Last Updated Jul 18, 2008 2:22 PM EDT
BNET: There is still a lot of "Web 2.0" talk in the industry. How do investors see the term? Justin Perreault: Occasionally there are technology innovations that are profound and generate whole ecosystems. There are obvious ones like the PC's emergence and the Internet in the mid-90s. But Web 2.0 was in my view an amalgamation of next-gen development tools, technologies, and techniques, all of which were helpful and useful, but in and of themselves were not a wave that creates an ecosystem.
BNET: But aren't there are a lot of companies in the space? JP: All of a sudden something becomes good and interesting because it's in [some] category, and everyone loses sight, at least temporarily, of the basic issues -- what is the value proposition for the customer, what is the compelling problem you're trying to solve, and then what is the economic business model around which a company could be built, versus sounding like you're pitching scripts to a Hollywood movie studio. They all become derivative.
Fifteen years ago you might have seen 15 to 20 me-toos. Today you see hundreds of me-toos. They micro-slice up the market opportunity in terms of bringing something to market like one of the first entrants, frequently carving them up into smaller and smaller niches of appeal and by definition carving up the size of the markets. They get funded in narrower and narrower amounts. In some of these [markets], they tend to be leaps of faith. For example, a lot of these web 2.0 things become "let's get the audience and figure out how to monetize it later." People don't stop to ask what is the size of the audience even if you do win, and how do you eventually monetize it?
Another case in point, we've seen a lot of business plans around the notion of building communities of people who provide care of some sort to family and friends. That can range form the notion of aging demographics and the baby boom generation caring for aging parents to plans we've seen come through the door where a member of the family has a very profound and upsetting but not common disease, and looking to build a business around that. It's just a law of large numbers versus a vertical niche. We see those kinds of dynamics all the time, but they all seem to get funded.
BNET: Why do they get funded? JP: Good question. We ask ourselves that. I don't think it's a question of starry-eyed entrepreneurs over-judging their prospects and steely eyed VCs saying no. There's plenty of over-judging on both sides and plenty of capital looking to find a home.
BNET: Don't you need the hundreds of entries to get to the few that will actually succeed? JP: There is always overshoot. If you take any one of these sectors and look at the distribution curve about them, you always will have some monster winners. I think the question is what's the shape of the rest of the distribution? Is there opportunity for the next 20 to 40 companies to be good investments? You may be a loser, but at least the stage is set for some number of people to create businesses that have real value.
BNET: What other areas are hot? JP: The virtualization technology in the enterprise data center. VMware -- triggered a wave that resulted in a whole top-to-bottom re-architecting of the whole computing stack. That is a profound wave, for both the venture community and startup community, where there are many ways to play and win. I think the sheer number of winning companies will be greater [than with social networks]. Granted, they won't be on the scale that a Facebook or LinkedIn will become if they play out as promised.
There's a whole sector of renewable and solar energy that's consuming a lot of venture capital. I think a lot of VCs are cutting their teeth on their first energy investments now, and the fallout will be high, but that's when the opportunities are enormous. I think the economics are starting to emerge. That's one where I think we're probably on that first wave of hype on alternative energy.
BNET: Does high tech have the patience it needs in these sectors? JP: I think everyone got spoiled in the 90s, because you could start these companies and get exit in thee years or less. But that was an aberration. Prior to that time period and subsequent to that time period, the more normal time frame is if you're doing a start up business in tech, you're looking at seven, eight, or ten years to build a business large enough to have some substantial liquidity options. That should be the time frame people should think in. It just takes that long. That's the time scale the venture industry has moved back to. People think the two or three year s explosion is normal and it's not. It's great when it happens, and we all celebrate, but it's not normal.