Memo to Web 2.0 VCs: What happened to Doriot's rules?

Memo to Web 2.0 VCs: What happened to Doriot's rules?

Summary: Are Web 2.0 VC investments following the fundamentals of venture capital?

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TOPICS: Enterprise 2.0
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DMM71706BM.jpgIn 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,” PBS recounts in its Georges Doriot profile for “Who Made America.”

Known as the “first venture capitalist,” Doriot’s VC “philosophy” is studied to this day.

In “Fundamentals of Venture Capital”, VC attorney Joseph W. Bartlett, presents Doriot's “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").

Bartlett says of Doriot:

General Doriot's boundary conditions are to be treated with great deference because it is commonly agreed that Doriot is the single most significant figure in postwar traditional venture capital.

Today’s Web 2.0 venture capital investments do not overwhelmingly meet Doriot’s investment criteria rules;  two of the aforementioned “rules” are considered below.

New Technology, New Marketing Concepts, New Product Applications

TECHNOLOGY The rapid proliferation of Web 2.0 “start-ups” reflects the wide scale access to low cost and easy-to-use software and technology. In “Web 2.0 'no money down' model: heady, not bubbly” I discuss Web 2.0 low barriers of entry.

Today’s Web 2.0 heroes boast about launching a new app over the weekend for a few hundred bucks. They don’t invest time or money, so they don’t think about trying to make money. Social Web start-ups begin as “public betas,” with new applications and services put out on the Internet for free. If a cool app gains traction with the hip MySpace demographic, then the weekend software developers start to understand maybe money is needed to run the show.

MARKETING – PRODUCT APPLICATIONS In “Web 2.0 monetization by Google AdSense, Where is the business model?” I discuss how crucial business model components, such as differentiated marketing and product development strategies, are lacking in Web 2.0 “start-ups.”

In the fast-track Web 2.0 start-up world, “business model” does not appear to factor into “stealth mode” or “public beta” or “soft launch” strategies. Many Web 2.0 start-ups that make Web applications and services available to the public for free, first stake their claim to a piece of the Social Web real estate, and then, sometimes as an afterthought, look to Google to “show them the money” through AdSense.

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")

BET THE JOCKEY Web 2.0 VC investment “bets” on “management” generally fall into one of two categories:

  1. Investment in Web 2.0 start-ups founded by Internet “pioneers” who made their mark during the first wave of the commercial Internet.
  2. Investment in Web 2.0 start-ups founded by “20-something” weekend software developers.

INTERNET PIONEERS In “Wetpaint CEO invites anyone to 'start their own click-and-type Website' " and “DoubleClick veteran Kevin Ryan wants to pay you $50 for your video” I present two Web 2.0 start-ups founded by 1990's Internet veterans.

I spoke with Ben Elowitz at Wetpaint:

From luxury diamonds at Blue Nile Inc., to tech books at Fatbrain.com, Ben Elowitz has a track record of 1990’s e-commerce success selling specialized product to targeted consumers. Today, however, Elowitz is favoring open collaboration, over commerce, with his Social Web start-up, Wetpaint.

I spoke with Kevin Ryan at ShopWiki:

Kevin Ryan, former CEO of DoubleClick online advertising firm and one of the original 1990’s Internet pioneers, is now firmly in Web 2.0 territory with his start-up comparison shopping search engine and community buying guide, ShopWiki.

ShopWiki received its first round of VC funding this week, $6.2 million from Generation Partners.

Ryan noted the importance of his 1990's Internet history in securing funding, according to Red Herring reports:

the process of getting the funding was fairly easy. He has known Mr. Hawkins (Generation Parnters) for a long time and the two spent five years on the board of HotJobs.com…He was approached by other venture capital firms about funding ShopWiki, but opted for his friend.

“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," Ryan said.

WEEKEND SOFTWARE DEVELOPERS In “Web 2.0 financial success: Easy as 'two weeks and $700 bucks'?” I discuss the cavalier “management” style of Web 2.0 “start-ups.”:

Digg, apparently, was launched without a pre-determined business model and is currently using Google AdSense for monetization of its traffic. Kevin Rose, co-founder and CTO of Digg is quoted by InformationWeek:

"I was sitting around thinking about how this would play out. My background in school is in computer science. I wrote a scoping document to a friend, who is a developer. The friend said it would take two or three weeks to create and cost 700 bucks, so I said, Let's go for it."

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Topic: Enterprise 2.0

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