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David Swensen, the guy who manages Yale University's $19 billion endowment was asked the other night by Charlie Rose if there was anything he learned in school that informed his investment strategy today. David replied that he learned to argue from first principles. This struck me first as a great endorsement of the value of a liberal arts education, but it also seems to me to be a great foundation for an investment strategy. We are often asked if our strategy is to invest in specific markets, like media, or financial services, or specific technologies, like video, or wireless, or if we confine ourselves to one style or stage of investing, or if we invest only in consumer facing businesses. If you looked at our portfolio you could conclude that we invest in early stage, consumer facing, web services, in the media market. I am sure we are guilty of furthering this misconception by using this description of our firm as a short hand when we introduce ourselves. But it would not be true to say that our investment strategy is to invest in one stage, one type of business, one technology and one market. That would not answer the question - why do we invest in these things? It would not be arguing from first principles.

So why do we invest this way? We believe the web is fundamentally transformative (have we said this before). The global economy is defined by scarcity in resources, production, and distribution. On the web, the raw material is data. It is often shaped (produced) by volunteers, and it costs almost nothing to replicate and distribute the resulting product. This is profoundly different than the current industrial economy. Our investment strategy is to arbitrage the difference between the capabilities of the new medium and readiness of the existing economic and social structures to exploit those capabilities.

Looked at that way, our apparent focus on early stage, consumer facing, web services in media markets makes a lot of sense. We invest at an early stage because many of the most important new business created on the web are phenomenally capital efficient, and we are concerned that the best businesses may have too much pricing power once they are well established and it may be difficult to invest at attractive prices. That said, we have invested in later stage businesses, which we believe will transform markets, and will continue to do so.

The apparent bias for consumer facing services has everything to do with the pace of adoption. In enterprise markets, there are usually gatekeepers who have a vested interest in the current market structure. The best internet based businesses radically restructure markets. Where would Craigslist be today, if it had chosen to market classified advertising services to the newspaper industry. Would we invest in an enterprise focused business? Absolutely - but only if they exploited the "magic powers" of the web to restructure an important market and had a way to circumvent the gatekeepers to get their service to market. Will it happen? Yes. Has it happened yet? Not often.

Is our apparent focus on web services a technology specialization, like semiconductors, or internet video? No. We invest in services that engage users. We are often approached by companies with a technology that serves pages faster, or that enables video to be streamed to cell phones over current networks, or some other incremental improvement. We think it is critical for a web services start up to have in house technologists. We believe that technological innovation is often the key to attracting users early on. But we do not invest in the technology itself, because we believe technology differentiation is increasingly difficult to sustain. The technologists we do back are seldom doing basic electrical engineering. More often, they are user experience gurus and/or quants who can derive useful insights out of the flood of data that is a byproduct of users interacting with their service.

That brings us to media. Many people think of us as media investors. We're not. But it should be no surprise that we have made a lot of investments in and around media. It makes perfect sense that information markets will be the first to be disrupted by the web, but media is not the only market where services can be delivered as bits over the web. Banking, education, healthcare, and government will also be fundamentally changed. Media has fallen first because it is consumer facing and there are fewer gatekeepers to slow the adoption of a more efficient delivery model.

So yes, today we are investing in early stage, consumer facing, web services, in the media market, but tomorrow we could be investing in a later stage, enterprise oriented, platform, in the healthcare market and it would be entirely consistent with our investment strategy

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