A week ago I authored a blog posting on the history of venture capital for Jonathan Patrick and 898 Enterprises. I promised to come back and explore in more detail the principles of modern VC, initially authored by Georges Doriot.
Doriot’s first principle is what I’ll call the “new factor.” Doriot believed that venture investments investments involve new technology, new marketing concepts, and/or new product applications. The driving force behind this policy is that venture investment needs something unique and novel that addresses an unmet need. The reason, of course, is a question of competition. If you’ve got the only solution, everyone with that problem has to come see and pay you for the remedy.
To understand the effect of having new technology, look at the effect of any modern industrial revolution. The gasoline powered engine disrupted so many traditional markets and economies from buggy whips to horse shoes. That’s the point of the “new factor,” you need something that disrupts in a life-altering way. New product applications can recreate the life cycle of a technology. Do you think the original intention of the Internet was streaming video and digital music? There is probably no better example of new product applications that the internet and its seemingly unlimited number of applications.
The tricky part of this issue is not accepting the necessity of new technology or product applications. Those are relatively tangible ideas that we can wrap our minds around. The difficult part is understanding the role of a new marketing concept. A great case study for this discussion is hotmail.com. Hotmail, while an early email platform, was not the first of its kind. Its unique and competitive element, crated with the value-add of investor Tim Draper, was the creation of viral marketing through the email invitation system. Hotmail was one of the first platforms to do invitation only type services. Like most modern applications, invitation only is really not designed to choke off usability. Instead, its designed to force conversation about the product as people search for users in order to gain an invitation. It creates buzz and raises the profile, almost providing an air of exclusivity.
All entrepreneurial opportunities need some kind of “new factor” in order to capture and hold the market, but high-growth opportunities that seek venture investment need a life-shattering newness.
Next up, I’ll talk about the need of investors having a controlling interest in their investments.
