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May 27, 2005

Is A Consumer VC Bubble Coming?

Last post, I shared my observations from the recent Microsoft VC conference hosted by Steve Ballmer in Silicon Valley (BTW:  what an amazing young entrepreneur turned mega-executive and company-builder; he has my vote for CEO of the century so far - and I'm not just trying to suck up so that I can sell any of our companies to Microsoft!).  I included in that post an observation that the enterprise software business model is dead and VCs are really shying away from these deals.

The corollary is that consumer is hot again in the VC community.  E-commerce version 2, the digital home, online advetising, social networking and finding the next Google -- all are themes that VCs up and down Route 128 and Silicon Valley are chasing.  As a result, experienced enterprise software investors are trying to convert themselves into consumer VCs.  Literally every VC I talk to in Boston is asking themselves:  "How do I reinvent myself as an enterprise IT guy/gal into a consumer VC?"

And so the obvious contrarian thing to ask is:  is there a consumer VC bubble coming?  Just as Gary Rivlin of the NY Times observes the phenomenon of "VC Tourists" in his recent Sunday Business Section Article So You Want To Be A Venture Capitalist, I might argue there are "Consumer VC Tourists" now jumping into areas where they have little to no background and are therefore bound to lose lots of money.  Fast.  I confess to being personally biased on this one.  At Upromise (college savings loyalty program I co-founded in early 2000), we raised over $100M and spent much of it on marketing to acquire the now 6+ million member households.  I saw first-hand how quickly money can fly out the door in a VC-backed consumer play and I'm worried that it's happening again.  And, yes, I still worry that we in Boston still have a thin talent pool for successfully executing such businesses.

There's some emerging data to support the "consumer bubble" theory.  VentureOne recently reported that in 2003, there were 183 consumer deals and $1.2 billion invested.  In 2004, it jumped to 246 deals and $2.1 billion invested.  I would be surprised if 2005 didn't continue the trend.  Most worrying, this month's featured event at Harvard Business School Club of Boston is, you guessed it, "Emerging Trends in Consumer Technologies".  Uh oh.  Anytime HBS jumps on a bandwagon, you know it's the top of the curve.  Maybe the contrarian thing to do is plow back into enterprise IT!


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I would argue that recent consumer deals are bootstrapped and reach visibility on a limited funding (< $1M ?). Then, once their model is sort of proven, they can raise additional capital from angels, VCs or get taken out.

An additional point is that some of these deals will not present the right economics for most VCs to invest in (not enough money to deploy, not enough revenue potential,...).

There is a risk of a bubble, but we are not there yet. Even though it was a bit scary to see $100M+ plunked in Webroot or eHarmony.

Funny. I think this is a good early warning, but I'm not concerned yet. It will probably take a couple of solid new East Coast consumer hits before the tide really turns. After all, only a few weeks ago everyone from BusinessWeek to Boston.com to the "A-List VC bloggers" was still lamenting the lack of good consumer opportunities in the East... Actually, I think I know what's going on here, Jeff- you're trying to scare everyone away from consumer opps to get them to yourself. Very clever :)

The consumer bubble is here! And, has been on the rise for the past 12 months. I've been predicting the direct-to-consumer Internet bubble since 2002! When such predictions fell on deaf Boston VC ears and deaf ears...period.

And, recently, I have spent a lot of my time in VC pitches trying to convince the "B2C challenged" Boston VC set that the consumer bubble is here and that they're missing it; that it's opening up right in front of them and they're sitting on their risk-averse hands; meanwhile, hundreds of millions of marketers' dollars are shifting from traditional advertising mediums to non-traditional, internet-based marketing vehicles that offer direct-to-consumer engagement that cuts through the clutter.

Jeff, you nailed it in your "Why is Boston hitless?" post; I've lived it; I've worked in the B2C e-marketing space for several years and have spent time as an executive at a major ad agency. These guys just don't get it. Maybe I should move my company to Madison Ave.

Funny remark about HBS bandwagon -- I couldn't agree more -- but interesting to note that Jeff and his partners all went to HBS.

The second derivative implication makes my head hurt ... i.e. if HBS people are saying that HBS always predicts "new trends" at the peak, maybe the HBS-bandwagon tide has turned ... and there is a coming wave of practical advice/predictions originating from HBS.

Too counter-intuitive to accept ...

An additional point is that some of these deals will not present the right economics for most VCs to invest in (not enough money to deploy, not enough revenue potential,...).

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