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Monday, May 15, 2006

The Real Chasm in 2.0 is VCs

I took this post down because I really didn't wanna offer yet another long explanation of what I think is wrong in the venture community, but several people have asked me to repost this, so...

Don't look now, but it looks like venture guys are finally beginning to get the massive gaping chasm at the heart of 2.0 (which we've discussed in excruciating detail).

But they are asking (and answering) the wrong question. The malaise in the venture community isn't down to entrepreneurs - it's squarely and fundamentally down to VCs.

Now, of course, there are exceptions to the argument I'm gonna make, and you know who some of them are.

Last time around, VCs were the guys that helped entrepreneurs discover how to tap mass markets. Today, the vast majority of them aren't doing that - there are very few VCs who are providing the kind of insight, fresh ideas, or leadership the community needs.

As I've pointed out, this is because many of them don't understand media or cultural industries, which is where the action will be for the next few years. They don't understand the new drivers of scale - as evidence by Feld and Josh talking about doing exactly the wrong thing: reaching scale in decaying, vanishing mass markets.

To make this intuitive, all you have to do is think about Myspace recently destroying YouTube in a matter of weeks - there couldn't be a more stark confirmation that, when it comes to edge strategy, most venture guys have (not to put too fine a point on it) no idea what they're doing.

To make this clear, let's go back to the old saw: what is 2.0?

If you think Web 2.0 is purely technological, you end up with Om's recent thesis, where you're basically trying to sell nicer use experiences to a moribund software industry.

That's kind of insane from the point of value creation - because it fundamentally misses the economics of 2.0

Those technologies - lamp, rest, blah, blah - are a commodity. If we want to talk about 2.0 from the point of view of value creation and capture, it becomes pretty clear pretty fast that 2.0 is the common set of design principles and attributes (as in mechanism design, not make it look nicer design) which unlock radical new ways for people to connect and coordinate: markets like Digg, networks like Last.fm, and communities like MySpace.

The technology matters, sure - but it's also cheap, ubiquitous, and very, very easy to work with. Instead, what counts is the fact that guys like this are embracing radical kinds of management and strategic innovation which make old economics obsolete. For example, they're rethinking the way a dying media industry thought goods had to flow through value chains.

Now, if you follow my argument, you end up at a very different place. You end up with the hypothesis that 2.0 is going to cause tectonic shifts across industries.

Consider HCL's recent radical management innovation, recently discussed in a very nice catch by M. It sure feels 2.0 to me. It's the emergence of what is a vast, untapped market for 2.0.

Consider Fanlib. It sure feels 2.0 to me. It's another example of an emerging market for 2.0

But you'll never hear these examples discussed by the usual suspects, whether VCs or otherwise. The point is that the Valley is caught in a core rigidity. It's spent so long thinking about tech, it can't think about anything else.

And the problem is that 2.0 is much, much more than tech - it is about a new economics. And these economics are changing the way business is done all over the world. It's the Valley's fault - the fault of the senior guys, the thinkers, the leaders, the VCs - if it can't (or won't) notice.

Of course, this begs the question - why won't/can't the venture guys get it?

I think VCs are the new chasm because they are so scarred by the bubble, they're scared of new concepts and new Big Ideas - they are paralyzed into trying to "monetize" yesterday's stale, tired, old ideas. Yes, many venture guys have always been vultures - but a good portion were also fairly visionary. That fire in the belly is gone - the passion to disrupt and change things has disappeared.

Ultimately, this death of ideas, novelty, and renewal is why we end with the VCs thinking 2.0 is about technology; why we end up with the guys who should have an economic vision failing to create one; why we end up with a whole community of very smart guys, who, afraid to step outside their narrow comfort zone, are missing the obvious and enormous tectonic shifts rumbling through the economic landscaope, where innovators outside are using the real 2.0 - markets, networks, communities - to disrupt new industries almost every week.

So I'm glad VCs are beginning to have conversations about the latest chasm, but, frankly, I think the real problem is, in fact, something a lil bit hilarious: they're talking furiously about where the chasm is - from inside the chasm.

-- umair // 3:12 PM //


"venture guys explicitly don't want young guys who want to change things. They explicitly want the opposite: spreadsheet jockeys and, to a smaller extent, dealflow amplifiers"

this isn't unique to VCs... this is a symptom of the problem with corporate america. too hierarchical / cronyist and not enough of a meritocracy.
// Anonymous Anonymous // 4:24 PM

One counterpoint that must be considered is that the VC business is like any other investment business... focus on minimize risk.
Going with a proven team, or people who can open doors is a way of minimizing risk. Their money is not free, at the end of the fund they must pay that money back to their investors.
That does not change the fact there are many very talented young entrepreneurs that will succeed because they have nothing to lose, and they are closer to the potential audience.
Thanks for the post!
BTW I havent figured out how to do trackbacks yet, but this post compelled me to write one that I have been meaning to get out over the last week or so.
New Media is Old Media
// Anonymous Anonymous // 6:59 PM

Anon 2,

I think that's a good point, but in fact, minimizing risk is only half the equation. VC as an asset class is difficult to justify purely by minimzing risk, no?

Anon 1,

I agree - that's why I used the example of GM. But there are industries which are shifting away from being corporocratic...
// Blogger umair // 8:11 PM


Industries? Please expound!

I've seen examples of companies moving towards a decentralized innovation / mgmt / workspace / pick one model. Semco in Brazil, Google, Rite Solutions are three...

// Anonymous kareem // 8:29 PM

The problem isn't that VCs don't "get" Web 2.0. It's that apart from selling eyeballs to the greater fool (Flickr, MySpace, etc), there aren't any interesting Web 2.0 investment opportunities.

Whether HCL uses Web 2.0 to manage employee relations is irrelevant to VCs. We can all agree that elements of Web 2.0 (both the technology and the philosophy) can yield improvements for companies across the board. But that's just like saying that email makes business more efficient. It's a long way from creating genuine opportunities for investors to back a company and make a return.

In fact, it seems to be the entrepreneurs who are lacking vision regarding Web 2.0 -- why do we need hundreds of social tagging, online sharing, etc, etc startups? They're all the same. And virtuallyi none has an investable business model. What I'd like to see is an entrepreneur (or a VC!) with the vision to use Web 2.0 concepts to develop a product that someone actually needs! So far it's mostly "cool" and useless....
// Anonymous Max Bleyleben // 8:31 PM

Anon2 here : Umair- Agreed team experience is not the ONLY variable. So along side of the idea, the revenue model, the competitive environment, the IP involved, and many other factors Team/Experience is just another factor.
Despite my unwavering belief in my company, I can see why YouAreTV is not yet funded. With Google, YouTube, MySpace, Brightcove and the other 100-150 direct and indirect competitors in the online video distribution space what makes us different? Why will we succeed at what we do? VCs only have a general grasp on the market so any red flag that goes up that presents a reason NOT to invest that screams louder than all of the reasons to invest.
Ideas don't make money, the execution, and monetization of those ideas do. All of those other considerations are included in the equation of probablity of success.
// Blogger David // 8:53 PM

Hey Kareem,

I didn't mean as extreme shifts as you're talking about - I just meant shifting away from Anon's semi-cronyism/hierarchy. That's happening in places as distinct as banking, pharma, luxury...

Hey Max,

I have gotta say, as much I respect you, I totally disagree with you.

What HCL is doing isn't employee relations - it's deep management innovation.

There are a ton of companies interested in those kinds of management innovations HCL is pioneering.

Why not a 2.0 play focused on doing that set of things? That's a genuine opportunity - but it requires pioneering a new market.

But isn't that what VCs are there for?

There are a ton of markets, networks, and communities gaining enormous traction.

Aren't VCs there to help them develop new business models that work?

Some of them are redefining branding from the ground up. That is going to be their new business model.

But VCs across the board are assuming that selling eyeballs is the only model, so they don't invest and help these guys develop.

Those are just three examples.

I disagree with your argument, in the end, because it makes VCs only out to be cash dispensers. If they're not more than that, then why do they exist as an asset class?

Thx for the comments guys.
// Blogger umair // 8:55 PM

Take a look at koolweb2. User added, reviewed, & ranked web 2.0 sites..
// Anonymous Anonymous // 9:03 PM


You are so not helping my argument...

// Blogger umair // 10:38 PM

Link to Fanlib is incorrect.

Can you link to story on MySpace destroying YouTube in a matter of weeks? Are you talking about MySpace selling episodes of 24?

// Anonymous Alex in Los Angeles // 10:58 PM

Sitting in India I can only draw a huge sigh after reading this !!

If you talk about a VC's in the valley trapped in a chasm then I don't even know how to describe the VC's that are based here.

For instance I am yet to see any single interesting idea out of here funded by a VC. I can't think of even one good idea that got funded so far.

It is like it is a totally different galaxy here. The S curve is totally alien concept, may be it can be related to be looking like as dollar sign :D which can be earned through cost arbitrage.

If a local VC or any VC from elsewhere( who come here after doing the painful space travel :) ) decide to make some investments then they would rather put their money into cement companies, real estate or old proven internet models (stale job sites, travel sites etc)

And yeah every VC that I met here except two of them would very bluntly put "I don't give a shit about the coolness and innovativeness of your concept I am only concerned about if it makes lot of money now and a gaurantee that it will make a boatload money in the future"

// Blogger Rajan // 5:12 AM

Just as a matter of interest, have VCs *ever* been important in funding "media"?
// Blogger phil jones // 7:28 AM

"the problem with corporate america. too hierarchical / cronyist and not enough of a meritocracy."

If you think that corporate America is not enough of a meritocracy, God help you if you work just about anywhere else (i.e. not in the US) where there is less meritocracy and more nepotism and cronyism, etc.
// Blogger Gen Kanai // 10:42 AM

"If you think that corporate America is not enough of a meritocracy, God help you if you work just about anywhere else (i.e. not in the US) where there is less meritocracy and more nepotism and cronyism, etc."

Agreed, but that doesn't make it ok!
// Anonymous Anonymous // 3:27 PM

>>> Myspace recently destroying YouTube in a matter of weeks

Umair - I wasn't around much recently, perhaps I missed that one, can you clarify what do you mean by that...?

hope is not 24 thingy as other commenter state b/c then I would disagree...
// Anonymous Anonymous // 11:11 AM

Gen Kanai,

Ummm...perhaps a gig at HCL wouldn't be too bad comapred to a corpocratic job in a dysfunctional US corp, eh? :-). Seriously, US-centrism in general never ceases to amuse me : wake up, the US is not the center of the Universe or mostest/bestest/fastest/coolest in everything or even a lot of things.

// Anonymous Anonymous // 6:41 AM
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