OpenSource Connections
Category: Uncategorized
On Wednesday, I had the opportunity to attend the Potomac Tech Wires 2009 Venture Capital Outlook. First, I applaud the Potomac Tech Wire for putting together a fine panel. All of the panelists were insightful and informed, which made the discussion interesting and flowing.
While there were too many nuggets to write down, I tried to capture the most noteworthy ideas. The bottom line of the discussion was that for entrepreneurs with good ideas, there will be money available in 2009. In the .com bubble, many venture capital firms pulled back their investments, and they missed out on the next wave of great companies. Its easy, relatively, to make money in a boom economy, but companies that make money in down economic times are the ones that tend to be the strongest long-term. So, the large VC firms realize that they will want to take advantage of the opportunity to find the strong companies which emerge from a recession. Its in hard times that companies look more to innovate, and the panelists expected innovation to continue to drive costs down geometrically, expanding Moores Law into areas like clean energy. To quote Harry Weller, “Capital is there for talented people.”
Naturally, my interest was more in software and web-based opportunities and where the panel saw the trends. One of the most prevalent themes was the change in the advertising model for online communities. In the past, the idea was that websites could simply be massive advertising platforms, but given the poor clickthrough performance of social networking sites like Facebook, the marketing model is rapidly changing. Now, media buyers want to see advertising leading to incremental sales rather than just brand building. There is still a recognized difference between brand building and sales-driven advertising, but the advertising agencies want to see the potential to drive sales rather than just create awareness.
This doesnt mean that the web as an advertising platform is a dead idea. The big advertising agencies realize that there is a disproportionality of advertising money spent on interactive media compared to the percentage of time that people spend on it. The trend is shifting towards two areas of focus: video and direct response advertising. According to Sean Greene, direct response advertising is important because it drives sales, but the entrepreneur that wants to get the attention of the venture capital community needs to have significant numbers on a unified advertising platform to get the interest of advertisers. When asked to quantify that number, he said that for general advertising purposes, a website needed to drive 1 million unique visitors per month to garner interest, although with niche markets, the number would obviously be lower.
Since measuring brand equity is difficult, adverstising agencies are looking for better metrics to provide them with a true way to measure performance-based online advertising. In an ideal world, advertisers could link a direct line to a purchase from an advertisement; however, most purchases have some level of attenuation from the viewing of the advertisement. Something along the lines of Andy Gregorowicz`s Wikipedia Concept Extractor could provide a baseline for extrapolating the ads performance against the context in which it was placed. Whatever the idea is, the goal is to make the venture capitalist say “Oh my God, I have never seen this before! Its going to be fundamentally disruptive!” (…and theres money to be made here)
As Don Rainey put it, the next few years will see the move from the information age to the wisdom age. People arent going to look to the Internet for information, as it is now saturated with information. Instead, they are going to look to the Internet for wisdom, for the synthesis of the information into the pertinent chestnuts of wisdom that help them do their jobs, live their lives, and pursue their dreams more effectively. The idea that the Internet would let the masses publish and that everyone could contribute has led to the realization that not everyone is a source of authority. According to Forrester, 18% of people surveyed trust personal blogs (compare that to a 16% level of trust for company blogs…makes me wonder if theres any value to this whole “blogging” idea!) compared to 77% of people who trust e-mail from people they know. What is missing is the concept of the reputation of the information provider. E-mail from people you know has a higher threshhold of believability because of the implicit trust already established, whereas a random blog plucked from the blogosphere lacks that same level of implicit trust and credibility. Thus is born the need for a reputation engine.
Because of the boom-bust cycle of the 2000s, venture capitalists are moving towards a 5-15 year time horizon. The dearth of IPO filings in 2008 means that quick exits through the IPO market are not the first choice option that they once were. While other companies are still acquisitive, that market, too, has slowed. As a result, capital efficiency is paramount. At one time, entrepreneurs could get all of the money they asked for because the exit markets were so liquid. However, now, entrepreneurs must learn to get by with less, to be more efficient, and to be more innovative with the capital they are given. This means that the amount of money to be expected in early stage ventures will be lower, and venture capitalists will look for proven performance (breakevens, or, even…
Even with the economic slowdown, venture capital and private equity is not going away. As Mark Heesen said, 10% of American employees are employed by venture capital-based employers, and those firms generate 18% of the U.S. GDP. In a time when leverage seems to be such a curse word, thats a pretty good use of financial leverage.