On Saturday Fred Wilson wrote a post on the Union Squares blog announcing that they have added a new fund that will let them make larger investments (up to $25m). That is an interesting development in its own right, but more interesting to me was the way he describes the difference between investing in web services and other older venture capital categories:
Early on, we recognized that investing in web services was different than investing in chips, routers and enterprise software. The start-ups are more capital efficient. Differentiation is more about user experience than proprietary technology. Defensibility is more about network effects than patents.
For regular readers of this blog, or indeed Fred’s, there is probably nothing surprising in this quote, but I like the way it brings everything together and points anyone looking to understand the value in an internet company straight to the customer story and understanding how the business scales. Union Square Ventures is very focused on web networks, and the only qualification I would make is to say that for those of us that are interested in a broader set of web related investments it is probably helpful to think about defensibility coming from scale effects rather than network effects. The difference is subtle but allows the introduction of concepts like ‘economies of scale’ and ‘brand’, which are not strictly speaking network effects.