What drives Web 2.0 VC bets?

Web 2.0 VC investments lack the financial and intellectual rigor demanded by the founder of modern day Venture Capital investing, Georges Doriot.

In “Memo to Web 2.0 VCs: What happened to Doriot's rules?” I posited that Web 2.0 VC investments lack the financial and intellectual rigor demanded by the founder of modern day Venture Capital investing, Georges Doriot:

In 1946, ‘A Frenchman with a cool eye formed a publicly traded company to assess thousands of business proposals — and funded the best ones, inventing the modern practice of venture capitalism.’

I cited Doriot’s six “rules of investing”:

• new technology, new marketing concepts, and new product application possibilities
• a significant, although not necessarily controlling, participation by the investors in the company's management
• investment in ventures staffed by people of outstanding competence and integrity (herein the rule often referred to in venture capital as "bet the jockey, not the horse")
• products or processes which have passed through at least the early prototype stage and are adequately protected by patents, copyrights, or trade-secret agreements (the latter rule is often referred to as investing in situations where the information is "proprietary" (proprietary information))
• situations which show promise to mature within a few years to the point of an initial public offering or a sale of the entire company (commonly referred to as the "exit strategy")
• opportunities in which the venture capitalist can make a contribution beyond the capital dollars invested (often referred to as the "value-added strategy").

Of the six Doriot principals, “bet the jockey, not the horse” may be the dominant (and easy) Web 2.0 VC investment rationale.

Kevin Ryan, former CEO of DoubleClick online advertising firm, has noted the importance of his 1990's Internet history in securing funding for his Web 2.0 start-up, ShopWiki:

Getting the term sheet took three and a half weeks…It was the fastest, easiest, and most efficient fund-raising process I’ve been a part of. That almost made it fun…What made it easy for the VCs who looked at it was that the team has a track record. The last time we started from scratch, and it ended up being worth a billion dollars.

In TheDeal.com’s “VCs see opportunity in blogosphere” today, the importance of the individual at the helm is also asserted:

Venture investors normally cite the strength of a company's management team as a key reason for investing in new technologies and ideas. But two new venture investments in widely read blogs have taken this concept to a new level: investing directly in people for the content they produce.

A $5 million first round of funding for Arianna Huffington’s political blog is cited, as well as a “small” funding for Om Malik’s technology blog.

HuffngtonPost.com is operated by political insider Arianna Huffington and GigaOmniMedia is run by tech media insider Om Malik.



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