Looking back at three years of Web 2.0 investing

Almost three years ago, I left the fund I was a general partner of and decided to switch my investment focus from mid-stage enterprise software to (very) early stage consumer Internet. Dotcoms as they were, since the Web 2.0 meme had not been cornered yet. Since I had limited investment track record in that space, it was clear that raising a fund – may it be from traditional limited partners or high net worth individuals – would be impossible, or so close to it that it was not worth trying. The alternative (like any bootstrapped startup) was to start investing our own cash in some of the companies that were building a new generation of services for the consumer.

Why the consumer? Because I still could not figure out how to make angel-type investments provide any meaningful leverage/return in the enterprise software space, whereas interesting things were being built for the consumer on a capital efficient basis. So efficient that these companies sometimes managed to launch their service and even generate revenues on very limited outside investment - because hardware, bandwidth and (open source) software costs had decreased by one to three orders of magnitude. And since the burst of the first Internet bubble had drastically lowered salary expectations of early stage startup employees, overall startup costs decreased to a point that a friends and family, or angel, financing of a few hundreds of thousands dollars allowed a company to reach a number of key milestones.

Three years ago, we were busy inviting the same group of friends to a bunch of social networks. Some people were reading blogs directly on web sites or through the first generation of feed aggregators, and all VC bloggers could sit around a dining table. My initial interest in user generated content – text, pictures, audio and the very beginnings of video – led to my involvement in Buzznet (photo sharing), Truveo (video search) and Feedster (RSS search). Around the same time, I came across Userplane (private instant messaging network) for the first time – but did not engage for almost a year. I also made a conscious decision to attend a lot of conferences, events and other geek dinners. This allowed me to meet casually a number of the CEOs I would end up investing in: Dogster’s Ted Rheingold, Edgeio’s Keith Teare, Rapleaf’s Auren Hoffman,… And this blog – started in June 2004 – led me to meet another group of entrepreneurs: Kaboodle’s Manish Chandra, Maya’s Mom’s Ann Crady and Wikio’s Pierre Chappaz just to name a few. A large number of deals also came through referrals from angel investors or firms I have worked with several times.

And then there is the strategy that brings it altogether, putting each companies in a nice set of well defined buckets. I started with 3 buckets: Search, Social Media, Infrastructure. And evolved each bucket with the investments I made, and the ones I passed on. But that will be the subject of other posts in the next couple of days.

The slide below is a list of the companies I have invested in, most in cash, a few in kind, sometimes both. I have also listed two advisory boards I am/was part of: Netvibes, that I met a few days after they had closed their angel round, and MyBlogLog, that was acquired by Yahoo in January 2007 before we closed the angel round that was in the works. Were also acquired – by AOL – Truveo and Userplane, respectively in January and August 2006.

It is common practice for startups these days to keep a stealthy profile even several months after raising a round of financing, and this has delayed the (almost) full disclosure of my portfolio until… tonight. I want to point out however that I have always made these disclosure in private when required, for example when an entrepreneur has contacted me about a company that would be overlapping or competitive to one of  mine.

PS: Peter Rip has an interesting piece: Web 2.0 - Over and Out, in which he suggests that the Web 2.0 hype has peaked, and now the real work begins. We'll also address that aspect in future posts.

Comments

[John Furrier]

Jeff: congrats on the three years of hard work. It was two years ago that PodTech was conceived and I'll always remember our conversations at dinners and events. Those companies are lucky to have you on their team.

Keep it going!

[Jason L. Baptiste]

wow, long time no post. That's an amazing portfolio, but more importantly a very diverse one. Coming from the enterprise side, how do you think enterprise/ business applications can innovate in the same manner that the consumer side has? Not only innovation in products and distribution, but in pricing methods.

-JLB

[Serge Lescouarnec]

Jeff

Good to see you back on the blog block

I had the pleasure to see a couple of the people you mention (Ted and Ann) at South by Southwest.

I did take issue with David Hornik as to whether some companies that got VC money made sense as an investment.

He obviously agreed to disagree with me (at least on his picks I guess, others can make mistakes...)

Have a good day

Serge
'The French Guy from New Jersey'
http://www.sergetheconcierge.com

[Sameer]

Nice to see a post pop up here. I remember enjoying your topical discussion at the StartUp Unconference in MV last year. Glad to see that you are writing again.

Cheers, Sameer

[Mike Volpe]

Looks like you have built a solid portfolio. I cannot agree more with the focus on capital efficiency. Today there are so many tools available to build consumer and small business services quickly and cheaply. The key question you are trying to answer in a startup business is "will people pay for this product?" and in software / consumer internet it no longer takes a lot of time or money to answer that question.

If you know this as an investor, you will pursue a different strategy than people have before, and I think you will be pretty successful.

[Marshall Kirkpatrick]

Jeff, that's a portfolio to be proud of for sure. Your participation in the conversation in this market is much appreciated as well.
take care,
Marshall

[Jeff Clavier]

John> Thanks for stopping by. Yes I do remember these conversations and the very first podcast we recorded in my old Palo Alto office 2+ years ago.

Jason> Pricing usage, or better pricing value, is obviously where enterprise software will have to go. The interesting notion is that only a few CIOs will see user generated stuff as an opportunity to make their IT life better/cheaper/easier. We will discuss that at Software 2007 by the way.

Serge> I have had my fair share of criticism or questionning about some of my cos: "Nobody makes money on instant messaging","Yahoo and Google are both developing their own (video search) solution, what do you think Truveo can do again these guys",... At the end of the day, we make a certain set of assumptions to back our investments, and until proven wrong, we stick to them.

[Alex de Carvalho]

Congrats, Jeff, you've come along way and the hard work has paid off. I won't see you at blogger dinners in Paris, but let me know if you're in Miami and we'll set one up for you. There are plenty of other startups here besides MyBlogLog ;)
A btt j'espere,
-Alex
scrapblog.com / tapio.com

[Auren Hoffman]

Jeff -- congrats on the three year anniversary. We've been incredibly lucky to have you as one of our investors ... i am sure all your other portfolio companies feel the same way.

[Chris Yeh]

He lives! Welcome back to blogging Jeff. And not a bad portfolio either!

[Julien]

Jeff, You rock. What a portfolio !
too bad you don't wanna help entrepreneurs in your own native country. ;-)

[Nic Brisbourne]

Hi Jeff - good to see you back in the saddle again. I have been saying for some time that building consumer internet companies is going to get more difficult. I was starting to think maybe I was crazy but now I don't feel so alone...

I'll look forward to your posts on the subject.

Also - awesome portfolio - who'd have thought it when we were struggling with the Reuters spin out??? Great work.

cheers,
Nic

[Fergus Burns]

Hi Jeff

Good to have you back in the saddle - missed your blogging

Hopefully we can grab a pint on my next trip to the Valley

Best Regards
Fergus

[stephane lee]

Hi Jeff !

How do they say "fin limier" in English ?

I was wondering : how do your start-ups keep in line with their users expectations ?
Would they care for some feedback ? ;-)

[Garth Hall]

Jeff,
Only started reading your blogs beginning of 2006, and have enjoyed them and learnt a lot. Thanks for that. Then we got distracted, and you went quiet. filmcommunity.com has been around for six weeks and building quietly toward the Cannes Film Festival.

We're 'a social MEDIA network for Film & Filmmakers, and for anyone interested in the Cinema' (with a Wiki attached). Now there's a hybrid for you - we're developing 'A Wiki for Film' as a companion site.

Congratulations on the portfoilio you've put together, and the people you've helped,
best wishes,
Garth