As we’ve written about in the past, we use what we call a thematic approach to what we invest in. Our current themes are Human Computer Interaction, Glue, Digital Life, and Protocol. We’ve been hinting about two new themes that we’ve been investing in for a while – one that’s a derivative from our Glue theme (which we’ll discuss in a separate post) and the Distribution theme.
In general, we avoid investing in vertical markets. The one exception is a set of companies that are in our Distribution theme and include Zynga, Topspin, StockTwits, and Cheezburger. Each of these companies is aimed at a specific vertical market and has the following set of common characteristics:
A Gigantic Existing Online Market: We are only interested in companies that are attacking an existing online market segment that is greater than $10 billion in annual revenue. These are market segments that generally (but not always) emerged in the first wave of commercial Internet and Web activity between 1995 and 2000.
Entrepreneurs Obsessed With Transforming The Way The Vertical Market Works: We want to back entrepreneurs that are completely obsessed with the vertical market. They must be thinking – every single waking moment – about how they are going to change the way the world interacts with the vertical market they are attacking.
A Clear Opportunity To Use 2011 Distribution Dynamics to Transform The Market: This could be Facebook, Twitter, user-generated content, contemporary Web approaches, mobile, or something we haven’t yet thought of.
A Vertical Market At Least One Of Us Is Into: Since we generally avoid vertical markets, when we do invest in one, it has to be a vertical that at least one of us is infatuated with.
If you look at the four companies we’ve invested in the distribution theme, you see each of these four attributes writ large on the companies.
- Zynga: Video games + Mark Pincus + Facebook + Brad
- Topspin: Music + Ian Rogers + Contemporary Web / Social Networks + Ryan / Jason
- StockTwits: Stock market news and information + Howard Lindzon + Twitter + Seth
- Cheezburger: Entertainment (starting with humor) + Ben Huh + user generated content + All of us
In each case, the distribution dynamics will evolve over time as the company grows. For example, Zynga now uses distribution channels beyond Facebook (e.g. mobile) and Stocktwits now uses distribution channels beyond Twitter, while Topspin’s widgets live not only on their artists’ own websites and music-focused sites, but are distributed via sharing through Facebook and Twitter. We believe we have real intellectual leverage understanding how these different channels work and have spent a lot of time internally synthesizing what we’ve learned as we continue to evolve this theme.
There are plenty of vertical markets we simply aren’t interested in. For example, the online jobs market fits criteria #1, but we haven’t run into an entrepreneur or a distribution dynamic that we think is powerful. And, frankly, the online jobs market bores us, so it’s hard for us to engage in it.
As we’ve said before, we don’t have a particular quota or strategy for which themes we invest in – we use them to help us frame the kinds of companies we actually spend time with as potential investments and where we spend our intellectual time trying to better understand markets and where they are going. While we only have about 10% of our overall investments in the Distribution theme, we are extremely excited about the overall potential impact on our portfolio and our continuing to look for more entrepreneurs and companies to back around Distribution.