“The new mass media — with half its 400 million users logging in every day, “that’s almost like what broadcast television was 20 or 30 years ago” – GigaOm
You may also recall the CEO of Nokia saying that they stayed clear of the internet simply because they though it wasn’t big enough to be worth the effort but Nokia was confident the Mobile Web was going to be huge.
All of which left me wondering what did Nokia know that Silicon Valley didn’t and was Nokia’s management team correct in their decision to stay clear of the web during the 1990′s and 2000′s?
It raised a fundamental question: Just how efficient is the venture capital industry in picking the winners?
Assuming we are now entering the 3rd wave investment activity – following on from the dot com boom/bust and the Web 2.0 era – I thought maybe we could look back on the economic data from these two periods to discover an answer to these questions.
Having decided to limit the study to the period 1995 to 2007 – From the beginning of the dot com era through to the dawn of the GFC – I began working through the 2007 Census Data, US and International Credit Card Data, the 2007 Federal Reserve Payments Study, SME Credit Market Data, Venture Capital Data (Government) and the NVCA data to see if I could apply some “scrapbook logic” to the problem.
Here is what I discovered. The diagram below displays the interconnectivity of 3 models.
VC Internet Investments (1995 to 2007)
The first model is the estimated $94 Billion invested by the VC market in Internet Start-ups for the Period 1995-2007. The second model illustrates the 2007 revenues of the “Google Web” and B2C e-commerce as a combined eco system. As you can see the combined 2007 revenues of these two ecosystems was $151 Billion.
The 3rd model shows how much Nokia grew its revenues by over the 1995-2007 period.
So was Nokia correct in its original estimate that the web was going to be too small to become involved in? If we think of the web in terms of the Google Web (i.e. Advertising) then yes Nokia made the right call. In 2007 Nokia revenues were almost 2.5 times larger than the “Google Web” in the USA.
So how about the VC’s how did they fare in all this? The difficult part about making this assessment is just how much funding of the web sites that harvested the $151 Billion in revenues can be attributed to Venture Capital and how much of it can be attributed to 3rd party investment (e.g. Microsoft, IBM, Telcos, HP, Banks, Retailers etc), Owner’s equity (including “sweat equity”) and the reinvestment of revenues.
So rather than make a call I thought I would set it out in a table.
| VC Funding Contribution | Share of 2007 Revenues | Revenues expressed as an Annual Rate of Return on Investment |
| 100% | $150 Billion | 60% |
| 80% | $120 Billion | 30% |
| 60% | $90 Billion | 0% |
| 40% | $60 Billion | -30% |
| 20% | $30 Billion | -60% |
In comparison Nokia achieved a figure of almost 700% on their 2007 Revenues expressed as an Annual Rate of Return on Investment on their original 1995 Revenues. That’s about 10 times better than the best case scenario for the VC industry.
Applying “scrapbook logic” to the problem suggests that perhaps
- Nokia were far more efficient than the US venture capital industry in picking the industry winner during the first 2 waves of the MobCon. and
- Nokia was correct in its original estimate of the economic value of the web
We see a similar out come if we apply the same “scrapbook logic” to Wal-Mart.
The US retail sector was worth $4 Trillion in 2007. At that time Amazon, the web’s most successful eRetailer, represented less than 0.4% of the US Retail economy. In comparison Wal-Mart represented just under 10%. Wal-Mart revenues in 2007 were 3 times larger than the whole online retail eCommerce eco system in the USA.
In the period 1995-2007 Wal-Mart’s Revenues expressed as an Annual Rate of Return on Investment on their original 1995 Revenues of $78 Billion was 385%.
The venture capital industry will rightly point out that they are not in the business of building strong, viable industry eco-systems. They are in the business maximising the Annual Rate of Return on Investment for their investors. It is their job to buy new businesses at a low price and to sell them back into the market at the right time in the form of leveraged buyouts, mergers and acquisitions or as IPO’s at a very high price.
As I’ve said before the profit is always in the sale.
All the same the venture capital industry likes to promote itself as one of the major catalysts of growth in the U.S. economy so I think it is interesting to spend some time exploring what 12 years of unparalleled investment in Silicon Valley has delivered to the US economy in a wider context than just merely “redefining the future of mass media”.
Posted on March 25, 2010
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