The following was written by Stephen Windsor, a first-year student at the Kellogg School of Management. Prior to Kellogg, Stephen worked in IT, startups, biotech and cancer imaging.
Investing in Consumer Internet: Separating the Needle from the Haystack
- Moderator: William P. Sutter, Jr., Managing Partner, Hopewell Ventures
- Bret Maxwell (KSM ’82), Co-Founder & General Partner, MK Capital
- Joe Dwyer (KSM ’08), Senior Associate, OCA Ventures and CEO, Brill Street + Company
- Justin Shaffer (@shafferj), Founder & CEO, Hot Potato
Joe Dwyer provided an interesting lens through which to evaluate a startup: Maslow’s Hierarchy of Needs.
I had never heard someone refer to MHN as a means for gaining insight into whether a startup has growth potential and is worthy of a VC investment, but that’s exactly what Dwyer suggested we do. In a nutshell, MHN attempts to categorize human needs on a scale ranging from the very basic (e.g., food and shelter) to psychological and non-physiological needs (e.g., morality and spontaneity). The theory is sometimes taught in marketing courses as a method for developing a deeper, albeit somewhat theoretical, understanding of consumers’ inner needs and motivations for purchasing.
Dwyer recommended MHN as a filter for considering potential VC investments and argued that the more a startup hits the high level of the MHN pyramid, the more potential there is for growth.
Do I agree? I’m not sure yet, but I’m certainly chewing on it. Those bottom two levels are at the heart of the world of venture investing in life sciences and healthcare, where many startups directly target the consumer’s basic need for survival. But I do think Dwyer’s perspective is invaluable for evaluating social networking startups. For instance, where does Facebook hit MHN? In the love/belonging category? Or in the self-actualization category, that centers more on the need for self-fulfillment?
The site clearly hits the former, but a quick glance at the Facebook page for a 20-something will often reveal a considerable effort toward self-definition, individualism, and joie de vivre. What about YouTube? Its success is entirely due to hitting the higher levels of the pyramid. Despite the inherently-subjective and philosophical nature of applying MHN to the question of startup growth potential, I think it’s an interesting lens through which to look at the latest array of social networking sites.
Monetization in Consumer Internet
I’m always a fan of healthy debate, and this panel provided a satisfying degree of differing opinions on virtual goods and advertising. Dwyer immediately highlighted virtual goods as a hot area for investment, a perspective I’ve heard from several VCs in recent conversations. Zynga, Playfish, Playdom, Serious Business, and Facebook would all certainly agree, and they have the user bases, revenue and IPO potential to prove it.
Yet, Maxwell expressed guarded enthusiasm for this arena, arguing that the proliferation of virtual goods has raised important ethical questions. Others have raised similar concerns, such as TechCrunch’s Michael Arrington (watch the video at the end – it’s entertaining). It was interesting food for thought, and I actually agree with both of them, in that I see a distinction between the virtual goods themselves (interesting with high-growth potential) and the methods that have sometimes been used for marketing them (deplorable).
Shaffer joined us by video link to share a bit about Hot Potato and his thoughts on social networking. The video feed was “technically challenged,” so I couldn’t decipher most of what he said. From what little I could hear, I sensed that the company is focusing on product development and audience aggregation, rather than on monetization.
Despite the video feed, I learned a ton about Hot Potato as a result of the conference, and I thought I’d share a bit about how my experience was substantially improved thanks to the app. As I’ve written previously, I’m a big fan of Twitter and have found it to be a useful means for communicating with classmates, following others’ thoughts at conferences (e.g., SF New Tech), and tracking the latest developments in VC.
Hot Potato has taken that to the next level by linking a Twitter-like feed with events. Why was that useful? Thanks to Hot Potato, the tech-oriented attendees of the conference maintained an invaluable ongoing conversation about the day’s events, ranging from Kramlich’s keynote to a discussion of taxes on carried interest during one of the PE panels.
Although going to the VC panels prevented me from attending the ones on PE, I was able to monitor the conversation from the PE panels via the Hot Potato feed, enabling me to gain more value from the conference than I otherwise would have. The more important question: Why did I use Hot Potato instead of a Twitter hashtag? Both approaches provide a useful way for filtering out the noise in order to focus on a single conversation thread, but the decision to use Hot Potato boiled down to the interface. It was simply much easier and quicker to get to the conference event in Hot Potato than it was to get to the conference hashtag in Twitter. It’s all about the interface.
Bottom line, I had a great time at the conference and look forward to (hopefully) being on the leadership team again next year. Thanks to everyone who helped put it together – it was one of the highlights of my Kellogg experience thus far.