I’m a little later than the crowd to comment on Fred
Wilson’s blog post on his firm’s recent investment in del.icio.us, but I have
to say that his commentary (on at least one particular point) struck me as
atypical of what I have seen taught in business schools with respect to venture
investing. Not to say this is bad for either the b-schools or the investment – just noteworthy to mention the variance.
At risk of disservice to more extensive “venture capital”
checklists in evaluating deals, an extremely simplistic model of evaluating an
opportunity involves looking at three things:
- Team – how good are the employees?
- Customer – can the company clearly articulate who buys the product?
- Growth Rate – is the growth rate sufficient to generate [VC] rates of return?
Yet Fred’s comment indicates something to the effect that
“we’re not sure what the business model is yet, but at this phase we haven’t risked
a lot of money to do the deal”.
On the surface, Fred seems like both a smart guy and honest
guy, so it is probably reasonable to take his words at face value. I haven’t
read through other people’s commentaries yet, but some other potential
hypotheses (not mutually exclusive) for why the investment could diverge from
venture capital investing a la business school frameworks:
- The
option value of having an existing investors right agreement with del.icio.us
is the real deal: 1) proprietary deal flow and early-access are the keys
here and 2) if Joshua can meet technology milestones then the investors can
have for “low” cost another look in the future as to where things stand. - The
investors have a good gut feel about the potential types of business models
that could play out but need some time to experiment or watch general industry
markers play out. I’m guessing the former more than the latter. - Variation
on theme #1: it is getting significantly harder to land quality, early-stage
deals in the Internet space even though the number of available serial
entrepreneurs has gone up. On the
one hand, there may be too much money chasing too few companies, but perhaps
there is also something to be said about the naturally sustainable market
structure. I’m less tied to this hypothesis, but maybe I’m feeling more teary-eyed
about the 40th anniversary of Moore’s Law and his statement that the
phenomena of the doubling of transistors on a plot of real estate may only last
another 5 years or so …
What I will say about the del.icio.us deal, is that some of
the investors are also actual end users of the product. I see this as having a
lot of positive effects on both how the deal is evaluated and on how the
product may evolve in the future. Congrats to the del.icio.us team and the
investors. If the investment doesn’t pan out, at least there is a cool product.
Perhaps a Warren Buffet model of investing in a different genre.
Note: Those unfamiliar with del.icio.us can view a prior post of mine here that gathers some screencast info, screenshots, etc.