and services)
Generational shift
Global growth of the Web
Mobile
Of course the Web is becoming more social, programmable, playful, and intelligent, but there are also bigger shifts occurring as the Web audience becomes more mobile and global. There is also a fundamental generational shift going on among Web users, which Wenger defines as:
The difference between people who dated before they had their first computer and those who had their first computer before they started dating.
The risks he worries about are:
Scaling
Net Neutrality
Data Ownership
Any Web startup that becomes popular fast has to deal with scaling issues that can derail it (see Twitter, a Union Square investment). Wenger, though, thinks that these issues will go away as cloud computing matures. Net Neutrality issues could pose a risk if ISPs decide to start blocking or discriminating against certain types of data. And the whole question of who owns the data that Web companies accumulate about users could result in some privacy backlash down the line. Startups should have answers to how they plan on handling these risks.
Despite signs of a recent slowdown in Web advertising, the VCs are still bullish about the ability of online advertising to keep taking share from other media. And as digital media becomes more personalized, so too does the advertising. Bell from DFJ Gotham sees the evolution of the way advertising is delivered (see slide below) going from undifferentiated mass media to targeting by categories, behavior, context, and finally the social graph. Here are the themes he is looking at:
Atomization of content
The arrival of the mobile Web (finally)
Hyper-targeting of advertising
The coming of human-friendly interfaces
Cloud computing
He thinks we still have along way to go in terms of making the Web easy to use. For instance, Bell compares Google’s current interface to the C: prompt days of the PC before Windows. Says Bell:
This is a really good way for a search engine to get input from a human and for Google to make money. It is not the best way for a human to interact with a computer.
He argues that more intuitive Web and search interfaces, like SearchMe, are needed.
There may be an IPO drought going on right now (not a single venture-backed IPO has gone out so far in the second quarter, according to the National Venture Capital Association), but VCs are still looking for the next, next thing.
I’d never thought people would want to invest in Twitter because Twitter is a boring time-waster, but yeah.
So Webvan and Pets.com are coming back? Hmm, I guess I need to read the article again…
“If you are a startup entrepreneur looking for funding, it’s always a good idea to know what investment themes a VC is interested and tailor your pitch to those themes.”
http://www.sequoiacap.com/ideas/
“Elements of Sustainable Companies”
None of this applied to youtube. I bet working at Paypal didn’t hurt.
I am starting to strongly believe that VC is all about your contacts and nothing more.
I’ve also been told that most VCs will only very generally take your plan seriously and instead will look for the best contact to fund.
IE, they don’t really care about your plan or pitch, they care much more about who set up the meeting and how well connected you are.
That’s just what I heard. …from VCs
Erick,
dumps up! Very good post.
Please go on with the great work.
“He thinks we still have along way to go in terms of making the Web easy to use. For instance, Bell compares Google’s current interface to the C: prompt days of the PC before Windows. Says Bell:”
This argument would be ok in the 80s. The problem we have now is that software companies are no longer managed by executives indifferent to technology.
The days of the board that threw away the mouse at Xerox are long gone.
The people at Google in charge of product development are passionate software engineers.
When MS and QDOS were popular we had people who would never dream of using an “ick” computer running product development. As soon as something is deemed useful now, you will have a similar feature or interface simply show up on Google in a very short period of time. IE, Kiko.com, ect…
That’s the problem. MS was tied back by the DOJ, Google breaks for no one.
To succeed, you really have to create something that the umpteen million developers at Google will be indifferent to. MySpace was a great one. Geeks thought it was dumb and horrible looking and they flew under the radar.
TechCrunch Re:Structural Change Is Always a Good Theme to Invest In
What happens to the seesmic video comments. They seem to disappear after posting…?
left off the graph:
1) what other investors are investing in
2) who introduced them to the company
Take your upward sloping curve, flip it upside down, and change the y-axis title to “Impact of VC firms on the WWW”
@Chris- You assessment of the VC world is right on. They talk out of both sides of their mouths. “Do as I say, not as I do”. You cannot listen to them. Do what you know makes sense (biz sense) and everything will flow, unless of course you “are someone”.
@Peter- Thank god.
@chris
That makes as much sense as anything else I’ve heard. I am often completely amazed at the sort of foolish ventures VC’s throw their money into, and equally amazed at the many good ventures that never get a penny.
I always thought structural change will occur AFTER major investment has been made.
Also see earlier ad spending Techcrunch article at http://www.techcrunch.com/2008.....ewspapers/
Great data in boths these articles!
> The decline of the firm and the rise of one-to-one commerce
> …
> Unified identity (across different sites and services
That doesn’t go together.
And it’s a privacy nightmare, since even in real life we all play different roles.
Plus, there is (most of the time) no need for the consumer to share her real identity with sites and services.
This is unlikely. The Web is an entertaining and aesthetic experience, as well as an information source.
The mobile web can only aspire to be an convenience for information.
It is not capable of delivering the visual arresting experience of good monitor or LCD
My trackbacks aren’t showing up on Techcrunch?
http://www.techcrunch.com/2008.....invest-in/
my thought is if you need vc bucks you have no product
Oops - wrong link. I’ve argued that’s We-commerce is the future - social e-commerce is a natural progression from social media!
http://www.vinnylingham.com/us.....merce.html
::Grins:: I feel like an investment in structural change has always been a good bet. Heraclitus phrased things best circa 500 BCE: Nothing endures but change. No new news there.
And the VCs have every reason to be optimistic about the ability of online advertising to grab market share from other media. (ie. AdAge’s front-page headline: “U.S. News loses weekly war as sector’s ad pages plummet”.)
Clearly, there’s money to be had in the structural shift of internet usage. The multimillion dollar question is “Where do I place my bet?” Good luck!
Erick, thanks for the writeup - and also, thanks for making it out to our event. There were some great presenations and I did a mini-writeup at: http://tinyurl.com/6mvx3u
Targeted marketing is the way ad agencies will have to go in order to make effective ad campaigns. The information is there, they just need to create the right tools to work with it. But is this the way they are going to monetize social networks?
Erick
Good article, I enjoyed reading it. I especially like the quote from Bell, about Google being the equivalent of the C:> prompt. One is already gone, soon the other too?
BTW, interesting string of comments at SAI
http://www.alleyinsider.com/20.....s_sober_up
@22 Matt - thanks for that link, nice read.
@Erick - ty for a great read.
“The decline of the firm and the rise of one-to-one commerce”
“Merging of cyberspace and real space”
I totally agree. One thing that most of us online people don’t understand that the future of online social networks will also be off-line.
For me Web3.0 will emerge when social networks figure out other sustainable streams of revenue other than advertising & when they can offer more than just connecting with people you know. /yawn
Change is a great thing to invest, especially if you are looking for high risk/high reward. Look at the investors at Google as a simple and cliched example. Search was supposed to a feature, not a full blown revenue machine 10 headed monster. Change resides with innovative thinking and challenging the status quo beliefs…. http://www.readtheanswer.com/index.php?RTA=web2
What about recession? Why isn’t recession factored into this?
@rbk
I agree. Blimp.fm is kind of an example. You can exchange music tips in a twitter style conversation and create your own play list, then you can go buy the CD or mp3 if you want. I just tried it out it’s really cool. We interviewed their lead developer last weekend. The video will be on our blog soon.
Here is a complementary song dedicated to all Web 2.0 Entrepreneurs:
http://www.fuzz.com/blip/user/PeterUrban
What prompts people to link to TinyURl et al? Insecurity about the content?
Darren, as in D, for dumber than a rock.
Agree that monetization for social media sites has to go through behavior, context, then the social graph in order to be hyper targeted. Thus far it has been based on reach / scale with low CPMs because of exploding inventory and ads that haven’t been relevant/targeted. But i think we are closing in on an inflection point where we can substitute relevance for reach with subsequently higher prices. The social networks are just a start: they form the basis of a user profile - interests and likes, etc. Now match that up with what a user tells their friends about all the other likes and dislikes in other content sharing sites (take FriendFeed for example) and you have a rich profile to combine with all the other behavioral targeting information collected by the Google, Yahoo, MSN ad networks. They should be able to serve up highly relevant display ads, maybe even at PPC or CPA pricing, to narrowly targeted audiences. Then we can monetize both the head and the long-tail of social media content.
elaboration here:
http://techstrategypartners.wo.....f-the-web/
Says Bell:
“This is a really good way for a search engine to get input from a human and for Google to make money. It is not the best way for a human to interact with a computer.
He argues that more intuitive Web and search interfaces, like SearchMe, are needed.”
Glad to hear that VCs are seeing the importance of user centric design and the need for natural user interfaces that get us beyond unnatural interactions with computers. The iPhone is really helping to prove that users want to interface more directly with their content and devices, at http://www.uvlayer.com we are betting on this space as well.
@PeterUrban - thanks for the plug buddy =)
Almost done moving the Blip feature onto its own servers w/o the rest of the Fuzz stuff. Couple more days and it’ll be alive on Blip.fm as opposed to fuzz.com/blip
-Arin
What is “Direct Telephone” advertising? It is #1 on the list at $110b spend.
This is pretty funny. If there is a graph that is attempting to capture Hype, then that should tell you in itself that we’re at the top of the hype cycle.
Ben,
yes ‘Direct Telephone’ trumps the lot…. that is instructive, and reinforces the argument that ‘connectivity’ is king, not ‘content’. This is despite the fact that ‘direct’ cold calling sucks and has a low conversion ratio, its still attractive to advertisers because its about connecting directly with the consumer.
Erick, excellent look at the trends and risk-points of the investor community. This is a great read for anyone monitoring trends online, from product, to Modular Innovation, to investing. I’ve included this article in the today’s Weekend Reading from The Product Guy @
http://tpgblog.com/2008/06/27/.....e-27-2008/.
Read, Enjoy & Share!
Jeremy Horn
The Product Guy
http://tpgblog.com