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Web 2.0 Relational Capital

November 8, 2006 on 8:02 pm | In Company Analysis, Investor Analysis |

I continue to be interested in the Web 2.0 investment space, as it provides an exemplar for relational capital in the Silicon Valley. A recent entry on Matt Marshall’s Venture Beat blog (a highly recommended source of information) on Web 2.0 Investment Booms, points to a recent VentureOne report indicating that recent investment activity in Web 2.0 startups has more than doubled over the past 3 quarters (from a year ago). Check it out for some interesting statistics and factoids on Web 2.0 from a venture perspective.

In this blog entry I seek to examine Web 2.0 investment activity in more detail. I was curious as to how this investing space has grown (from a relational network point of view) and ponder about what lies ahead. I began by mapping the combined relational network of the top 3 companies who raised the most money in 2006: Zimbra, Facebook and PodShow. LinkSViewer 1.2 Filters: Founded 2001-6, Funding in 2005-6, Internet Sector, Pendants (Non-connected links) removed. Below is the resultant relational network map (click on map to enlarge in a new window).

Discussion:

(1) Web 2.0 companies are interconnected through their investors. In the above map, it should be noted how Web 2.0 companies such as Wink, Oodle, LinkedIn, and SpikeSource appear as common investments between VC firms investing in Facebook, Zimbra, and PodShow. This is consistent with my previous blog post on the VC Web Chart, which illustrated meshed interactivity between Web 2.0 companies and their investors. Moreover, Zimbra is connected by common board members Tim Haley (Redpoint) and Kevin Harvey (Benchmark) to other recently funded companies Internet startup companies FatLens and Odesk, providing potential resources available to Web 2.0 companies. Multiple levels of interconnectedness facilitates dialogue and partnerships.

(2) Friendster plays a central in the network - the “old skool” still rules. This can be seen both spatially (it is in the center of the map) and connectively (it has 5 ties in the network). As one of the pioneers in the social networking space, it provided a fertile ground for the next wave of Web 2.0 companies such as Zimbra, Facebook, and PodShow. Friendster also provides an early connector for investors in the Web 2.0 space - the continued investments from central people such as Peter Thiel (PayPal) and Reid Hoffman (LinkedIn) bode well for the space as a whole. Location and frequency of ties helps identify central network components.

(3) Accel Partners plays a strategic role as an investor in both Facebook and Zimbra. Although it only had only 9 Web 2.0 deals over the past 5 years (6th place according to the Web 2.0 Investment Chart), at least two of these deals were recent and highly visible. Also note how indirect connections from investors point toward pre-existing relationships between investors - note particularly Greylock Partner’s ties to Oodle (Redpoint) and Wink + LinkedIn (Reid Hoffman, Peter Thiel). Key linkages illustrate relational capital.

Commentary:

The Web 2.0 space reflects a unique space that has brought together key players (companies, investors, management team, and board members). Web 2.0 will continue to grow as an organic network of relationships - on the Web or as a business strategy. What is most interesting to me is the relative ease by which partnerships and alliances can be formed because Web 2.0 capital network structures facilitate connectivity. I claim that the ultimate winners in the Web 2.0 space will be those who achieve strategic advantage by effectively tapping into their relational capital because: (1) everything is happening so fast (Where were any of these companies 5 years ago?); (2) the rules are constantly changing (e.g., What has happened since AJAX?); and (3) its effects are unprecedented (e.g., How many people visited MySpace this year?; Did YouTube actually influence the mid-term elections?). If we couch this in terms of Google’s recent acquisitions of YouTube and JotSpot, then such deals make even more sense. What will the future be like? Stay tuned, with Web 2.0 the networking has just begun…

Update:

I decided to enlarge the map to include more Web 2.0 companies in the Silicon Valley with > 10M in capital raised in 2006. Thus, I expanded the relational map to include Yelp, Tello, and Six Apart (Same Filters). Click on the map to enlarge in a separate window, comments below:

Update Comments:

(1) The map now looks like a scorpion (or ladybug)

(2) Added links: Video Egg (August Capital/David Honik); Wikia (Bessemer Ventures/Reid Hoffman); Intel Capital (PodShow/Tello/SpikeSource); StrongMail Systems (Sequoia Capital/Evercore Ventures)

(3) Note how the structural integrity of the map remains the same (pretty much the same key players with a few tentacles added to the scorpion)

(4) Exception is inclusion of Intel Capital as a central player with direct ties to Six Apart, Tello, and SpikeSource

I thought this was a useful map by including Intel Capital as a key player (validating Matt Marshall’s observation on Venture Beat), while also demonstrating the prevalence of the key players from the original map. Any other comments appreciated.