What types of investments do venture capitalists seek? How do they decide what to invest in? Two recent videos provide answers along with updates on the venture capital scene for IT sectors.

Each is an hour long question and answer session recorded at Stanford University. In the first video, serial entrepreneur Marc Andreessen talks to Stanford University students here.

He talks about ventures he’s put money into or in which he serves on the board, eg Facebook and Ning.

He notes the changes in the VC market in the 10 years since the late 1990s. He says, for example:

  • It can costs less to switch on an IT start-up and build it – cloud computing plays a key role there.
  • Initial public offerings (IPOs) are rare; companies like Facebook now grow huge without VC or IPOs.
  • There’s been 10 years of sickness in the stock market, implying this is another factor which makes VC investment more attractive.

When asked what makes a prospect attractive he emphasises deals where there is already an a large and established market for the offered product.

He strongly emphasises that ideally the product will have been already created and earning revenue or at least being used by customers. He cites the examples of Facebook and Twitter; both existed and operated well before their leap in adoption by markets worldwide. Facebook operated successfully in a campus. Twitter as a chat space between two developers working on a failing project. Today both products are founded on awesome software platforms employing the best and brightest.

He does not tell fairy tales about market take-up of new technology. He mentions how the fax machine was invented before the telephone but commercialised only a century later. And he goes on to use the take up of the fax machine in the 1980s to illustrate what is meant by the concept of “network effect“.

Here it gets interesting. He praises companies like Facebook which create their own “viral” (his word) network effect. Facebook he notes does this by asking you to check if you have invited all your “friends” in Outlook (or whatever email client you use) or whether you’d like to prompt another friend to be more engaged in Facebook.

He talks about the problem of incumbents and other established enterprises being addicted to their existing sources of cash flow.

  • His illustration for this is newspapers, held back he says by serving their addiction to dollars from ink, rather than 1s and 0s. Turn the presses off he has said elsewhere.
  • His reference to Apple’s decision from the early 1980s onwards to not license its operating system (confirmed in 1985 by Apple’s rejection of a written Microsoft proposal) can also be seen as an example of being addicted to your established source of revenue (in Apple’s case its own boxes, not licensing its IP). So by the late 1990s Apple ended up with less than 10% of the operating systems for the personal computer market, while Microsoft got a lion’s share for its various flavours of Windows.

Going against common views, he sees a shift back to the US in home entertainment electronics. His guess is that there’s just so much more software in play in entertainment devices now that the Valley has a natural advantage over manufacturers in East Asia.

"olive_opus_no_4_silver_angle"We’ve noted this. The accompanying image is of the Olive, a digital music server and wireless multi-room hi-fi player developed in the US. It’s even in the .us branding of its domain name – http://www.olive.us.

He also has an uncommon confidence in future growth for enterprise software despite the flood of activity towards cloud computing solutions.

Andreessen’s talk is useful as a beginners guide for VC, or listen to it in the background if you seek an update on VC or the thinking of one of the most wired and successful people (in many senses) in the Valley.

The second video is more mundane, and personal. It’s a venture capitalist talking about what she looks for as an investor in IT ventures. Moreover she talks about her work/life balance challenge as someone who’s spent her life working and now wants to work to live, rather than the reverse. The speaker is Lisa Lambert, Vice President of Intel Capital.

Her snapshot on the VC scene, at least in the US, is that it continues to be in trouble and continues to shrink through consolidation of VC companies. She frames the VC scene succinctly as – too much money chasing too few deals and in a recessed market where liquidity events are all too rare. “We are well off the height of our industry in the 1990s.

Noric Dilanchian