March 29, 2007
I am going to shamelessly borrow from Fred Wilson’s blog post yesterday, both for a good quote and for a quote from another post he linked to.
The quote is actually borrowed from none other than Warren Buffet:
Be fearful when others are greedy and greedy when others are fearful.
These are great words to live by. For me, one of the proudest periods in my VC career was when our partnership made a calculated decision to be active investors in the post 9/11 meltdown. While I was new to the business and candidly somewhat shellshocked, my more seasoned partners who had ridden other down cycles in the business firmly took the view that the trough is the best place to be sowing seeds. Which we did. And, while it took 4 or 5 years, our portfolio from that vintage is chock full of winners that we are really proud of. A great lesson.
Does that mean that now is the time to be worried?
To some extent, I would say it probably is. Lots of money is chasing many fewer high quality deals, and nowhere is that more the case than in the Internet sector.
But, I would also invoke quote of the day #2 which is from Peter Rip in his now infamous post entitled “Web 2.0 Over and Out”:
VCs have always made money at finding the ideal point of friction between the Present and the Future. Profits accumulate in the gap between What Is and What Is Possible. Web 2.0 is now firmly in the category of What Is.
Peter is right.
Internet venture investors faced two challenges in the last wave: many of the credible ideas were unoriginal and not hard, which even in decent markets led to lots of small companies nipping at each other with no big winners. As for the good ideas that were hard, many were simply too early, ahead of market or technology preconditions for success.
Today Internet investors face the first problem in spades, resulting in a seeming overinvestment against a number of credible but unoriginal and not so difficult opportunities. The timing problem, though, has been inverted. With more and more media being consumed online, and the coincidence of bandwidth, computing power and a new generation of Internet software and tools, many of the original promises of broadband are being realized, and pretty rapidly. As an investor, the challenge has shifted from being too early to finding companies that really are doing something difficult and so will enjoy real competitive barriers.
Or, to use Peter’s terms, the Future is coming at us hard, the trick is finding the points of friction between here and there.