del.icio.us – Stephen Shu, PhD

April 18, 2005

Where Venture Capital Investing May Differ From What Is Taught In Business School

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 40^th 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.

April 4, 2005

Musings on Maven Havens (Not Fully Thought Through)

Malcolm Gladwell, author of "The Tipping Point," uses the term "maven" to describe very knowledgeable people. These mavens are people who would know instantly whether a particular product is priced 10% too much (whereas the average person would not). They are the types of people voracious for product details in magazines like Consumer Reports and Road & Track. They can be the type of people that call the 800 number on the back of a box of Ivory soap to get the full scoop on what the soap ingredients are. Mavens may be both connoisseurs and fanatics.

Gladwell’s basic premise is that under the right conditions when mavens spread their knowledge to connector-types (networked people) which then in turn spread the knowledge to salesmen-types (charismatic, evangelist people), there is the possibility of information spreading virally. Anything from a mini-epidemic to a major epidemic is possible. The best example I have found on how blog ideas spread (in the context of the Tipping Point framework) can be found here.

Building business models around the concept of mavens, connectors, and salesmen seems like a powerful concept then. Businesses want to sell ideas, products, and services in epidemic proportions for sure.

From my vantage point, the social bookmarks platform del.icio.us is becoming a maven haven for certain Internet resources. As an example, it was there that I near instantly discovered the "wisdom of the del.icio.us crowds" was focusing in on this tremendous compilation of search engines. Never would have found that on my own. In part, I wonder whether the maven haven environment is supported largely by the fact that the user interface can seem so intimidating on first blush (see here for screenshots and screencasts of del.icio.us). I made a recent comment to an organization that might be able to improve its workflow by utilizing del.icio.us, and the comment was made back to me that "less than two people would know how to use it". Applying my high-end MBA quant skills, that means one person, right? Duh.

These observations also lead me to believe that features like different GUI interfaces for tagging Internet resources (as a user configurable preference) and the ability to both restrict use by and generate reports for different groups and demographics of people might be useful for better building businesses. More generally, it would be very valuable to be able to lincoln log together and monitor maven, connector, and salesmen puzzle pieces. The magic of creating business epidemics could then be "reduced" to world-class R&D and reading the tea leaves on introducing products in the right market conditions.

Pipe dream … perhaps. As for improving on the tagging of Internet resources, the search engine companies seems like they could move in this direction, but there also seems like there could be opportunities for some vertical integration plays to control the companies that support the maven (e.g., del.icio.us) and maven-connector (e.g., Technorati) model-based companies. From an empowerment perspective, it’s probably too simplistic to view some of these technologies just as "search engines for blogs" or "tagging and folksomy companies". If the world of finance is any example (albeit finance is a quicker market to adjust to information possession and release), the value of proprietary research and information goes up when a single entity has it and goes down significantly as more and more people have it. On the flip side though, it seems as though overall economic value can go up if the technology is designed such that proprietary solutions can be built on top of trusted and broadly available maven and connector technology foundations.

Steve Shu

Don’t forget to subscribe to Steve Shu’s blog now (click icon)! Business and technology information for everyone.

March 31, 2005

Del.icio.us vs. Del.irio.us … Are You Dizzy Yet?

An interesting business and technology case study live in the making. To bring people up to speed:

Del.icio.us (pronounced "delicious") is a social bookmarks manager that just secured some seed funding (cryptic post)… I liken it to having a free intelligent, sortable, distributable database for managing one’s bookmarks. Proprietary software and free. Pretty easy to use. Quick to sign up and configure your browser (< 2 minutes). I started to use just yesterday although I have known about it for some time.
Rumors are that the funding involves a prominent venture capital blogger (not confirmed, so I won’t be specific here).
For those not as adventuresome but perhaps curious, a good del.icio.us screencast demo (with audio) is here. You can watch about 2 minutes of it and get the gist.
Now I catch wind of a free and open source clone … del.irio.us via this great post at Bubble Generation. Here’s a quick snip of the post:

… If you don’t know, del.irio.us is the perfect example of
hypercommoditization – it’s a total (open-source) clone of del.icio.us.
A shameless clone – it rips off del.icio.us down to the font sizes, and
adds a few bits of it’s own …

… there are no entry or imitation barriers until it’s too late – until your network is already
the biggest. This is happening all over again – dot com 2.0s are
failing to build entry or imitation barriers, and are getting
hyperimitated – in every space, we see one innovator, and a huuuge wave
of imitation (networking, tag servers…etc) …

Jeff Nolan (VC at SAP) now has an interesting $0.02 on the developments too. Basically, do we collectively allow copycat type of behavior? Will the market see this as fair? Fairness is something that should not be underestimated (think about the ultimatum game, "The Wisdom of Crowds," etc.). But is fairness the right frame? By the language some people are using, it seems that fairness may need to be a consideration. Dollars and subscribers talk in this sector.

It would be interesting to take a snapshot of the current subscriber base of each of these companies and how it develops over time. At any rate, if the VC I know (through reputation only) is involved, there will be barriers to entry built up for del.icio.us down the road. I cannot say about del.irio.us. I am only learning about them now.

Steve Shu

Don’t forget to subscribe to Steve Shu’s blog now (click icon)! Business and technology information for everyone.

Update (3/31/05):

Screenshot of del.icio.us (click to enlarge) versus screenshot of del.irio.us (click to enlarge)