Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Monday, February 27, 2006

Industry Note - Are VCs the Real Chasm In 2.0?

I had a fun chat with Scott a few days ago, and he has a post outlining a bit of what we discussed, so check it out for some fresh thinking.

But the larger point behind that particular discussion is simple, and probably worth a larger, broader discussion.

Out discussion was about the fact that we're at an impasse today in the 2.0 space. The 2.0 crowd has the right tools (communities, networks, attention markets, etc), but not the right audiences. Big media still has the audiences, but not the tools.

Consider Digg. Digg, as it is, is useless to me, and to most of the rest of the universe. I don't care if there's a video on YouTube about an 87 year old dude having a sex change. Reading Digg is like listening to a coked-up Connie Chung talking to the same 1000 Ajax worshippers...every second of every day.

It's not that Digg inherently sucks. In fact, I think attention markets are going to be a revolutionary, radical innovation. But, as in many 2.0 models, the content is like the community. Digg's community of pimply teenagers can give me neither relevance nor depth.

Now, the WSJ's, WaPo's, NYT's, Economist's audiences could - but they haven't been given the tools to connect and create.

This begs the bigger, more crucial question: why not?

I think the answer's simple: VCs. VCs are great are crafting value propositions for enterprise software and semiconductors. They understand those industries very, very well.

But they distinctly don't understand media and culture, and so they can't craft value propositions (or build the right relationships, etc) for their portfolio companies - and that's when they invest in the right companies to begin with.

Largely, this is because the things that make VCs good at crafting value props for software and chips - alliances, the stack, efficiency, building out ops, helping slowly win big customers, investing a great deal in a small number of plays, etc - destroy more value than they create for plays at the intersection of media, www, and consumer markets.

Hence, the impasse. The senior guys in the community that should be understanding where 2.0 plays fit in the emerging value chain, and then actively seeding that concept with potential acquirers aren't, or won't - or maybe, just possibly, can't.

I think they need new blood, new ideas, new thinking, to build that understanding. What's stopping them? VC is clubby. Like any other club, they exist to sustain asymmetries (in information, resource, capital, etc).

Now, that's not inherently bad. Asymmetries, too, can be efficient.

But I think it's becoming increasingly clear that, today, VCs are deeply resistant to change. If you factor in the pre-crash, it's taking two cycles - 14 years - to change VC. That is an incredibly long time - especially for an industry that's supposed to be about innovation!

Three simple examples.

Ask yourself: is it really efficient for VC to have so little turnover compared to any other industry?

How is it possible that while every other industry in the world has undergone wrenching change, VC looks almost exactly the same as it did 20 years ago?

Is it any coincidence that while the VC overhang (uninvested cash) piles up, the very definition of the term innovation is shifting to a class of players who are clearly much hungrier - like Ideo, Cheskin, Doblin, etc - and are busy redefining innovation on their own terms, as a design-driven discipline?

Now, I'm not trying to offend my VC readers and pals here - in fact, many insightful venture guys have said as much in the last few months (Joe Schoendorf last year, memorably). But let me be more honest than I perhaps should be: from my POV, as a strategy consultant at the intersection of exactly those spaces VCs are grappling with, the current state of VC is a full-on stall.

The failure to understand, craft and articulate 2.0 value propositions is just the latest example of this VC decay. VC must change organizationally and strategically - or the downward spiral is going to continue.

And that's why we've reached an impasse: because, just possibly, the real chasm for 2.0 is exactly the set of guys that should be seeding, growing, nurturing, and building it.

-- umair // 10:41 AM // 9 comments


That's the problem?!?
No one loves you more than me but I think you are overthinking this.

All you have to do is give the tools to the people. Not the tech people. The people. And they'll figure out what to do with this stuff.

Take me for example. I am not a tech person at all. Don't know html. The nearest I get to RSS is My Yahoo. If I didn't have an interest in new media (because I used to work for a major record label) I wouldn't know about a quarter of these apps being built.

What these developers need to do is to put this stuff in the hands of the people. The regular folks who would actually use it.

Digg? Hand a version of it to the music fans and see if they find it valuable. They don't now because they never even heard of it.

A VC problem? No. It's just a matter of having some dude (or dudette) in the company open enough to let other folks try there shit out.

If VCs are actually stopping that, then, o.k. but I really don't think so.

Sorry I cursed. It's a music industry thing. :)
// Anonymous chartreuse // 2:54 PM

The mobility of people employed in the Venture Capital industry is significant. First, in the late 90's more business people (from all industries) flooded the VC space. Lots of new blood. Many of these people were gone by 2002.

Generally, I see former founders of startups take jobs with VCs only to go back to start another business. The cycle is never ending. There are afew icons (just as their are in any industry), but the rest of the people keep switching chairs moving in and out of the business.

I am surprised that it seems so static to you.
// Anonymous Anonymous // 5:46 PM

To me it's not about VCs but is a failure of the old media companies. The Economist is a great example-- why don't they start their own DIGG? Or their own Metafilter for that matter. It would cost them maybe $100k to get the whole ball rolling, including advertising the new part of their site to readers.

Why is Yahoo! and not old media companies investing in emerging media space on the web? Relatively speaking, developing their own versions of new media websites would be cheap. Really cheap.

Maybe they will in 2006? Or is the internal strucutre so moribund that there is no hope?
// Anonymous Anonymous // 6:22 PM

I agree that many of the VCs have had more experience with enterprise firms. That being said, however, I do not think that the venture community is to blame for the Web 2.0 chasm as per your rationale.

Ultimately, the VC is not responsible for crafting value propositions that drive a business. The responsibility always falls to - you guessed it - the entrepreneur. The entrepreneur is not only responsible for building a product, but is also responsible for successfully transitioning technology from early adopters to the early majority. VCs simply provide capital, guidance, and - if you are lucky - connections.

Don't get me wrong, there are a lot of smart investors that will give you great feedback, but they are not responsible for running the company. That is why they invest in entrepreneurs. Any entrepreneur that is looking to a VC to forge his marketing position should probably rethink their general management approach, fast.
// Blogger Hooman // 8:31 PM

Ahh, Umair,

I wondered when you would address this point. The whole space that you're looking at is all about making oneself obsolete. It's a very tough gig. No one likes doing it, because it feels way too vulnerable. And here, you are doing it. Good for you.

A VC that funded a really killer web 2.0 app may just end up funding his/her demise, as the community becomes conscious of it's own intent and realizes it doesn't need a figure-head to make decisions for it.

The Crowd trusts not in it's own Wisdom... not yet, anyway. But soon. And when it does, everyone who thinks they have their hands on the controls will wonder what happened to the power.

I read Scott's piece. Love the problem space you two address, but the solution that Scott proposes sounds way too much like more silos. The boundary that defines "the audience" is amorphous, permeable, dynamically changing, chaotic, fractal, hyperdimensional. No silo can contain all of that. Let's really turn this thing inside out and let the people draw their own connections.

I've got your venture right here. Wish that didn't sound so crude, or so arrogant. Keep your eye on my space, or better yet, give me a ring and let's see if we've got something to work out.

- David
// Anonymous David Swedlow // 3:39 AM

good post - it's the same lessons from web 1.0 ...

1) cool technology without consumer demand is a non-starter
2) investors follow the hype, not the value
3) there's no such thing as "easy" money

I've been looking at old-school businesses lately & realizing that they're where most of the innovative edge strategies are actually being adopted - as a VC in 2.0, I'd focus more on companies looking to add communities that geeks looking to start them
// Anonymous Anonymous // 2:20 PM

"Now, the WSJ's, WaPo's, NYT's, Economist's audiences could - but they haven't been given the tools to connect and create.

This begs the bigger, more crucial question: why not?"

Wow, it's a weird claim to jump from this question to blaming the VCs.

Why aren't the WSJ's audience given the tools? Because The WSJ's gatekeepers don't understand or can't articulate the value to their readers.

VCs are only the solution when money is the problem. Are you telling me Digg wouldn't let WSJ run an own brand a copy of their software *very* cheaply if they came knocking?
// Blogger phil jones // 3:46 PM

The industry is changing on its own. Watching web 2.0 and the funding it needs rfequires smaller amounts of capital. Also, the huge supply of money will move lots of venture to the hedge fund industry and talent will flow there as well.
// Blogger Howard Lindzon // 3:48 AM

There is a building consensus that VC is broken. I believe that local and global communities and "social capital" models may be part of the answer. More in my post here
// Anonymous Mark Kuznicki // 7:20 PM
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