The Rehabilitation Of Consumer Internet VCs

Just a short time ago any VC that mentioned “consumer internet” would have been summarily executed and had their body left in a box by the side of Sand Hill Road a la Ned from Unforgiven.  Faced with such a reception, most “consumer internet” VCs either laid low somewhere in the Santa Cruz Mountains or entered the internet VC protection program, otherwise known as software investing.  Ah, what a difference a couple of years make.

These days it is almost fashionable for consumer internet VCs to come out of hiding and declare that they never lost faith… they just got distracted.  It is a performance that often times would make St. Peter blush.

A Cautionary Tale
If anything the resurgence of interest in consumer internet investing offers a cautionary tell about the increasingly fickle nature of venture capital investing.  An investment space that was supposedly “dead” just a short time ago, is now white hot.   Yet anyone following the core trends of consumer Internet usage in the US over the past few years would have known that the consumer internet was anything but dead.  Since 2000, the percent of US consumers that use the Internet is up from less than half to over 2/3rds.  This increased usage, combined with heavy broadband adoption and increasing e-commerce activity has created an extremely vibrant and dynamic consumer internet market.

The reality is that the VCs that will make the most money off of the great consumer internet “re-rush” of 2005 are the few that put money to work in consumer internet startups during the dark ages of 2001-2003.  Unfortunately, thanks to the group think that pervades Silicon Valley very little money was actually put to work during that time because no one wanted to end up like Ned.    Now that Google has shown the light and there is no longer a stigma attached to consumer internet VC investing, there’s little chance that VCs making new investments will end up like Ned, but there’s also little chance that they will make outsized returns because everyone else is plowing money into the space driving up valuations and funding marginal deals.

Perhaps the best lesson from all this is that given the increasingly competitive and fickle nature of venture capital the best place to invest is the one that is the most out of favor according to conventional wisdom.