A VC speaks on Web 2.0
OUT-LAW Radio, 23/11/2006
The man who refused to invest in YouTube talks us through the
hype and hope of Web 2.0 from the point of view of the ultimate
tech insider.
A text transcription follows.
This transcript is for anyone with a hearing impairment or who
for any other reason cannot listen to the MP3 audio file.
The following is the text spoken by OUT-LAW journalist Matthew
Magee.
Hello and welcome to OUT-LAW Radio, the weekly podcast that
keeps you up to date on all the twists and turns in the world of
technology law.
Every week we bring you the latest news and in depth features
that help you to make sense of the ever-changing laws that govern
technology today.
My name is Matthew Magee,
and coming up on this week's show we have a special extended
feature on the man who said no to YouTube. Kevin Hartz may have
turned down the investment opportunity of a lifetime, but he is
still at the epicentre of the second internet boom, and gives us an
insider's view of web 2.0.
But first, the news.
- Universal sues MySpace in copyright battle; and
- Users of 3's TV service could break licensing laws
Universal music group is suing MySpace in a copyright lawsuit
that challenges the 'safe harbour' status of content-sharing
websites. The case has been filed in the US District Court in Los
Angeles.
"Businesses that seek to trade off on our content, and the hard
work of our artists and songwriters, shouldn't be free to do so
without permission and without fairly compensating the content
creators,'' Universal said in a statement.
The suit is the latest to challenge websites' 'safe harbour'
status, which says that as long as they take infringing material
down they can continue to operate.
Users of 3's just-announced mobile television service will break
TV licensing laws if they view the service on a mobile while it is
plugged-in at unlicensed premises, according to the TV Licensing
Authority. While the phone runs on its own batteries it does not
need its own licence.
Users of the service also run the risk of violating the terms
and conditions of broadcasters if they use the service. Terms and
conditions for a subscription to BSkyB's sky satellite television
service, for example, forbid the viewing of the content outside of
the registered address.
3's X-Series service will let users view television which a
slingbox set top box makes available to their phones.
3 said that its advice from TV licensing was that it did not
have to inform the TV Licensing Authority every time it sold a
customer a phone.
That was this week's OUT-LAW News.
Slowly, and with a familiar gyroscopic logic, the world is
changing, and hysteria is creeping back into the technology
industry. It's not just the $1.65bn YouTube price tag, it's the
vast sums being pumped into startups by venture capitalists; not
just the newspapers signing over their ad departments to Yahoo, but
the return with a vengeance of the twenty something chief
executive.
The boom is most definitely back, and just like in the late
1990s it is based on new logic, new business models and new
thinking. Some of these business ideas will be genuinely important
and innovative, some will be snake oil, and it is far from clear
now which will be which.
One man better able than most to be a guide through the turmoil
and the hype and find the cold business logic at the heart of some
of these ideas is Kevin Hartz. A silicon valley entrepreneur and
venture capitalist, Hartz is at the centre of the social and
business networks that form web 2.0, and even has the ultimate in
valley kudos: he was offered the chance to invest in YouTube. Hear
why he turned that one down later, but first, Hartz explains what
the mood is like in Silicon Valley right now.
"As you can see there has been a number of great successes in
the Valley and the investment activity has stepped up. Now
capitalism is very much like a pendulum and the pendulum either
swings far to one direction or the other. In 2000, 2001, 2002 it
was a very dismal funding climate and now I think we are certainly
starting to swing the other way. The question is have we gone too
far? You know some deployment of capital maybe or certainly won't
pay off but I think that the Valley is right for innovation right
now and a lot of exciting investments are occurring."
Hartz now runs a startup events company called Event Brite, but
he started his career at Silicon Graphics, where the fast computers
and high speed networks gave people like Jim Clark and Mike Ramsay
enough of a vision of what the web could become that they went off
to found Netscape and Tivo respectively.
"What was interesting Silicon Graphics in the mid-90s is that
you had very powerful work stations. You had high bandwidth
internet to the various other work stations and also to the
internet and you also had these very fast graphics chips, high
performance graphics chips and what that meant was that we almost
had a view of the future back in the mid-90s of what we all now
have on our desktops today."
That environment spawned some exciting graduates, but if one
group of people is at the absolute epicentre of the second internet
boom it is the young guns who learned their trade at Paypal. Hartz
says they are the engine driving the new new economy.
"Paypal has similar attributes of Silicon Graphics in that when
that company was acquired by eBay, all the management and the
various employees all went on to do some very phenomenal things. So
Peter Thiel, the CEO and co-founder of Paypal went in to start a
venture fund but also invest in a number of these hot new companies
in the process, including FaceBook to name a few. Reid
Hoffman went on to start a company called Linked In. Max Levchin,
the CTO started a company called Slide. So this phenomenal team all
kind of stuck together and all went out and did entrepreneurial
things and Chad Hurley and the other founders were actually ex
Paypal employees and that's how that interaction came for the
funding of YouTube.
Ah, the YouTube question. The YouTube deal is already a legend
for investors. Never in the history of business has so much money
been made so quickly by so few in a venture capital investment.
Nobody got a look in: venture capitalists Sequioa were the only
formal investors; the only others given a chance were a handful of
Valley insiders given a bite before even Sequoia got in. Hartz was
one of those and in a decision which was understandable at the time
but which surely will haunt him forever, he said no.
"I don't know if I should admit this but I was very busy with my
starts up and actually passed on investing as a private individual
in YouTube last year. Unfortunately it was a great return and in
that case from the perspective of the investors they had one of the
fastest IRRs or highest IRRs in the history of I would say all
venture investing to return such a high amount of money in such a
short period of time. Well it was invitation by another angel
investor and I was very busy with my own start-up and honestly
didn't think too much of it and didn't take a close look at it. You
know maybe in hindsight, obviously in hindsight that was a big
mistake, but you know I'm focussing my attention on my own
start-ups at this point."
The phenomena ringing investors' bells in the Valley these days
are social networking and user generated content, businesses based
on online communities where people can get in touch with other
people with similar interests, conduct their social lives
online and send each other stupid videos. Though some have had
their doubts, Hartz is absolutely convinced that this trend is a
gold mine, and he bases his view on some pretty sound economic
principles. Hartz was there from the start, investing in the
company that more or less invented the genre.
"I was an early investor in Friendster the pioneer of this
space. Unfortunately Friendster hit you may have heard some snags
that was more on the execution in scale side. They actually grew so
quickly that they weren't able to keep up things and this fickle
audience was fed up with the latency. You simply had a site and
went to these other networks like MySpace, FaceBook and so on. They
are very profitable. These businesses are actually very profitable.
They are media properties, they sell advertisements. They don't pay
again for marketing so one of the phenomenons of social networking
is that your users are your marketers and this is very different
from traditional business. Traditional business you go out and you
buy television adverts, you advertise on the web, you spend some
cases tens of millions of dollars to acquire customers and so on.
Here you have in the case of Bebo, in the case of Face Book in the
case of MySpace, these companies have their own users promoting
this so they are paying zero per customer. Now it is just a matter
of serving enough advertisements while the users are using this
site to monetise and given that they are not publishing or creating
the content themselves they are not spending money for that for any
kind of any editorial staff, given they are not paying for customer
acquisition for the marketing, you know they are simply selling
advertising space then that becomes a very profitable relationship.
Now the challenge there is that you do need to stay on your toes
because you know consumers are fickle and if you don't innovate
fast enough they can lose interest."
Hartz was in Edinburgh to talk to entrepreneurs as part of the
Edinburgh University's links with Stanford University, but Silicon
Valley is a special place: is the Valley mentality exportable?
"Well I think we are seeing a lot of that happening already. I
think you look at all different parts of the World whether it is
the growth of the internet industry in China or in India or the
advent of Skype, it is showing that things aren't just
limited to Silicon Valley. Silicon Valley has the jump on the rest
of the world in the sense that there is a lot of infrastructure.
The training wheels, the guidance is out there and you know it's
the same for the university and the engineering and kind of
powerhouse that you have out there is, it is really all the right
elements and I think there is a lot that the world can take and
watch and observe and replicate in other parts of the world and I
certainly think it's exportable."
That was Kevin Hartz.
That's all we have time for this week, thanks for listening.
Why not get in touch with OUT-LAW Radio? Do you have a legal
problem you would like us to discuss on air? Do you know of a
technology law story? We'd love to hear from you on radio@out-law.com.
Make sure you tune in next week; for now, goodbye.
OUT-LAW Radio was produced and presented by Matthew
Magee for International Law Firm Pinsent Masons.
