Month: September 2007

The Boston Globe has a well researched story about how and why Facebook moved to Silicon Valley. Why can’t the Chicago newspapers cover technology in such a thorough and complete manner?

I thought I’d rip some of the better quotes out of it that apply to VC, Internet and Chicago and discuss them:

Zuckerberg told the senior associate that he was planning to go to California for the summer, and he wasn’t sure whether he would return to Harvard for his junior year. Summer was less than two months away. The senior associate was pretty sure that if Battery Ventures didn’t invest before then, a Silicon Valley venture firm would discover the deal. For venture capital firms, getting in first can often mean getting a bigger chunk of a start-up for less money – especially if the start-up isn’t talking to other firms. And Facebook wasn’t.

After a second meeting at the Charles, and a visit to Battery’s offices above the reservoir in Waltham, Zuckerberg said he thought Facebook was worth about $15 million, and was willing to accept an investment ranging from $1 million to $3 million, which would have given Battery a substantial chunk of the start-up.

But Battery had already made an investment in an earlier social networking site, Friendster, which was foundering. Zuckerberg struck some partners at the firm as a little too brash. And no one was sure whether Facebook would appeal to anyone other than college students, its target.

From my days in mutual funds and institutional investing, there is an old saying that says “Past performance does not indicate future results.” Why did these VC’s let it cloud their judgment? I especially like the next sentence about Zuckerberg being “too brash”. Many entrepreneurs and great business leaders share this quality, yet these particular VC’s thought that was a problem? Makes little sense.

Through a chance connection, Zuckerberg was introduced to Peter Thiel, a cofounder of the online payment system PayPal, who was running a hedge fund called Clarium Capital. He met with Thiel in August, at Thiel’s office in downtown San Francisco.

Thiel had also been an investor in Friendster, and he knew that the conventional wisdom was that all the social networking sites “were just fads that would come and go,” he says. Thiel listened to Zuckerberg’s pitch in the morning, asked him to go out and grab lunch, and by the time Zuckerberg returned in the afternoon, “we said we’d invest, and we agreed to the basic valuation parameters,” Thiel says.

“It seemed like a good company,” he said, adding, “Most of the time, we’re not that fast.”

Thiel put in $500,000 of his own money in return for 10 percent of the company.

Though I don’t fully believe the chance introduction thing, if the time line is accurate you have to respect Peter Thiel.

“Facebook was perhaps the most controversial deal we’ve done in several years,” says Jim Breyer of Accel Partners. “Some of my best friends in the business were wondering why we’d write a check to a company that had very little defensibility to their business.” Indeed, anyone could potentially build a better site and lure Facebook’s users away.

This is true of almost all start ups, especially ones in social networking.

Greylock partner David Sze, who works on the West Coast, admits that he had the opportunity to invest in Facebook in 2005, but says, “I was too busy – I just didn’t have the cycles to look at it. In retrospect, that was a mistake.”

Smart people always make time to meet with entrepreneurs and potential employees. I actually checked to see if Mr. Sze had a Chicago connection after this statement, but could find none. I do admire his honesty in regards to this after the fact though. According to his Linkedin profile, he’s a Board Member at Digg so he indeed was busy (David if you’re reading this I have a support problem with Digg that is not getting resolved with an email to support – would be happy to discuss privately).

(Looming over Facebook’s success – and any eventual public offering – is a lawsuit filed by several fellow Harvard students who allege that Zuckerberg built Facebook using software code he had originally written for their site, http://connectu.com/, and that he also borrowed parts of their business plan. A Facebook representative said that none of its founders were available to comment.)

I can think of several situations like this in Chicago, but will not name them publicly as I would not want to give the situations undue publicity.

“We don’t want to make Facebook the cornerstone of our growth strategy, but we’re happy to ride the wave,” says Dina Pradel, StyleFeeder’s vice president of marketing.

Very nicely stated.

When I put that question to Accel Partners’ Breyer, who is a native of Natick, he had a one-word answer: no.

“So many of the Facebook employees have come from top Internet companies like Yahoo, eBay, and Google that the culture that has been built at Facebook is fundamentally more consumer Internet savvy than if it would’ve been built anywhere else on the planet,” Breyer says, after praising the engineering talent in Boston.

I think this is a most unfortunate limiting belief.

“Folks in the Valley are incredibly geo-centric to a point of snobbery,” writes Battery Ventures’ Scott Tobin via e-mail. He acknowledges that Silicon Valley is producing more companies than Boston but “to make an argument that great companies can’t be built in any one place is bunk in my mind.”

He mentions Microsoft Corp. in Redmond, Wash., and Qualcomm Inc. in San Diego as examples. “It just takes a good driving attitude to make it happen.”

As for passing on Facebook, “that may turn out to have been a mistake,” Tobin admits.

Scott Tobin, it would be nice to meet you. I agree completely with your comment about driving attitude and I’d also unfortunately have to agree with your geo-centric comment. What do you think the root cause of this behavior is? Does Silicon Valley need more outside thought? I’d like to hear your thoughts.

I’d love to hear Don Dodge’s views on this subject, so I’ll tag him.

I’m also in touch with several mobile advertising and local concepts in the early funding stage, so reading this article was more than a bit fascinating to me. I look forward to hearing your thoughts.

Update: The author of this article has a blog post about it.