In Part II of our Venture Capital Series, Voce Nation sat down with Trinity Ventures general partner, Larry Orr, to discuss the transition from big bang marketing to keyword advertising and viral marketing techniques and where Trinity is focusing attention in the coming years.
What has changed for venture capital leaders like Trinity from its approach to investment strategies in the dotcom boom to this recent surge in activity around Web 2.0 companies?
In the initial dotcom boom, companies had a land grab mentality and raised large amounts of capital to support aggressive first mover strategies. Business models were predicated on big bang marketing tactics designed to jump start businesses to the point where network effects could take over. Although many big, successful companies were created, a much greater number of capital-intensive failures occurred. We all learned the hard way that network effects are a two-edged sword, and that before you reach critical mass, you have to deal with the chicken-and-egg problem.
Newer business models were born out of the necessity for entrepreneurs to make do with less capital, the maturation of the web infrastructure, and the learning that came out of Web 1.0. These new models combine some of the benefits of pay-as-you-go customer acquisition strategies with the beneficial network effects resulting from scale. Companies using keyword advertising and viral marketing techniques are able to deploy a variety of tactics and measure their effectiveness real-time before deciding where and when to put the pedal to the metal.
What types of companies or technology does Trinity see attracting investment in the next 3-5 years?
We see a broad range of emerging consumer and business services with recurring revenue models, many of which leverage user-generated content into information that can be monetized. For example, one of our portfolio companies, LoopNet, just completed its IPO and has built a very profitable subscription business that is essentially a multiple listing service for commercial real estate. There are also huge trends relating to the explosion of digital media, wireless networking and mobile devices. Each of these trends individually, and in conjunction with each other, create many opportunities ranging from consumer entertainment services to new infrastructure technologies. We are also excited about new opportunities in traditional enterprise technologies such as security and networking, especially lower cost solutions to address the needs of small to medium sized companies.
How has the social media or blogosphere impacted venture capital? How does this affect the start-up plans behind your investments?
The influence of community and user-generated content has affected venture capital in a number of ways. First, there have been a number of companies (arguably too many) directly involved in social networking and social media. Second, almost all companies can benefit from effectively using the new ecosystem as a marketing vehicle. Third, a new group of companies is starting to emerge that provide tools and services for managing the marketing ecosystem of social media, much as Web 1.0 spawned a generation of analytic tools and services. I’m sure we will see other effects continue to emerge.
Where do you suggest emerging companies invest their marketing resources? With new word-of-mouth communication vehicles available today, should start-ups adjust their marketing strategy?
Startups need to think about strategies for initially acquiring customers, as well as retaining them and leveraging them through referrals or other techniques to acquire additional customers. Usually, the hardest part is getting the flywheel going with a critical mass of initial customers. The exact mix of tactics depends on the situation, but the good news is that most Internet-oriented marketing vehicles can be deployed with small initial expenditures, and their effectiveness can be measured pretty quickly. Companies should experiment with a variety of tactics and continually evolve, giving more juice to the ones that are working and trying new techniques as they become available.
What is the one piece of advice you would give someone looking for investors today?
Use the fundraising process as a learning experience. We interact with many entrepreneurs and only invest in a small fraction of the opportunities we see. But we learn something from each interaction and develop some lasting relationships. Entrepreneurs can err by either being too stubborn, or else trying to adapt to every comment they hear from a prospective investor. The most successful ones balance the courage of their convictions with being open to input and evolving their strategies.