For all their faults...

I have been living in the venture capital world for what seems like too long.  Many successful companies evolve to include investor syndicates consisting of 3, 4, and sometimes 5 different venture groups.  Many times the perspective and priorities across the syndicate vary greatly.  It can cause huge headaches for management teams simply trying to do their jobs.   These management teams sometimes are not exactly sure who is the boss. They are left guessing and a "gap" is created between the company and its investors. 

Despite the resulting lunacy, the measurable dysfunction manages to plod along approximating (over time) something resembling rational thinking.  I say this in comparison to one particular form of alternative: one where there is a mix of professional investors and non-professional investors.

I have lived in this dynamic believing that non-professionals can come along via the experience gained along side those whom invest for a living.  This is nothing less than a near-fatal belief. Many times the absence of experience causes all humans to cling to emotional behavior. Absent a recognizable pattern of data the emotion takes root and chaos begins to surface. One experienced investor can not overcome the emotional activity of the inexperienced lot.  I have lived this too many times to know otherwise. It really only takes one person screaming "the sky is falling" to create doubt despite substantial empirical facts to the contrary.

We live in a period currently where "the sky is falling" is very difficult to quash. Here is an example: We have an investment in a small company that has over the past four calendar years grown license revenue 400%, wiped out competition, is winning the sector and is producing significant operating margins (this is a software company).  Is the sky falling....? YES.  Just ask the non-professional investors. As a professional investor I am absolutely delighted by the progress.  We are winning a turf war and dominating a sector.  Until the market emerges into the thick of "early majority" this is about as much as one can ask for. Nonetheless, chaos reigns supreme.  It is exhausting.

So why the panic? The answer is that the non-professional investors in the deal are not familiar with the attributes of a successful enterprise software endeavor. They don't really know what to look at. There is no recognizable handle upon which the can firmly place their fingers, tighten and derive confidence. Unchecked panic is a California brushfire headed toward the planned community anxious to leap on rooftops and jump from house to house.  Don't believe me...just contact the local branch of your go-to venture firm and ask if they have any "similar" experience. It is nuts.

So what is the lesson here: To the professional investor - as capable as we make think reason alone may be, it is not always an adequate translation mechanism to overcome many categories of those who don't do this for a living.  To management teams - chose wisely whom you elect to pull into the syndicate....the price of some money can not necessarily be computed in an Excel spreadsheet.

Yes...this may all sound like hubris but this is the exact reason so many firms invest only in control positions so perhaps it is a popular form of hubris.

 

It's the Content Dummy

I remember in the late 90's the recurring theme among many "Internet-oriented" companies - the stated strategic ambition of "creating content". Many fledgling companies that came to us for funding insisted on the "content focus" but something regularly did not seem quite right: it was that much of the content that they proposed to produce for their target market was hurried and forced. Many times they published something that might seem to be appealing but was instinctively not quite on target. Popularity of content was measured in "hits" and "click-through". The frequency and momentum of this data activity was the basis of "getting funded" and "potential economic value". Many of these funding candidates were funded but with capital from others.

We kept an eye on these "content companies". We noted that while some flourished most died. This death was measured in the "peaking" of their hits and click-through followed by a slow decline thereof. What happened? Was the content losing its relevance? Why did so many die?

Part of the answer lies in choices. As the Internet grew in popularity the amount of content available exploded. The available supply of content outpaced incremental growth in Internet users wanting content and the time available users had available to sift through the increasing mounds of content. This meant fewer clicks available per capita for the mass of Internet content as a whole.

As a further result, content was required to become more specialized to be appealing. This meant that these content companies had to develop a deeper relationship with a smaller number of users. Obviously this is why search engines became so popular. They could point to that content that pertained to a particular subject matter. Content companies became beholden to the technologies that searchers used to get to what was relevant.

Users then decided that they wanted ways to organize subject matters in which they had a persistent interest. Bookmarks helped but content aggregation took the lead. These were in essence search engines that compiled data on particular subject matters or areas of interest and presented it in a way appealing to interested parties. These aggregation sites in part decreased the import of generic search engines.

So yes....we all have either consciously or unconsciously witnessed the evolution and importance of content specialization with regard to survival and prosperity of many "Internet companies." So what is this saying? What did this mean? How can we look at this?

What is interesting is what was going on in the background and it is this: one part of the Internet was increasing in value and another part was decreasing in value. Remember the great fortunes that were developed in Internet Access as the nascent Internet was evolving. These were the foundation companies that were hooking users up to this new information resource (Earthlink, Covad, AOL, PSInet, etc. etc. etc.). Where did they go?

Well they still exist but for the most part they lost their distinguishable import in the "information supply chain". In other words..."what good is electricity if you don't have any light bulbs?" They didn't provide light...only the means to make light possible and many others strted developing the commercial means to make light possible. AT&T, Time-Warner, Hughes, Sprint, Verizon...and the list goes on.

These companies managed to take market share from the pioneers of Internet access. At first is was primarily because they could bundle Internet access with other services they provided and lower overall cost to the customer and increase convenience by presenting a single bill for this bundle of services. But as these companies started to compete with each other with bundled offerings they needed to compete on something other than price. And what they had in mind was..."you guessed it....content." AT&T hooked up with Apple computer and developed an exclusive relationship for the iPhone. While one may look at this as a physical device it is actually content - it is a desired form of relationship with the Internet. They also developed a relationship with Yahoo. Through this they offered services that enabled users to organize content (i.e. content aggregation) d/b/a My Yahoo - AT&T Uverse. As a result, they are taking market share at a very fast clip from those with lower value content offerings.

So what is the history lesson here? It is this: If you are a network services provider.....you had better get on your horse and develop a strategy for layering content on top of your basic network service or else you will find yourself a distant memory in the supply chain of the Internet. This natural law applies to networks of all sorts now matter what their initial market focus. To do this...they must understand what the common ground among their users may be...why are they on this particular network access system? Is it a common industry focus? Is it a common service these users may in turn provide to their own customers? Is is a common set of problems they might share? Answer these questions carefully and you will find your network content strategy. Ignore these questions at your own peril.