We are true believers in the potential of the web. Over the last year, we have seen a number of lightweight web services that could be the foundation for large and valuable businesses. Many of these services appear to be fundamentally changing the structure of their markets. This creates a tremendous opportunity for venture capital investors, but it also requires an appreciation for the very real differences between these opportunities, and the more “traditional” hardware and software opportunities that have been the bread and butter of the information technology venture capital business for the last 30 years.
Many of these web services reach customers directly through the internet rather than through channels; they are developed quickly and released early; they tend to be purpose built narrow services.Their value is in their usefulness not their comprehensiveness or their level of integration. Many of these services are “peer produced” - created by the same community of users that consume them. Because these services are often built on top of open source software, run on inexpensive and powerful hardware and delivered over the internet, they require a lot less capital. In the past, the differentiation and defensibility of an information technology business was usually based on the technical difficulty of solving the customer’s problem and the use of patents and copyrights to prevent competitors from replicating the solution. Today, with everyone building on top of the same tools, the differentiation is more subtle, and defensibility is more often based on authenticity of the brand, the loyalty of the community and/or the exclusive access to valuable data that is produced directly or indirectly by the web service.
It is easier to analyze an enterprise software opportunity. The business model is proven. The metrics are broadly understood. Unfortunately, if the growth is, as we suspect, going to be in web services, there is no way to avoid the heavy lifting required to understand the opportunity and develop an investment strategy that fits.