July 28, 2008
Robert Scoble had a good and provocative post on what he calls “Silicon Valley VC Disease.” In response to a comment by David Hornik that he wouldn’t invest in an iPhone app company because the iPhone doesn’t have a large enough market share, Scoble argues that Hornik’s comment illustrates a “disease” in which VCs’ insistence on large market share leads them to overlook important new platforms.
(Hornik has a good response here).
Scoble has a point. If VCs only invested in startups that had dominant market share in markets that were already well established, then by definition we’d miss most if not all important platform shifts, which is precisely where the greatest disruption, and greatest returns, usually come from.
Scoble also goes on to argue the merit in backing new innovations that have captured the attention of early adopters and influencers, including the absence of competition, the ease of targetting this audience, and the brand and revenue value in winning influential early adopters.
With all respect, I think Scoble misses the mark, and in doing so does a great job of illustrating what I call the “TechCrunch Echochamber Disease.” Actually, to be more current, I’ll call this the “FriendFeed Echochamber Disease,” but you get the idea. Silicon Valley’s early adopters, like the influencers in any of our country’s major power centers (think Wall Street, Hollywood, D.C., Silicon Valley) are so consumed with their own echoes in the chamber that they forget there is life outside the chamber. Sure, Scoble and his 100k or so pals on FriendFeed are early adopters, and frequently anoint new startups as the cool new thing. Sure, FriendFeed and Twitter are cool, just as Digg, Flickr and del.icio.us were a couple years ago. All are interesting new services that quickly garnered rabid following amongst the web 2.0 crowd. And that is worth something. But it does not make them investable, valuable, or in some way important in the real world outside the chamber. In fact, most web 2.0 darlings anointed in the echochamber will (and should) end up as small-ish acquisitions by a portal, which are great outcomes for the entrepreneur, good outcomes for angel investors, and almost always bad to fair outcomes for VCs.
So while Scoble has pointed out an interesting paradox in looking for dominant market share, the answer is not simply to argue that it makes sense to back companies who have won the early adopters. At least for me, the decision whether to back an emerging technology which lacks meaningful share in an existing market, should turn on whether the combination of idea, technology and entrepreneur convinces me that the startup has a realistic shot at creating a new, valuable platform of its own.
And to me, “valuable” means valuable to the broader market, not just to the EchoChamber…