Friday, April 27, 2012

Like a Rolling Stone

I am often asked about the theme around my investments and for the past couple of years have answered that I invest in great people in emerging growing areas and the rest takes care of itself. Based on the quizzical responses, that explanation has been inadequate. As I use this forum as a way to flesh out my thinking on points and as a way to communicate with others, here's a stab at a deeper and more nuanced reply to the 'what areas are you investing in' question:

As an overview, the other day I was on a panel with Lawrence Lenihan of FirstMark  and in response to a question about how things are different today from five years ago, he said that the entrepreneurial paradigm has switched to 'it's now easy to start a company, yet so hard to scale it'. He's so right and that remark set me off to thinking much more deeply about what's driving some of the fundamental changes in the market. To illustrate his point on scale of users and infrastructure, here's some recent statistics showing 60 second activity across some major sites:

Facebook  695,000 status updates
Skype:       347,000 calls
Craigs list:   12,000 new ads
Twitter:       98,000 Tweets
Tumblr:       20,000 posts

As a frame of reference, ten years ago investors and entrepreneurs were broadly categorizing their companies as being B2B, B2C, then a hybrid B2B2C. In the last five years, however, the social, broadband, mobile and visual waves have upset many entrenched players (e.g. Yahoo), while driving extreme user and shareholder satisfaction (e.g. Instagram). Thinking about what's behind this has led me to a conclusion that the fundamental market and technology trends have opened greenfield C2C and C2B opportunities. YouTube really was the first notable example of a firm that was born around the recognition that aggregating consumer files, to be distributed to other consumers, could be a massive market opportunity. The founders of YouTube did not have traditional broadcast experience or capabilities, instead, they took an outsiders approach to disrupt an existing market. They validated the notion that there's an opportunity in building consumer to consumer platforms, where the value-add to users is easy self-expression, psychic rewards, and entertainment. For the business, it's a new channel to reach millions of consumers with like interests/demographics, or a vehicle to gain instant insight. Insight is really important as, I believe the John Wanamaker quote of 'I know 50% of my marketing dollars are wasted, I just don't know which 50%' is no longer valid in a world where you can sample

More instances abound, for example, when you hear about 'big data companies', most often the conversation points to an entity that aggregates (Facebook Airbnb or LinkedIn) or creates (Instagram) massive amounts of unstructured data and distributes it (Youtube), or  analyzes it (Tracx), redirects it (Pinterest), or adds value to it (BillGuard) in a way that could not have been done a scant few years ago. The initiation of the value chain is with the consumer, a solitary individual, when massed together has incredible value. The difference in the technology necessary, the road map of key success factors, and capital capital deployment differ markedly from the prior generation. In fact, given the state of technology deployment (smart phones with cameras, social deployment, and 3G, these companies could not have existed five years ago. For this reason no entrenched competitors exist in an opportunity that has sprung up overnight and is tremendous.

As Lawrence so rightly pointed out, building the technology behind these firms is not a herculean task, but scaling the traffic and the systems when you deal with hundreds of millions of identities, or records, is indeed huge and the scaling, not the starting, is what can get to be capital intensive. The good news is that, it does not take that much capital to know if you have caught an express train, and when you do, it's not that huge a risk factor for the follow on investors either.

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