November 30, 2009

I’ve been thinking about this topic a lot recently, and the funding announcement for Chegg and BookRenter motivated me to write a quick post.

As a VC, I think a lot about how to determine what investment areas I think are interesting and also how to select the most promising companies within those areas.  Recently, I’ve found myself confronting two different paths.

Path 1 is chasing the money. Watching where money is flowing, and then looking for entrepreneurs/opportunities that match. For example:

  • Altius Education: A Spark Portfolio Company.  The for-profit education space has clearly been a moneymaker and it’s no secret.  We thought the entrepreneur Paul Freedman was excellent and had some very important differentiators in his model.  But in my view, this was clearly a case of chasing the money
  • There has been a melee of activity around the social gaming space.  This isn’t reactive – clearly all these deals were in the works long before Arrington’s Scamville posts.  But this was clearly the case of investors chasing the money.
  • Chegg: It blows me away that 10 years after, the best solution for the broken textbook market is textbook rentals.  A part of me is just baffled, but at the same time, Chegg is killing it and has a lot of room to grow.

There are some pro’s and con’s to this strategy:

Pro’s: Clear consumer willingness to pay, more certainty around business model, easier to choose “good” companies

Con’s: Prices of these investments are often high and you are always wondering if you are investing “too late” in the market or that a company will come out of left field and change the game completely.

Path 2 is chasing the problem.  Doing this is a little more subjective, and requires that we have a very strong point of view about how markets and customers will evolve when presented with the right solution.  The expectation is that if done right, the money will follow.  For example:

  • Kateeva: We invested in this company assuming that OLED will be the next major technology for large displays.  Kateeva solves some significant problems that prevent the manufacturing of these displays on a large scale.  However, it’s still very early for this sector on the consumer side as well as the OEM side currently.
  • Bump Technologies:  A very cool technology that has attracted some high profile backers.  Not a lot of dollars here at the moment.  But the challenge of moving data between devices seamlessly and securely is a very interesting problem to solve.  You could imagine a lot of applications for this down the road, including payments.
  • Flat World Knowledge: Like Chegg, Flat World is solving the problem of expensive college textbooks.  But they are trying to change the entire structure of the industry and the product, which opens up the opportunity for greater customization and freshness of educational content.  The downside is that the business model is unproven and it will take some time to convince buyers that this is the right alternative.

Pro’s: Potentially more strategic value to acquirers if you bet right.  Better chance to build an industry transforming company, which sometimes (not always) leads to bigger potential exits.

Con’s: Business model is less clear.  Unclear sometimes whether you are building the right product for the right customer.  Can be a solution that is introduced too far ahead of its time.

I don’t think either approach is better than the other.  A lot of successful investments have been made in both categories. Personally, I find that I’m intellectually more drawn to path 2.  But I think I could be well served by thinking more about path 1 investments as well.

  • Author robchogo
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