Venture Capital and Web 2.0

Post ImageToday’s second keynote features Mathew Ingram talking with Dr. Paul Kedrosky about venture capital and Web 2.0. Here are my notes from the session (my comments in italics):

  • Is this another bubble? In a sense we’ve returned to 1995, two browsers got funding! (Maxthon and Flock) In a sense, it feels like we’re renacting a lot of the same things that happened last time. “It takes a lot of dead bodies to fill a swamp.” Mathew says Web 2.0 is making the same mistakes faster! Paul says he sees the same plan four times a day, which is always a sign of the bubble.
  • Paul says there’s a strong argument to be made that the first bubble (not tech, but way back) wasn’t a bubble at all, but rather a reaction to policy. We’re really good at overpainting bubbles.
  • Mathew says there seems to be a lot of money, and people have to make investments. Paul says we’re at record levels for VC, in terms of capital under management. There’s as much more money out there now as the last bubble, it’s just much more concentrated among the so-called top tier.
  • In the venture industry is a rigged market, in that the best venture investors fish from a well stocked pond.
  • Mathew wonders if you need the money VCs have? Paul says if you don’t need the venture capital, don’t take it. If you can build a company that doesn’t require capital, you’d be an idiot to give part of it away for VC involvement.
  • The nice thing about a lot of the consumer-centric Web 2.0 companies is that you can do them very cheaply. Well, sort of I guess. Cheaper when compared to ten years ago, sure. People still cost money!
  • Paul says there is very little barrier to entry now. He says its sort of like being pecked to death by ducks!
  • Given that its so easy to start a company, how can they raise all this money if they don’t have a business model? Paul says YouTube looks like a very early mockup of a television network of the future, so its a very interesting company (though they should stop stealing other peoples stuff). Paul thinks you can come up with a business model later.
  • Look at Google, the precedent is well set, maybe you can stumble your way into a business model. You better have scale though.
  • Questions from the floor are starting early. What about progression, say to B2B or enterprise? Paul says its definitely starting. He thinks the spread from consumer to enterprise has gone from 99% and 1% to maybe 60% and 40%. One of the most interesting companies Paul likes is DabbleDB, a classically Web 2.0 company oriented towards enterprise.
  • Any examples of good, profitable models? Paul says a good Canadian example is PlentyOfFish.com, who are pretty profitable. Paul thinks they are doing about $15,000 a day.
  • Is VC in Canada lagging for Web 2.0? Paul says that everywhere he goes, it seems they think they have a seed financing gap. Even in Silicon Valley! In Canada in particular, the level of wealth per capita isn’t high enough, so yes there is a gap. Under the current structure, it’s hard to do seed investing out of a large fund.
  • While it may be easy to build a Web 2.0 company on credit cards, you can’t build a sustainable, successful company. Thoughts? Paul says that’s true. Later often doesn’t happen for venture capital firms.
  • How many things that get investment are actually features and not products? Paul says its epidemic proportions. He says it is easy to start thinking that features are products. People feel they have plausible deniability though, because things are getting sold, and big companies are doing it, just look at Google.
  • Has Skype made some VCs rethink their strategy? Paul says investing and venture capital is trend following and number following, so absolutely.
  • The death of the IPO has caused some big change in the venture game. So a big acquisition (like Skype) that looks like what an IPO might have been, they’ll all jump.
  • Is AdSense the only model? Paul says there is a preoccupation with AdSense, for sure. In a sense, Google is the single customer. The cashflow is great, but there are other ways to get paid, even just multiple ad networks or subscribers.
  • Paul says we are back at the advertising level online that we were in 2001, and it’s still just a drip in the bucket in terms of the total ad spend in North America. Paul thinks network television is starting to lose it’s monopoly, there are some cracks in the dam.
  • Paul says in Canada, we need more big exits in a dense area so that people have some examples to follow. In the Valley, people see other people being successful and think “I gotta get out there and do that!” It’s a chicken and egg problem in Canada, and as (missed his name) from Bessemer says, “we don’t have enough chickens or eggs.”
  • Paul says the Boston area investors have a history of investing up in Canada.
  • Paul thinks that venture folks remain as preoccupied with how you’ll spend your money as ever, if for no other reason than it’s an important discipline to have, to go through the steps of planning. You’ll find venture firms are more creative than usual when structuring deals.
  • Paul says institutional VCs are more flexible and creative lately, not stuck on doing the same old thing.