What We Look For
The following five posts guide our thinking as we navigate our investment environment.
Our Focus
A year ago when we first re-launched our web site as a blog, we did so because we felt that the environment was too volatile for a fixed investment thesis. Instead we suggested that our thesis evolves in a dialogue with the market and that it made more sense for us to publish the conversation.
Potential to change the structure of markets
We invest in IT enabled services that have the potential to change the structure of markets. We see many plans that claim to incrementally improve the efficiency of an existing company or market. Some of these have pretty compelling economics, but in our view the upside here is capped by the structure of the existing company or market. We would prefer to invest in a business that at least has the potential to change the structure of market. Google is again a convenient, if over used, example. In their best years, the major TV networks book revenue from 300 to 400 customers. Analysts estimate that Google has more than 600,000 customers. They have fundamentally restructured their part of the advertising industry.
Information Technology Leverage
Not all IT enabled services businesses get the same value from their IT investment. We look for companies that have substantial technology leverage. When we make this point in conversation with an entrepreneur, it is usually enough to say “think Craigslist not Webvan”.
Defensibility
Historically the defensibility of information technology companies has been based on intellectual property – usually patents, sometimes copyrights. From the late 70s until the late 90s many venture backed start ups contributed key components to the information technology infrastructure we all now depend on. These businesses required a big R& D investment and often worked for several years developing their product before they hired their first sales or marketing people. Once they were ready to go to market they distributed their products through major equipment companies that sold a broad range of products to a large base of customers. Because it would have been relatively easy for a major manufacturer to mimic the innovation of a start up, solid intellectual property protection was the only way to defend the margins of these businesses and create an attractive return for the investors. As the technology infrastructure business matures, however, the nature of defensibility changes.
Scalability
One of the common concerns about IT enabled services generally and web services specifically is that they do not have the potential to scale. When the focus of venture capital was on IT infrastructure, this criticism was often voiced as “ that’s a feature not a company”. Today, a lot of the most interesting web services do seem to do one thing well - think Google, YouTube, or Skype. There have also been a number of recent transactions that could lead one to the conclusion that the major web players will buy up all the neat “features” and integrate them into a more “complete” offering. Many would offer Flickr and del.icio.us as examples.