Web 2.0: VC2 2.0 Panel

Because of 1) traffic, and 2) massive overflow at the registration desk, I ended up arriving to the first workshop 30 mins after it started.

I decided to attend the “VC 2.0” panel, featuring Paul Graham, Fred Wilson, and my friends Ross Mayfield and Steve Jurvetson. The room is packed, no wonder.

When I arrived, the discussion was around Web 2.0 definition and investing, and how open source is influencing both software infrastructure and community process (Ross mentioned Wikipedia as an example).

Fred and Steve mention discussions they have had with Oracle and IBM executives, and the effect of open source on both business strategies: IBM is pushing Glue Code alongside Websphere, Oracle has developed an automatic source code analyzer that detects open source module in the code base of potential acquisitions in order to get rid of them.

The panel then talks about how Web 2.0 has changed VC investment strategies, and the amount of capital invested. Paul Graham states that he looks at the tools used by the prospective investment (Ruby vs. Java, etc.) – which is a very strange statement to be honest – basically use the most appropriate, efficient and scalable toolset. Fred reckons that they will tend to invest smaller amounts because of reduced capital requirements. For Ross, Web 1.0 was about Commerce, Web 2.0 is about people and the fact that these new tools are putting them back in the driving seat. For Steve, Web 2.0 and Open source drive huge economies of scale thanks to network effects: he mentions SugarCRM and the fact they now support over 20 languages thanks to the community (which is after one year more than Salesforce.com in 8 years).

Q: Exit is M&A and not IPO, because of the limited appetite of the public market and Sarbanes Oxley issues
A: Steve makes the point that IPOs will only make sense for the top winners in VC portfolios, where returns will be spectacular. It should be targeted as a goal, being open to listen to the right “take-out” opportunities as they come.

Q: How to avoid a backfiring from one’s community when taking VC investment or being acquired. Quote the MySpace acquisition a bad news for its community.
A: Ross states that the issue is community management, and the social contract that has been signed with the community.

Q: Why should a company take VC money if they are already cash flow positive ? Isn’t a VC investment becoming an endorsement ?
A: If you don’t need the money, then don’t bother with VCs (Fred Wilson: “If you don’t need money, and you take it, you should be shot”). And the endorsement value can only be leveraged in the context of relationships and contacts VCs can open.
A: Fred mentions another type of deals where VC (or private equity) funds buy out a portion of founders equity.

Q: What is most valuable: technology, community, business model ?
A: Steve explains that clearly the value is in the network and the (geometric) pattern of growth of one’s community.

Q: What is the expected desktop platform, 5 years out (vs. today’s dominance of Microsoft) ?
A: Weblogs and wikis will be used widely across businesses, and these tools don’t need Windows. Ross sees applications contributing to the social fabric as a driver for diversity.

Q: There is a gap between Angels investing and VCs that is growing because of limited requirements of Web 20 companies. This has created a need for an incubator/early stage fund that VC firms could contribute to ?
A: Ross suggests that one of the ways would be to allow VC partners to invest their personal capital. Fred mentions that an early stage VC fund has been created for that purposed. Steve explains that there are limitations due to their own limited partnership agreements (and the need to avoid Double fee, Double carry).

Q: How can Web 2.0 companies make money without having millions of users (in the case of an infrastructure company) ?
A: Generate value at all levels of usage (Ross mentions wikis delivering values to 2 people to large teams to very large communities).

PS: Updates and spell checking will be done later.

Tag: web2con