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.

Thursday, August 17, 2006

Why The Venture Industry is Broken, pt 317174

Here's an analysis from a VC - like most others - looking to invest in Myspaceconomy plays (a la Photobucket).

Now, it's not a bad analysis in itself.

Until the point when he notes that:

"...I don't believe MySpace has shown investors a clear view of whether a company in it or dependent on it can every make a venture return."

lol - exactly.

All of which lends a great deal of support to the hypothesis that the venture industry is broken in no small part because, well, most VCs are out of their depth when it comes to investing in tomorrow's growth markets (in this case, the social/cultural).

Myspace widgets won't make huge $$$ - he's right. Not that that's stopped VCs from placing their bets anyways - witness the recent (and unfortunate) funding of Photobucket, for example.

But The whole point is that VCs missed the boat, and despite that, they continue to ask the wrong questions, and learn lessons from their big mistakes in 2.0.

The real play, of course, was Myspace itself - and the new breed of players that are taking deep lessons from it about the hypercultural and the hypersocial (and I distinctly don't mean lame imitators who don't get it, like Tagged and TagWorld).

These players get very little interest from venture guys, and so the result is a huge innovation gap.

Like I've pointed out, the real chasm these days is VCs themselves - here's very nice support for that thesis. Clearstone might be better off thinking about what made Myspace happen, instead of trying to eke out incremental returns from players attempting to parasitize Myspace.

-- umair // 1:23 PM // 6 comments


U - Boy, I hope that it's a cold and not cancer.

If VCs are 'smart money' that help facilitate taking an early idea to either its fruition (as an IPO) or an acquisition to be part of a larger entity, then they inherently need to be: 1. smart about what they invest in (hard to be smart in newly developing markets) and 2. they need to have an identifiable exit/outlet (hard to do when strategic market players are dynamic).

Unfortunately, not many would have predicted that News Corp [main stream media] could have been an exit for MySpace [social network] 3-5 years ago. Or that Google would have been any company's exit until Google went public.

This gap sounds like a big problem, and with big problems, come lucrative returns for the VCs (or hedge funds?) that figure it out.
// Anonymous CoryS // 3:42 PM

Given the costs involved in starting up hypersocial web/mobile properties, why would anyone look to a VC anyway? Angel funding, personal investments, etc. seem to be the way to go when it comes to getting these projects off the ground. Although I suppose if the builders of the thing are unable to grow because they themselves haven't figured out how to make money from their creation, a VC could come in handy, but at that point, what does the VC offer besides money? IF they don't have the type of people who can help the company other then to throw money at it, what good are they for these types of companies?
// Anonymous Anonymous // 4:46 PM

I agree with anon, cut VCs out of the loop. Hard to see where they add value at all.
// Blogger Mahashunyam // 2:55 AM

The C in MySpace and other VC opportunities is Social capital and if a startup gets it right, the Capital is provided by its users in tiny increments one person at a time.

What is more, these VC's don't have or need an exit strategy and they don't require a financial return on their investment.

They put in SVC and they get out SC and it has to return only a tiny percentage on their investment because the other return they get is personal creative satisfaction.
// Blogger Earl // 5:58 AM

I remember from the last bubble, the most common VC term that I heard when we pitched was "game-changer". The photo storage/database service or playlist management feature provider or any other such MySpace plugin is not actually changing the game, they actually ARE the changed game. Their only exit strategy is to be acquired by News Corp. which will never happen in any significant way, b/c it is orthogonal to the business model and platform that they are managing. Also, considering how lean a MySpace can run in terms of working capital, there is no need to integrate with ASPs that are only around because they leverage your customer base.

Does anybody see a 50%+ ROIC on the Photobucket round? In order for that to happen, the edge of their value chain, all the social networking sites, need to grow proportionally to let the revenues filter down to PB.

Not sure if that is really Long Boom, sounds more bubble-ish to me.
// Anonymous Jayastu Bhattacharya // 3:25 PM

Hey Guys,

All good comments.

I would just add:

1) I'm pointing out that Photobucket (etc) isn't the oft-wished-for game-changer.

1.5) Photobucket etc aren't the Long Boom; you're looking in the wrong places. Look at markets, networks, and communities.

2) A big part of the problem for venture guys is the sudden death of capital intensity (ie, zero investment businesses which can actually scale).

2.5) Another huge part is exactly social capital - VCs do not understand the social; in fact, it's mostly creatives who do.

3) Try and think about it this way - a huge percentage of yesterday's venture dollars were spent on...advertising.

4) Which is ultimately what got disrupted by Goog!!!!

5) lol.
// Blogger umair // 4:24 PM
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