It has been so long since I had a chance to blog. I know that this has already been covered in other circles, but I have been chewing on this well-written piece that BusinessWeek did on Google vs. VCs. The basic premise of this piece is that Google (and to a lesser extent Yahoo!) are competing with VCs for early stage VCs to get access to new companies with cool technology. Just a few thoughts.
1. This is not the end of VC. Some of the posts I have seen in response to this article suggest that this heralds the end of VC as we know it. I don’t think that’s the case. Sure, it will be much harder to makeVC-style returns or find companies looking for VC money in the consumer-facing services space if the acquirors are willing to plunk down $20-50MM at an early stage. That being said, there are still opportunities in communications, enterprise software, open source software, and even the consumer internet where VC dollars are useful and probaly necessary.
2. Many of these companies that are getting snapped up are nifty services with questionable or unclear plans to generate profit or generate revenue from their user bases. Unless these companies want to undertake the long and difficult process of validating a business model and generating profit, tying up with an existing company that already has distribution makes sense. Ironically, with all of this talk about a web 2.0 bubble, there is a silver lining; companies with unclear business models but promising user communities are being snapped up for millions and not billions this time around.
The thing that strikes me most is that this dynamic creates a clear set of marching orders for those who want to build companies that can be taken out for more than the $20-50MM that the big guys want to pay. You really have two options. First, go where the money is. Yahoo! and Google are beating themselves silly to see who can do the best job of serving advertisements to those who use their products (primarily search). There ought to be an opportunity in making products/services that either help the majors deliver more ads, increase conversion, bring new advertisers online, or otherwise make the ad business work better. My hunch is that this is not the kind of product one develops sitting around the table with your friends; it probably requires some knowledge of the pain points in the current online ad model. Or, find a way to build a network of users who are very aggressive users of your service in meaningful numbers — the perfect ad delivery target.
The other related option is to build a business that actually generates revenues aside from ads. Please hold your “duhs” for a moment. Think about the amount of ink devoted to cool social media companies with interesting services (mashups, web 2.0 versions of web classics like email, calendaring, and content sharing) versus the amount of ink devoted to companies that are focused on more mundane activities like e-commerce or some other business that generates revenue from non-advertising transactions with users. If you can build a business along these lines, you can afford to wait until your day comes and your market is as hot as some others are at the moment. These kinds of businesss are not easy to do but can provide real opportunities for return.
Okay, that’s it. I know this one was kind of a ramble.