Posts tagged Capitalists
You’ve seen it before. Someone raises a bazillion dollars and Twitter lights up with congratulations, as if the ability to raise money is synonymous with success. While it’s true that sometimes venture money does signal something positive is happening at a company, the best indicator of long-term success is a large and growing ecosystem.
In other words, look to developers, the tech industry’s “kingmakers,” to borrow Redmonk’s term.
Something Ventured, Little Gained
Why not venture capitalists? After all, they’re the ones funding tomorrow’s next big Microsoft or Google, right?
Well, no. First of all, none of today’s industry titans started with venture capital. From Facebook to Google to Microsoft to Oracle, each of the industry’s leading technology vendors started with great technology that developers or users loved.
Besides, it’s not as if VCs have much of a track record (Webvan, anyone? Or Color?). While we tend to think of venture capital as a high-risk, high-return gamble on the future of technology, the reality is that venture firms have averaged a measly 7.4% return over the last 10 years, according to Cambridge Associates, which means that VCs delivered worse returns than every major U.S. stock index.
In other words, your money was worth more in an index tracking the S&P 500 this past decade than with a venture firm:
Not every VC, of course. As Businessweek notes, some firms like Greylock have delivered outsized returns for their investors. Even so, as O’Reilly Alpha Tech Ventures co-founder and managing director Bryce Roberts thinks the industry must change to survive:
@mjasay yes, but doesn’t excuse poor performance. the asset class is broken and in the midst of getting reinvented.
— Bryce Roberts (@bryce) August 6, 2013
Not surprisingly, OATV’s investment thesis is to follow the alpha geeks; to see the future by looking at what matters most to the über geeks of today. OATV helped to spark the trend toward smaller funds tailored toward early-stage deals, many of which try to predict where ecosystems will emerge.
The irony, however, is that smart money is rarely as good as smart developers at predicting the future. JBoss, SpringSource and other companies already had vibrant communities before VCs got involved to try to monetize them.
Slavishly Following VCs On Twitter
When not dispensing cash (which is most of the time), VCs are also prone to dispense wisdom via Twitter. There are a few, like GRP Partners’ Mark Suster (@msuster) and Union Square Ventures’ Fred Wilson (@fredwilson), who regularly teach me a great deal about the technology business. Others, like O’Reilly Alpha Tech Venture’s Bryce Roberts (@bryce) and Greylock’s John Lilly (@johnolilly), offer insight into life in general.
But then there are legendary investors like Kleiner Perkins’ John Doerr whose Twitter feed reads like an infomercial for his portfolio companies. Not very interesting or enlightening.
Like venture returns, I suspect the ROI on following the average VC is quite low. While the average Twitter user has just 208 followers, the average VC commands 3,500 followers, according to Zeno Group data. People likely follow the VCs hoping to get a nugget of insight or to make a connection that will generate a nugget of Series A financing.
In my experience, neither is likely.
Average Joes, Average Josephines
Which is not to disparage VCs. Rather, it’s simply to recognize that they, like everyone else, can be average without much to say. And they can be exceptionally brilliant, generous people, just like we find outside the VC world.
But the larger point is that developers, not VCs, are the best indicator of a technology’s success. As Gustavo Niemeyer argues, “Network effects and dependency relationships [are] what make developers a better indicator [of success] than VCs,” because a successful developer ecosystem reinforces and feeds itself. VCs can dump money into a company, but money ultimately is no guarantor of success.
In sum, VCs aren’t members of the Justice League, donning capes and skintight suits (thankfully) as they battle poor returns and gift cash to a benighted underclass. Importantly, they’re also not nearly as good as developers at defining the future of computing.
So if you want to see the future, look to what developers are doing today. Which open-source projects are they embracing? In which partner programs are they enrolling? These are the real indicators of long-term technology success. Not venture money.
Image courtesy of Shutterstock.
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The allure of making millions, perhaps even billions, of dollars developing mobile apps for the consumer market is obvious. Instagram just got a cool $1 billion from Facebook. Path has a $250 million valuation. Even Twitter was started as a mobile, text messaging-based service.
Venture capitalists are always on the lookout for the Next Big Thing when it comes to consumer apps. But fledgling entrepreneurs may find a higher likelihood of creating a sustainable business and attracting VC dollars in the business-to-business (B2B) market.
The Allure of the Consumer
Consumer apps are sexy. Mobile developers and designers working on the top consumer mobile apps are considered rock stars in Silicon Valley. The Path team has been widely commended for its app’s user interface. Instagram created a huge community for wannabe hipsters. These developers are highly sought after, well-respected and are going to get paid big time.
But for every Foursquare, there are hundred of startups that meet an inglorious end. Succeeding in consumer mobile is difficult. Consumers expect things to be free, or very cheap. The ability to monetize consumer mobile apps depends entirely on scale. Build a user base and squeeze revenue through whatever means possible – be it ads, in-app purchases or paid downloads. Venture capitalists are willing to give seed rounds or Series-A rounds to consumer mobile apps only if there looks like a way the service might be able to scale. â¨
“If you build Instagram or the equivalent, that sort of thing can happen to you. You can go from zero to hero sort of almost overnight. That is never going to end, by the way. That has sort of been the story with media. Not just in the mobile world but in the Web world and the film world and the television world and the music world for a really long time,” said Kevin Spain, general partner at Emergence Capital.
But Emergence Capital does not look for consumer apps. In its decade of existence, the VC firm has focused exclusively on B2B applications, getting in on venture rounds for Salesforce, Box, Yammer and others. Spain said the VC firm is willing to look at the “unsexy” element that is B2B because there is value to be had in the realm.
“The hits are really big, but guess what? Then there is everybody else. That is the 99%,” Spain said. “We are starting to see a lot of entrepreneurs that maybe a year ago were starting to develop consumer apps that are now starting to think about business-oriented apps. You can still build really big, successful businesses here, by the way. Look at Salesforce, look at SuccessFactors and countless others.”
The advantage of building a B2B mobile app over a consumer app is that, from the start, there is a target for revenue. In many ways, the freemium world of consumer apps relies on a strategy of “build an awesome product, tack on a monetization method, and pray.” This can prove to be difficult. Only a handful of companies are going to be able to make meaningful money, or make meaningful exits, developing for the consumer world.
Is B2B for You?
Spain and Emergence Capital are not B2B evangelists. The firm is not actively trying to change entrepreneurs’ minds on what they should build. If an entrepreneur walks into Emergence’s offices and says they are 50/50 on whether to go consumer or business, the firm will state its case for business and let the entrepreneur decide. Emergence’s advice would sound something like what Spain told ReadWriteMobile in a phone interview earlier this week:
“If you are successful in executing, there is a greater likelihood that you are going to be successful and have a winning outcome than if you go down the consumer path. Maybe the highs aren’t quite as high. There is not a B2B company out there that is worth the $100 to $200 billion that Facebook is going to be worth. Not anything that has been created recently, at least. That is OK. If you build a business that is worth $10 billion, that is still a pretty big win. If you can do that with a higher probability, I think for developers that seems like a smarter path to take,” Spain said.
There are opportunities in several B2B categories. One is to find an existing category with an incumbent business and try to outdo it in the mobile realm. As an example, Spain said that a mobile CRM solution could potentially disrupt Salesforce. This route can be difficult, though, because a purely mobile solution has to be head and shoulders above the incumbent to gain enterprise market share.
What excites firms like Emergence Capital more is the ability to create a new category of mobile B2B app.
“Mobile is a new platform, fundamentally. The Web was the last platform, client-server was the platform before that. So, if you think about client-server, there were entirely new classes of applications that came into being. You think about spreadsheets and word processing programs,” Spain said. “Whole new mobile-centric B2B application categories [are what] we are much more energized and excited about. We think that is where the really, really big wins will probably come from.”
Spain mentioned health care as an area ripe for B2B mobile disruption. The health care industry, as a complete vertical (from physicians to insurance, pharmaceuticals, hospitals and hospice etc.), is the biggest single industry in the United States. Many of the mobile applications for health care are still consumer-related, not fundamentally trying to change how business is conducted.
The barriers for B2B mobile health care apps remain high. A doctor once told me, “my staff told me that if we go completely digital, they would all quit.” And that was in a Web-based world. Imagine adding the mobile niche, and the headache blowback likely intensifies. Health care, as an institution, is the hardest industry to move in the U.S.
For entrepreneurs and app developers, consumer products are sexier and offer the biggest potential rewards. The safer bet, though, may be to look toward enterprise customers.
“Fundamentally, in the business world, you build companies to serve other businesses that solve real problems. Businesses that have money in the bank are happy to have people solve their problems for them – and pay them for that privilege,” Spain said.
â¨ Healthcare and B2B images courtesy Shutterstock.
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Venture Capitalists have a big impact on the software that hits the web and the rest of us have been fortunate to get a good look into many of their minds thanks to the recent rise of the blogging VC. Some VCs love to share how they think about various technology issues on their blogs – but what do they really love?
VC Larry Cheng posted his 4th annual Venture Capitalist Blog Index today, listing and ranking 155 blogs written by venture capitalists. I discovered it when a feed we have in our team RSS reader tracking comments posted around the web by VC Fred Wilson delivered the link. I put the list into ITA Software’s Needlebase, scraped a list of all the blogs, then put them in a Blekko custom search engine. I searched for the word “love” (as I always do in any new search opportunity) and found that these 155 blogging VCs have used the word love in exactly 15 blog posts so far this year. What do they love? Read on for an amusing survey of 15 things blogging VCs love in 2011.
Mark Suster loves info graphics. He said so in a comment on his post How to Handle a VC Presentation with No Deck.
Chris Dixon says that people love horse races like NYC vs Silcon Valley, Facebook vs Twitter, IPO markets vs private exchanges, the valuation of some startup vs some other startup. But he says that “these questions are all footnotes that will be forgotten in a few years,” in his wide-eyed and awesome blog post PREDICTING THE FUTURE OF THE INTERNET IS EASY: ANYTHING IT HASN’T YET DRAMATICALLY TRANSFORMED, IT WILL.
Brad Feld loves working with entrepreneurs and helping create new companies. It’s all about doing what you love, he writes in a reflection post titled Snow in Seattle.
Jeff Bussgang says that if you love running your business, that’s one of the factors that can make it wise to walk away from large sums of money. He’s sat with two portfolio companies that have made that decision recently and wrote about it in a post titled Walking Away From Liquidity.
Charlie O’Donnell is excited about the new API for Q&A site Quora he says he’d love a Quora column in Tweetdeck and a Quora Feedera email digest in his inbox. He’s looking for a way to “monitor the important conversations without having to sit in it all day.” Hey Charlie, this isn’t as cool as a Tweetdeck column, but did you know that Quora provides RSS feeds (ReadWriteWeb asked them to and they did!) including for Answers posted by username? And the URL structure is really simple. (My answers are at http://www.quora.com/Marshall-Kirkpatrick/answers/rss) If you’ve got a list of people you find compelling, it’s not hard to build an OPML file of all the questions they answer. (I put their names in a text file, find and replace to turn those into feed URLs, then use a plain-text-to-OPML web service, save the file locally and import into a reader of your choice.) Primo signal-to-noise there, too. Will an API propel Quora into the mainstream… and will that suck?
Rob Day loves the funny looking dogs that win the Westminster Kennel Dog Show. “Be polarizing,” he urges entrepreneurs raising money. “The winner always seems to be some funny-looking dog, often a variety of dog you’ve never heard of even if the general category is familiar, and probably a dog that some people roll their eyes at and some people love. That’s what you want your pitch to be.” How to raise venture capital for a cleantech startup in 2011
Brad Feld loves the web design firm Slice of Lime.
Albert Wenger loves being told that his idea for a namespace for people is completely crazy.
Mark Suster loved getting to see the White House. How Twitter Got Me into The White House & Saved My Son’s Birthday
Albert Wenger again, in a prior conversation about his namespace for people idea, said he’d “love to hear from folks whether they think these are real problems with the current de facto solution and how services should deal with them (ideally with examples of good or bad implementations).”
Charlie Daniels would love to do an experiment with the students in his college class to test his theory that socioeconomic background is a primary determinate of a person’s comfort meeting new people.
Brad Feld loves starting off the year with CES.
Fred Wilson hands his blog over to guest poster Charlie Crystal, who points out that startup founders love to take risks – including stupid ones when it’s with their own money. M&A Case Study: ChiliSoft
Jeff Bussgang loves five apps he found in 2010 (Flipboard, Instapaper, Disqus, Foursquare and Tweetdeck) He wonders if they will blow up as businesses in 2011.
Fred Wilson kicked off 2011 with the awesome statement that he loves “doing random stuff on the web which takes me to new places and new ideas.” Cheers to that, Fred! Globalization
Image from Hikingartist.com
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