Monday, November 05, 2007
Research Note: Appetite for Disruption
So apparently Kleiner (Perkins) thinks 2.0 is over. Quelle horreur.
Actually, I agree - but not in the way you (or they) might think.
Yes, 2.0 is running out of steam.
But mostly - it's VCs themselves who are ruining the party.
From the most naively analytical pov - purely based on simple numbers - there are huge, rich, fat veins of value creation left yet to be tapped by the ideas of 2.0 that venture dudes should be drooling over.
But VCs are failing their portfolio companies, consumers, their LPs - because they've lost their appetite for disruption.
And so what should be a tsunami of radical innovation is still just an outsized wave of value creation.
So let's do an analysis, and then a mini case study.
For once, I agree - wholeheartedly - with Rubel. His post a few weeks back, about how the hype is killing the honesty, was heartfelt - and spot on (mad pr0pz to anyone who can find a link).
But where is the hype coming from? Ultimately, the money. So, as I've pointed out before, the real problem in this space is the money itself.
Venture guys investing in 2.0 still don't get it - they're the real chasm 2.0 has to cross. The "it", in this case, being consumers.
Most venture guys treat 2.0 investment either like investing in software or (worse) investing in mass media.
But next-gen media is neither mass media nor software: it's a new beast entirely. It requires a whole different order of strategic imagination, a capacity to advise to startups on next-gen business models, and a deep-seated appetite for disruption.
The problem is a structural one within the venture industry. Like any other industry, the problems are at the top: a lack of new blood means new ideas and new DNA.
Unfortunately, and I hate to be so blunt, the institutionalization of venture as an asset class over th last twenty years has eviscerated the incentives for failure, the passion, the sheer fun of the game, from Sand Hill Rd.
Many of the dudes on Sand Hill Rd are having exactly the same effect as boardroom fatcats in corpocracies: they're killing innovation dead.
Of course, real venture investors - the ones with vision - have noted exactly this dynamic.
We might, in fact, be better off without venture guys than with them.
Think I'm kidding? Consider the sad story of Zazzle.
From a strategic point of view, Zazzle should be utterly - totally - disruptive. Letting consumers remix clothes with brands isn't just brilliant - it's economically hyperefficient and strategically dominant.
From the point of view of economics and strategy - it takes a lot to make an idea as brilliant as Zazzle fail.
Kleiner Perkins, to their credit, got this much of the equation (maybe).
And what happened next? Well...nothing. Zazzle proceeded to go sideways for at least two years.
Why? Any marketing droid worth their consulting fee could tell you within five seconds - Zazzle was a play that bet on connecting consumers to crack open a dam holding back value creation in clothing, but whose entire consumer experience sucked.
Zazzle looked, felt, and tasted like a Geocities site circa 1999 - it was ugly, messy, totally unusable, and, failed to communicate almost any aspect of Zazzle's value proposition.
More to the point - to really get consumers to connect, Zazzle needed to design a new clothing value chain. Making deals with suppliers was just half the battle - what about reaching consumers, providing context, service, and all the other downstream value activities waiting to be revolutionized?
But because KP was treating Zazzle like a software investment, consumers - in fact, anything downstream from the industrial economics of production - weren't part of the picture.
Now, years later, Zazzle and their investors are finally taking steps to resolve this massive strategic error. It's signed a deal with Myspace, to let connected consumer remix clothes for their favorite bands. Great - brilliant stuff: this is real strategic innovation. It's rethinking how and where clothing is bought and sold - the first step in a real new value chain.
But this is a trickle of strategic innovation, where there should be a flood.
If it takes the best venture capitalist in the Valley years to innovate - then is there really much hope for the rest of them?
I don't think so - I think that they've fallen prey to the tragedy of success; they've lost the appetite for disruption.
Is it this one?
Great post, Umair. appetite for disruption
reminds me of a music album, was it "..for destruction"? :-)
I think you are right, earlier in the Web 2.0 emergence, there was much talk about the VC community not being able to handle the model. But before we new it the money was flooding in and the gold diggers were swarming into the valley.
Personally I think this is proof that the valley has turned into a web 2.0 sausage factory and the real disruption has to occur elsewhere with new kinds of investment, somewhere that folks aren't frightened of disrupting investment and investors.
The interesting question remains where and how? maybe it's not a place anymore perhaps it's on the net and probably not from middlemen infested investment factories, but rather some new disentermediated mechanism that goes way beyond just money as an investment.
Even more exciting times in my opinion
Here is the link to Steve Rubel's post:
This post wins you a spot in my bookmarks. Keep it up.
Umm, I call bs on this one. What happened to the Zazzle team? What were they doing in all of this? The team had a track record of poor execution - ask anyone who worked at the company. Notice Cafepress and Spreadshirt have both been doing fine.
This is partly Kleiner's fault, but as you know, these things take time to spot and even more time to fix (and this is where great venture guys differentiate themselves - in fixing this rapidly and without burning bridges).
that's a good comment. i'm by no means exonerating the zazzle team.
but if it takes kp 2+ *years* to fix such a basic strategic problem, then my original question still stands - are we better off without vc's entirely?
because other asset classes can easily just dole out capital.
also note zazzle's strategy is far different from cafepress/spreadshirt/etc.
thx for the comments guys.
VC's are a source of funding. They are not management. And there could be a couple of things wrong (and prob compounded here). The strategy may be challenging in the first place and take years instead of months. The team might have made missteps. But at the end of the day, the job of building a company falls on the shoulders of the management team. Not on the VCs. The VCs are a sounding board, a source for advice and significant shareholders, which causes them to look in the best interests of hte company. But they are not the entrepreneurs.
I'm not sure if you've ever built a company before, but VCs, despite their flaws, can add tremendous value.
let's nip the ad hominems in the bud. whether or not i've built a business is irrelevant. i work with both venture guys and startups.
sure, they can "add value". that's got nothing to do with the argument at hand. a plumber can "add value" when you need them.
i'm not talking about the operational challenges of "building a company" - i'm talking about advising a company about the big stuff. whether or not companies follow through on it, if venture guys can't do this in the first place, there is little rationale for their existence.
are you a venture guy? it sounds like it.
thx for the comments.