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When I first started talking to my now-partners about joining August Capital, I was stunned at the slow pace of the conversation. I couldn't imagine how it could take months to make a decision about whether or not to invite me to join the partnership. Admittedly, I wasn't coming from the most conventional background to enter the venture industry. But over the course of months, the August partners had more than enough time to talk with pretty much everyone I'd ever met in my professional life (plus a few choice grade school teachers while they were at it). In the end, after four months of grilling, I was invited to join August Capital.

At the time, I remember thinking to myself "how could it possibly take four months to decide?" It seemed like an absurdly long process. Yet, having now been in the venture business for some time, and having been on the other side of that process, it is amazing to me that it didn't take longer. Why is that? Two things in particular strike me.

The first is that partnerships are small, delicate creatures. At August, there were only four partners when I joined. That's not very many people. And partners spend a lot of time together. We make collective decisions about nearly all things in the partnership -- from investment decisions, to personnel decisions, to culinary decisions. And we each serve as a reality check for the rest of our partners. So keeping a partnership functional, let alone collegial, is tricky business. Rest assured, adding a new partner can throw off that balance really easily.

The second challenge is that adding a partner is a much bigger economic decision than making an investment in a company. I don't mean it is an economic decision in the sense of sharing the economics of the partnership. But rather, it is an economic decision because each new partner will be responsible for making a set of investments out of the partnership. If you make the right decision, your new partner will make investment choices that accrete large returns back to the partnership. But if you make the wrong decision, your new partner could easily invest tens of millions of dollars in companies that ultimately fail, hamstringing the overall fund returns. So adding a partner is a bit like making an indirect bet on a bunch of companies -- getting it wrong will have a widespread impact on your fund performance.

Given all that, the decks are stacked against anyone joining a venture capital partnership. It is just too easy to find reasons to say "no." Which is why it absolutely thrills me to welcome Howard Hartenbaum to the August Capital partnership. Howard has successfully run the gauntlet and come out the other side, and we are already enjoying the benefits of Howard's perspective and approach. Howard is simply a fantastic guy, and we are lucky to have him join us.

For those of you who don't know Howard, here are a few quick thoughts on why he's such a great fit for us at August.

First and foremost, Howard is a geek. After graduating from MIT, Howard didn't join an investment bank; he joined Honda Motor Company where he served as an ergonomics engineer. He got to build awesome products like the NSX. If there is one thing we like to do at partners meetings while eating lunch, it is talk about cars. Cars and email. Cars, email and digital photography. Cars, email, digital photography and high speed wireless. Cars, email, digital photography, high speed wireless and smart phones. Cars, email, digital photography . . . you get the point. Howard is a welcomed addition to the conversation.

Second, Howard firmly believes that the most important thing in a start-up are the founders. Howard has a great track record of working with entrepreneurs to help them bring their vision to fruition. As a result, entrepreneurs love Howard because he is helpful without being overbearing. What's more, Howard was an entrepreneur before becoming an investor. So he's been on both sides of the table and can bring that perspective not only to his portfolio companies, but also to our investment decisions.

And third, Howard is a great investor. Prior to joining us at August Capital, Howard was a General Partner with Draper Richards. He has invested in dozens of interesting technology companies. Notably, Howard was the very first investor in Skype and got involved in the business on the company building side (Howard was active in Skype's global business development efforts and served as the GM of Skype's US business). Howard was also an investor in Photobucket and Bebo, among many others. Howard's track record is impressive and it hasn't gone unnoticed -- he was named to the Forbes Midas List in 2007.

Given all that, it only took us a few months to invite Howard to join us at August. After all, we had to find time to talk with Howard's EE professors and his chess team coach :) We consider ourselves very lucky to have Howard as part of August Capital. He is a fantastic investor, a geek at heart, and a great guy to hang out with. What more could one ask for?

For the last several years there has been a lot of talk on Sand Hill Road about investing in China. To a certain degree there has been a lot of talk about all the BRIC countries -- Brazil, Russia, India and China. But the most excitement is clearly around China. (Interestingly, while India is a relatively close second, I have yet to hear of a single Bay Area VC exploring investment in either Brazil or Russia). Drawn by huge markets and a rapidly expanding economy, American VC's are heading to China to stake their claims. Go East young VC's. Go East.

Venture Capital investment in China has not, however, been a headlong dive. Bay Area VC's seem to be sending over exploratory parties. By way of example, David Chao from Doll Capital has been in and out of China for some time. Now a number of his partners are getting in on the act as well. Paul Koontz from Foundation Capital spent a year in China exploring the market. And perhaps the best indicator that the Chinese market is hot is Dick Kramlich's pilgrimage to China this year. Kramlich is one of the founding fathers of Sand Hill Road -- a 25 year veteran of the venture capital business. Not one to miss out on a big opportunity, Kramlich has headed over to China for 2008 to catch the wave of entrepreneurship and, perhaps, some of the Beijing olympics. Chow, Koontz and Kramlich are not the only US VC's headed to China by any stretch of the imagination. But these high profile forays into the Chinese market are excellent indicators of the level of interest in the market.

It is hard not to be intrigued by the Chinese market. With 1.3 Billion people, you don't need a huge amount of penetration to hit big numbers. One percent of the Chinese market is 13 million people. As they say, if you are "one in a million" in China, there are thirteen-hundred people just like you. What's more, the Chinese government anticipates that approximately 300 Million people will move from the countryside to urban centers in the next decade -- that's the same number as the entire population of the United States. The combination of massive aggregate numbers, rapid urban migration (and the commensurate increase in wages) and relatively low concentrations of modernized business processes, suggest a market ripe for investment. And that is precisely the conclusion many of my brethren on Sand Hill Road have drawn.

Given all that, I was anxious to check out China for myself. And right before the new year, I had the good fortune to do just that -- I accompanied a group of Stanford Business School students on a ten day study trip to China. We met with senior executives from companies like China Telecom, Alibaba, GM China and Bao Steel, as well as senior government officials and party leaders (yes, it is still a Communist country). But the most interesting discussions, to my mind, were with the leading private investors in China. (Because my meetings with these private investors took place as part of a study trip, there was no expectation that I would blog about the content of our conversations -- thus, I have decided to exclude the names of the specific investors so as not to violate any confidences they may have reasonable expected.) These investors gave a surprisingly candid view of venture capital throughout the country -- the good, the bad and the ugly.

To the mind of the Chinese investing community, the market dynamics described above well outweigh the risks of investing in the current environment. Huge markets with lots of business white space provides for numerous opportunities for economic gain. While American investors are busy debating the degree to which the US startup market is saturated, Chinese investors are having trouble keeping up with the inflow of opportunities. The opportunities in China seem unbounded, making foreign investors starry-eyed. But despite the glories of the Chinese market -- and there is no denying that the demographic trends in China are glorious -- I heard more than enough from Chinese investors to scare me away from the market.

As an initial matter, the biggest challenge that investors find in building Chinese startups is identifying great entrepreneurs. Because there has been all but no startup culture prior to a handful of years ago, there are essentially no seasoned entrepreneurs. A few native Chinese business expats are returning from abroad to take advantage of China's increasingly open economy. But those numbers are de minimis and do nothing to staff the rest of the enterprise. Meanwhile, Chinese executives have been trained to function in a business culture of bureaucracy and Party connections -- not the fast-paced, fluid environment of the startup world. The investors with whom I met lamented the lack of qualified executives and warned about the significant challenges of doing diligence on Chinese entrepreneurs.

The second challenge with entrepreneurship in China is grounded in the laws of China. The legal structures needed to support a vibrant startup economy are, at best, embryonic. Neither entrepreneurs nor investors are particularly well protected by the Chinese legal system. One investor with who I met on my trip described a recent situation in which he funded an entrepreneur, only to have that entrepreneur turn around and leave for business school months later. The entrepreneur assured the investor that he would be better situated to make the business a success after the two years of school. The investor had no recourse as his money left the country with the entrepreneur. In another instance, an investor backed an entrepreneur in a business that thereafter appeared to be failing. However, a couple years later when the same company started thriving, the entrepreneur informed the investor that it was not the company he had backed. The investor was incredulous. He told the entrepreneur that it was the very same company with the same team and even the same name. The entrepreneur assured the investor that it was, in fact, a different company and that he had not invested in this successful company, his investment was in the previous failed venture. Despite the obvious deception, the investor told me that he again had no legal recourse.

In many ways, venture capital in China is like the wild west. There are big opportunities, but they are not well defined and capturing their full value may well require manipulating the law to your own devices. One investor with whom I met described entrepreneurship in the United States like a zoo and entrepreneurship in China like a jungle. In the United States, he said, while there is always a lion next to you with sharp claws, driven by self-interest, there is a cage between you and the lion to keep you safe. You can count on the cage to protect you from unreasonable or illegal behavior. In China, on the other hand, there is no cage between you and the Lion -- if you don't take great pains to protect yourself from the self-interested behavior of the lion, you are going to get bitten. Case in point, one Chinese executive with whom I met on my trip described how he was able to leverage his dominant market position to force his competitors to sell at a discount. What's more, the entrepreneur described with pride that once he had bought up all of his competition, he was able to raise his prices three-fold.

Yet another significant challenge for United States VC's seeking to invest in China is the government itself. While China appears to be making huge market-driven strides in its economy, there remains a significant wild-card in all business transactions -- the Communist government. On my trip it was repeatedly pointed out to us that government officials don't make laws, Party leaders do. The government officials are tasked with managing the bureaucracies of their localities, but the party leaders are tasked with making the decisions. The Communist Party single-handedly makes all of the rules in China. For example, by mandate of the Party, no Chinese financial institution may be majority-owned by foreign investors. Thus, the fasted growing segment of the Chinese market is off-limits to foreign investment. What is to stop the Chinese government from making similar mandates in other market segments? This lack of predictability of the fundament legal underpinnings of business in China is sufficient in and of itself to make me take pause.

I thoroughly enjoyed my visit to China. The shear scale of Beijing and Shanghai was absolutely stunning, as was the velocity of the growth in both cities. And the extraordinarily candid conversations we had with Chinese business leaders and Party officials was both surprising and invaluable. But rather than leaving China emboldened to invest in their great economy, I returned to the United States surprised that my fellow VC's could accept the risks inherent in investing in China. I could not. And I don't anticipate that changing any time soon.

When I first met with the team at Splunk, they were working away on building a system that could accurately track a transaction as it traversed the entire enterprise stack. If the transaction broke somewhere along the way, their software could help IT discover the cause of that failure. While it was clearly a pain point for some businesses, there was no clear customer and the value proposition was a relatively hard one to articulate. But the technology they were building created a whole lot of intelligence built on the fumes of the data center (namely the log files). I was interested in what they were doing, but not interested enough to fund them. One day I got a call from Michael Baum, CEO of Splunk. He told me that they had "figured it out" and that we should meet up. I was certainly game to hear what they had figured out and we got together again a short time later.

So what had Splunk figured out? They had figured out that if they could track, manage and correlate log files across the entire data center in near real time, that they could create the killer IT Search Engine that would allow an end user to see into their enterprise stack in a way never before possible. The Splunk guys showed me a very simple example using Voip data and how one could track all systems that touched a particular extension by simply searching for that extension in the Splunk engine. I was an instant believer -- it was clearly a better way to manage the massive amounts of IT data that exist in enterprises today. I invested in the Series A and the Splunk team got to building the software that they had envisioned.

A short time after investing in Splunk, I was meeting with a group of managers from one of August Capital's biggest Limited Partners (the folks who invest in our fund). I was describing for them what Splunk was planning to build and they asked me "so what's the market size for that?" I quickly answered as best I could -- "I have no idea." Needless to say, this was not the most satisfying answer they had ever received and they stared back at me with a look that suggested perhaps I should come up with a better answer. But the reality was that I didn't have a better answer. Not because it was unclear if there was any market for what Splunk was building. But, more importantly, because once Splunk had built their search engine, it was unclear what market they would go after. I explained to my investors that Splunk had a number of multi-billion dollar markets in which they might play (management, compliance, BI, security, capacity planning, development, etc.) and the only question was which ones they would choose to go after first.

That conversation with my Limited Partners was over two and a half years ago. And since that time, the Splunk team has built precisely what they promised -- a large-scale, high-speed search technology for your data center. But despite the fact that Splunk's software has been downloaded by over 100,000 users and despite the fact that there are now more than 350 paying enterprise customers (including 21st Century Insurance, BEA, British Telecom, Catholic Healthcare West, Chicago Mercantile Exchange, Comcast, Dow Jones, FedEx, Fiserv, GE Consumer Finance, LinkedIn, Mantech, Mozilla.org, NASA, Shopzilla, Telstra, U.S. Department of Energy, U.S. Department of Justice, U.S. Department of State, Vodafone and Yahoo!), I would still have a tough time answering the question posed by my Limited Partner.

Splunk has not built an application. Nor is Splunk merely selling software. Splunk has created a software enabled platform that continues to be extremely broadly applicable. Is Splunk mission critical when it comes to maintaining availability of large scale enterprise systems? Yes. Is Splunk invaluable in the fight to maintain the security of your data center? Yes. Does Splunk uniquely simplify the process of data compliance? Yes. Can Splunk help you dig into your data and analyze it like no other solution? Yes. But, frankly, that's just the tip of the iceberg -- once you are able to query individual pieces of data across your entire data center in real time, the applicability of the platform is limited only by the creativity of its end users. And those end users are driving value back into the platform, creating applications we hadn't thought of before.

So what is the market for Splunk? i still couldn't say for certain. But I can tell you one thing -- it is awfully big. And in the venture business, that's big enough.

With great admiration, I have been watching Chris Anderson's book "The Long Tail" hit the New York Times best seller list and dominate the scarce business book shelf space of the brick and mortar bookstore world. The Long Tail is not just a geeky concept for the O'Reilly crowd, it is now a mainstream driver for the Business Week crowd. And while no longer an absolute requirement of every consumer internet venture pitch (and pretty much every enterprise pitch for that matter), the idea of the long tail continues to permeate many, probably most, of the PowerPoint presentations I see on a daily basis. Chris deserves great credit for simplifying and contextualizing a concept that plays such a big role in the evolving connected economy.

Continuing in his role as shirpa of the new economy, Chris has moved on from the Long Tail to a related but distinct idea that he is calling the Economy of Abundance. In a talk he just gave at the PopTech conference (a fantastic event in the unbelievably beautiful but remote town of Camden Maine), Chris described this new economy. The basic idea is that incredible advances in technology have driven the cost of things like transistors, storage, bandwidth, to zero. And when the elements that make up a business are sufficiently abundant as to approach free, companies appropriately should view their businesses differently than when resources were scarce (the Economy of Scarcity). They should use those resources with abandon, without concern for waste. That is the overriding attitude of the Economy of Abundance -- don't do one thing, do it all; don't sell one piece of content, sell it all; don't store one piece of data, store it all. The Economy of Abundance is about doing everything and throwing away the stuff that doesn't work. In the Economy of Abundance you can have it all.

The same businesses that are the poster children for the Long Tail, are the poster children for the Economy of Abundance. And the same businesses that are the victims of the Long Tail are the poster children for the Economy of Scarcity. With bandwidth and storage approaching free, iTunes can offer three million songs (P2P offers nine million). In contrast, with limited shelf space, Tower Records can only offer fifty- or sixty-thousand tracks. The end result, consumer choose abundance over scarcity (something for everyone) -- Tower Records gets liquidated while iTunes grows dramatically. Television is undergoing a similar transformation, from scarcity to abundance. TV initially consisted of only the major networks. Consumers were limited to 3 choices in any given time slot. With cable the number of channels was dramatically increased and a broader range of content became available (Food Channel, Discovery Channel, ESPN, CNN, etc.). To many, 250 channels may constitute sufficient abundance as to approach infinite choice in their minds. But the true television of abundance is YouTube. With unlimited bandwidth and unlimited storage, television is subject to microprogramming -- millions of shows, viewable on demand at any time. Now not only should NBC be worried, so too should be Comcast.

Unlike the Economy of Abundance, scarcity requires that businesses make tough choices. The Economy of Scarcity is a zero sum game -- new offerings necessarily replace old. Take, for example, Blockbuster. With DVD choices limited to the inventory that fits on the store shelves, the arrival of each new release necessarily displaces some DVD that the day before was available for rent. In contrast, Netflix has no shelf space limitations, thus the arrival of new releases need not replace the old. Blockbuster's user-base continues to wain as consumers prioritize choice over immediacy. And, of course, with the holy grail of movie abundance coming soon -- Rhapsody-style video on demand (made available courtesy of unlimited bandwidth and storage) -- both shelf space limitations and concerns about immediacy will be eliminated. Business owners forced to make choices about inventory are necessarily at a disadvantage. Even the best corporate buyers get it wrong and don't pick the year's hot color of Kitchenaide or the movie that outperforms its box office on the video store shelf. Meanwhile, businesses driven by abundance can make all SKU's available and need not fall victim to poor choices.

The Economy of Abundance allows business owners to defer choices to the end users. What better way to find out what consumers want than to give them everything and see what they actually buy. That is the paradigm of abundance. Why get your news programmed by CNN.com when you can have your news bubble up from the collective wisdom of end users at Newsvine or Reddit? Why get your television programmed by CBS when you can leverage the collective wisdom of the web to find great shows like Lonelygirl15 or Ask a Ninja? No longer will the success or failure of content be dictated solely by the Economy of Scarcity (e.g. Walmart). Rather, it will be dictated by the will of the consumers, as empowered by the Economy of Abundance.

Much like the Long Tail, the idea of the Economy of Abundance is not prescriptive. It does not tell you how to run your business. But it points to another significant force at work in the new economy and suggests that entrepreneurs should think creatively about how their businesses might be transformed by utilizing abundant resources in a disruptive way. Like the Long Tail before it, I suspect that I will be seeing the Economy of Abundance permeate the presentations that I see in the coming months and year.

In response to my last blog post about the startup ecosystem in Europe, my good friend John Girard, CEO of Clickability, sent me the following thoughts:

Here's the flip side: when you have a little too much help, you do more harm then good. Two examples: (1) small business subsidies don't work and (2) "incubators" suck.

You can see evidence of #1 in a lot of Europe. It's not that they don't want start-ups, but they have gone about seeding them in a bass-ackwards way. Money given away to small biz is money thrown away. They haven't figured out the incentives yet in any real way.

For #2, look at the incubator craze in silicon valley in 99/00. Granted there was a lot of air in a very big bubble, but my pet theory is that incubators made it far *too* easy for companies to start-up, and as a result otherwise good, capable companies tanked.

The reason: it just wasn't painful. And without pain, there is no resourcefulness. And without resourcefulness, there is no growth. I remember going to a meeting with a semi-competitive company back in 2000 that was being "incubated" and seeing all of the aeron chairs and the foosball table(s) and thinking "these guys are screwed." And in fact they were. . . Meanwhile, we were eating top ramen and had 9 people working out of a $1500 a month apartment in the mission (where 3 of us were also living). Now we're not microsoft yet, but we have certainly outlasted those other punks :)

There is little question that John and Clickability have done a great job of making it through the nuclear winter that was the early 2000s and building a meaningful and growing business while many of their competitors, incubated or otherwise, have disappeared. But I have a different theory about incubators.

It isn't necessarily a problem that incubators make things too easy for startups. The problem is that they don't promote true independence. It is one thing when an incubator provides fungible services (accounting, HR, etc.) to its companies. It is another thing altogether to provide help with core functions like strategy, business development, engineering and the like. These are critical skills that each startup requires, independent of the incubator. Yet, often times, those areas are supplemented by resident executives from the incubator. Sure, those execs may do a great job in the roles, but they will not be members of the permanent team and are therefore doing a disservice to their incubated companies by playing any core role whatsoever. When it comes time for the baby bird to leave its incubator nest, it won't actually know how to flap its own wings and, rather than soar, will fall like a rock.

Regardless of what are the true failings of incubators, I ultimately completely agree with John. Traditional incubators and economic grants can do more harm than good to a startup culture when there is not already a well-engrained and robust entrepreneurial ecosystem upon which these startups may grow and thrive.

I spent last week in Europe meeting with entrepreneurs in Amsterdam and Paris (it is a tough job but someone has got to do it). I met with some very smart people who are working on interesting projects. They are absolutely committed to their startups and are, in varying degrees, having some success in their respective markets. But I was once again reminded of the powerful impact the right ecosystem has on company building.

Starting a company is by its very nature a Herculean task. The odds are very much against you. As a general matter, people don't like working for startups, companies don't like buying from startups, building owners don't like renting to startups, banks don't like lending to startups, press don't like talking with startups, integrators don't like partnering with startups, lawyers don't like representing startups, and investors don't like funding startups. In Europe, each of these is more than a little true.

Despite some relatively recent efforts by U.S. venture capital firms like Benchmark Capital abroad and the notable recent success of Index Ventures out of Switzerland (driven largely by the spectacularly successful outcome of Skype), Europe remains more or less devoid of risk capital. It is extremely difficult to find angel investors to get a company off the ground and perhaps equally difficult to find professional investors willing to engage in venture financing. I had dinner with one of Europe's most successful tech entrepreneurs, Michiel Frackers, while in Amsterdam and he lamented the challenges faced by European startups. His answer to these challenges has been to create an incubator (Boost Digital) that provides the requisite infrastructure while focusing upon getting his sponsored companies cash flow positive in a short period of time. The advantage for Fracker's companies is that they aggregate infrastructure, publicity, administration, legal, etc. without requiring huge amounts of money to create self-sustaining businesses. But Michiel himself acknowledges the role venture finance plays in growing scale and velocity, something that is difficult to overcome in Europe.

In contrast to Europe, the San Francisco Bay Area and other startup centers throughout the United States (Boston, Austin, Seattle, DC, etc.) have strong institutions that support company building. For example, in the Bay Area, along with a robust angel community and Venture Capital industry, there are law firms that actually like representing startups (Fenwick, Gunderson, Orrick, Perkins, Wilson), banks and venture debt firms that actually like lending to startups (Silicon Valley Bank, WTI, Lighthouse), building owners that actually like renting to startups (all of South of Market seems geared towards startups today), accounting firms that actually like auditing startups (nearly any Big 5 Bay Area branch), PR firms, Integrators, staffing firms, etc. etc.

Starting a successful company in the Bay Area remains a Herculean task but at least you get a little bit of help along the way. The first city in Europe that can nurture that same ecosystem will become the region's center of entrepreneurship. Amsterdam is working hard to become that center and they may just succeed while London isn't looking.

I watched the 20/20 story last night on Kyle MacDonald's quest to trade "one red paperclip" for a house. The story is another testimony to the power of the Web as both a commerce machine (the very first trade -- a paperclip for a pen -- was facilitated on Craig's List) and PR Machine (how else would he end up on 20/20 and every other traditional media outlet you can imagine). But it is also a great story about resourcefulness and salesmanship.

I recently participated in a great event in NYC called the VentureVoice Workshop, put on by Greg Gallant and the team from the fantastic podcast VentureVoice. One of my fellow "instructors" in the workshop was a really impressive young entrepreneur named Tom Szaky. Tom is the CEO of TerraCycle, a company producing organic plan food and pesticide products, made and packaged entirely from waste. It is a product that literally has a negative ecological footprint -- by buying it you are helping the world. But, as Tom made clear, he is entrepreneur to make money first and save the world a distant second.

I was reminded of Tom's discussion of entrepreneurship by the One Red Paperclip story because Tom has managed to build his company by begging, borrowing and bartering. The initial funding for TerraCycle was won, in part, on the business plan competition circuit. Tom entered 6 business plan competitions, taking second in his first effort but winning each of the 5 subsequent competitions. That added up to thousands of string-free dollars. He got his furniture and computers from local universities that were upgrading offices and dorm rooms (they were thrilled to give the stuff to Tom because they would otherwise have had to pay for the equipment and furniture to be hauled away). He built his office and factory off the beaten path (in Trenton rather than NYC) to save on rent. He packages his product in recycled bottles that he gets for free. And Tom and the company are PR machines -- they get all their best marketing for free (check out all this press coverage thanks to a super charasmatic founder, clever marketing gimiks and a great product to talk about).

Sure, it is impressive to manage to trade up from a single paperclip to a house. But it is more impressive still to build a multi-million dollar corporation on a bunch of free worm poop, recycled soda bottles and the will to succeed.

A short time ago I had breakfast with my friend Abigail Johnson. Abigail has worked with numerous August Capital portfolio companies. She is a great strategic thinker who brings to the job of public relations a broad market view that can be invaluable. At breakfast she was telling me about the results of a survey she had performed concerning the importance of pure technology in startups today. The discussion struck me as something that would be of interest to VentureBlog readers, so I asked her to share her thoughts on the survey. Here is what she had to say:

Early last fall, I started wondering if unique technology is still an important asset for start-up companies. From my perch as a long-time strategic communications and public relations advisor to VC-funded start-up companies, I had been seeing some uneasy signs in recent years that the winds had shifted.

First, my VC friends and contacts â€" right here in the Silicon Valley â€" have reported that many of their peers have largely become conspicuously gun shy, and had been for some time been expressing preferences for “incrementalism” rather than “innovation” in new deals. Second, the characteristics of our own “deal flow” had changed dramatically.

Since the late ‘80s, literally hundreds of high-energy, technology-focused entrepreneurial teams have been sent our way by their VCs, in search of a defensible position of leadership. In their pitches to us, it’s always been the technology that drove their passions and was often the source of the company’s most defensible and substantial differentiation and competitive edge. But lately, “it’s the consumer, stupid” has taken over. The technology â€" when it exists â€" seems to be like Dirty Uncle Saul â€" something you don’t talk about in public, and certainly not as your raison d’être as a start-up.

Finally, there was my perception â€" and in my business, perceptions (even if wrong) are important â€" that the companies getting the best valuations were of late “consumer facing”. Chris Shipley in her keynote at DemoFall cited her firm’s research that IT departments are increasingly being forced to accommodate their infrastructures to technical decisions already made by individuals acting in their own interests. I took this to be further reinforcement that a company’s story â€" the one that had to resonate with the VCs and ultimately the press and influencers â€" had to rest on low risk and mass appeal, and that these new biases, in turn drove the businesses (and business plans) that were getting funded, and that ultimately made it to our doorstep.

Was it possible that here, in the Silicon Valley, technology didn’t matter any more for start-ups? Was the era of unique technology as “the” crucial asset for start-up success now over? We decided to find out.

We contacted about 75 key venture capitalists, entrepreneurs, press and analysts and asked them â€" with a short survey â€" what they thought. We got an extremely high response rate; it turned out that almost everybody was interested in the topic, and in sharing their opinion. A number of people commented that the question was provocative to them because no one else seemed to be asking it.

And, as it turned out, nearly everyone was still interested â€" very much so â€" in technology as a crucial asset to start-ups. You can look at the data yourself â€" a summary report can be found here. But let me give you the bottom line: 91% of the respondents believed that unique technology is “usually” to “always” crucial to the success of start-ups. We asked a half-dozen additional questions, trying to ferret out why they thought it was important (for competitive positioning, for higher valuations, etc. etc.) and the report will also tell you that. But that 91% was a surprise, given the vibes I was feeling, and to me, the results were quite pleasing.

I was pleased because we have always felt that unique, cutting-edge technology is a defining characteristic of those companies that truly and dramatically improve our lives in some way, and that such companies usually have the makings of the best, most successful, and most interesting start-ups. Certainly other factors matter â€" a lot. But technology is at the heart of a start-up company’s leadership. I was also pleased to see â€" and to be able in turn to share with entrepreneurs and those that make up their ecosystem â€" that creating new ideas and unique approaches â€" often from the ground up â€" continues to matter â€" very much.

A few other things fell out of our survey, including one interesting and noteworthy dichotomy. But that’s a story for another post.

Six months ago there was barely a pitch I heard that didn't include a slide entitled "Long Tail" or "The Long Tail of [fill in the vertical]," with the obligatory long tail curve. Impressively, it has taken less than a year of entrepreneurs explicitly referencing and explaining the Long Tail before it has become so well recognized and understood that it need only be implicated in passing without the same sort of fanfare as it used to receive. This is by no means an indication of the diminishing relevance of the Long Tail. Quite to the contrary. It is a recognition that the Long Tail is so obviously relevant and important as to no longer require explanation. Saying "Long Tail" is like saying "viral" or "search engine optimization" -- the concept is part of the standard parlance for VCs and entrepreneurs alike.

Yet despite the fact that "Long Tail" has become short hand, the economics of the Long Tail are, to my mind, still often misunderstood. I continue to hear funding pitches that talk about the Long Tail as a powerful enabler for content creators. Companies are presented to me premised upon the increased value of Long Tail content for musicians and artists and film makers. The fact that increasingly the likes of Amazon and iTunes make it possible for Long Tail authors or bands to sell a few books or records through legitimate, recognized channels is touted as the revolution of the artist. Far from it.

It is certainly the case that in the aggregate, Long Tail content is extraordinarily valuable. The question for VCs and entrepreneurs is "for whom?" I've had the good fortune over the last year or so to engage in a number of conversations about the economics of the Long Tail with Chris Anderson and to see those economics illustrated by innumerable Long Tail investment pitches. And, from those conversations and pitches, I have come to the conclusion that there are essentially two general classes of technology the will benefit economically from the Long Tail -- aggregators and filterers. And while both aggregators and filterers rely upon the increasing volume and diversity of content to assure their value in the ecosystem, that growth of content will not have a material impact upon the value of any one piece of content floating somewhere in the Tail. The value will all inure to the benefit of the aggregators and filterers. So who are the aggregators and filterers?

The aggregators are those web businesses that seek to collect up as much of the Long Tail content as is possible, so as to make their "stores" a one stop shop for content no matter how popular or obscure. That aggregation may be on a horizontal basis, as is the case with Amazon or Netflix, or it may be on a vertical basis, as is the case with WantedList or GameFly (the Netflix of porn and video games respectively). The value to consumers from these content aggregators is that they need not shop in dozens of places on the web in order to acquire a diverse set of content. As a result, aggregators are able to extract a disproportionate amount of value for the sale of each individual piece of content. And while creators are likely to sell slightly more content as a result of the increased ease of salability, they will not likely emerge from the obscurity of the Tail merely because they are made available for sale on Amazon or iTunes.

The filterers are those businesses that make it easier to find the content in which we are interested, despite the increasing proliferation of content creators, hosts, aggregators, etc. The purest form of filterer is the search engine. But the more obscure the content, the less effective the generalized search engine will be. Thus, I have been pitched on an increasingly large number of vertical search engines that use their thematic focus (shopping, real estate, employment, etc.) as a proxy to increase search effectiveness. And I have also seen an increasing variety of clever technical solutions to help filter the myriad of available content (for example, Pandora uses professional musicians analyzing songs based upon a standard set of characteristics and Delicious and Flickr use forms of end user tagging to characterize a disparate set of content). Again, while these different filtering technologies may make it slightly more likely that an end user finds his or her way to a piece of obscure content, it will not likely be sufficient to catapult an artist into the mainstream. The beneficiary of the filtering is the end user and the filterer, not the content owner per se.

(As an aside, I believe that it is difficult to be an aggregator without also being a filterer. It will be hard to sustain the scale necessary for an aggregation business if you don't initially also provide some of your own filtering tools. For example, Amazon has long been a leader in collaborative filtering, as has Netflix for that matter (interestingly, iTunes has been the laggard in this respect and I anticipate that we will see innovation on the filtering side from Apple soon enough). Once a business has reach scale as an aggregator, it can then rely upon mechanisms like affiliate programs and content syndication to empower others to be the filterers for their content (this has happened with Amazon in spades). But until that time, it will be necessary for aggregators like iFilm or Rhapsody to come up with their own clever filtering mechanisms to help consumers fully appreciate and navigate the breadth of the content they have to offer.)

None of this is intended to express any skepticism about the power of the Long Tail or the importance of the phenomenon. Long Tail economics are implicit in virtually every new media company I spend time with. But I think it is helpful for venture capitalists and entrepreneurs alike to focus on where the money is in the Tail. The real money is in aggregation and filtering and those will continue to be interesting businesses for the foreseeable future.

Over the last couple of months I've noticed an increasing sense of unease in the venture community about the trend in Web 2.0 company creation and financing events. While no one is officially willing to peg it Bubble 2.0 for fear of missing the next great opportunity, I've been having lots of conversations with venture investors about this nagging feeling that we've been here before. Which is not to say that there aren't potentially extremely interesting companies being built in the context of Web 2.0 -- after all, while Webvan and Pets.com and Excite@Home were born and died in Bubble 1.0, Yahoo and eBay and Amazon were born and thrived.

So why am I now getting this increasingly uneasy feeling? I was chatting with a veteran of Bubble 1.0 recently and I think he hit on the thing that makes those of us who've seen this movie before most nervous. He pointed out that there are a large number of "companies" being created again for the express purpose of being acquired. I certainly have seen it. I have met with companies that clearly state their intention to be acquired by Yahoo or Google or, in a pinch, Interactive Corp. I even had one company pitch me at the Web 2.0 Conference that if all went well they would be acquired by Odeo (don't get me wrong, I'm a big fan of Ev's and I certainly think that podcasting is exciting, but it strikes me as a tad premature to bet your company's future on being acquired by a pre-revenue company). These folks are unabashed about their intention to be acquired and they are developing their software and services with an eye towards compatibility with their would-be acquirers.

Acquisitions in and of themselves are certainly not a problem. The vast majority of money-making venture investments reach liquidity through acquisition. But, by and large, the most successful venture investments end in Initial Public Offerings (IPOs). It certainly isn't surprising that independent, stand-alone companies would in most cases be worth more than companies that can only survive through being consumed by larger entities. Therefore, from a venture capital perspective, startups that have the capacity to be stand-alone entities are by their very nature more appealing than companies that will ultimately require acquisition.

If companies are indeed again being built for acquisition rather than independence, venture investors are in for a rude re-awakening (that will be precipitated by a very loud popping sound). While a few companies being built for acquisition will be acquired, the vast majority will ultimately run out of money and be shut down (particularly as each new Web 2.0 idea doesn't just spawn one company but three or four). So when I hear large numbers of companies pitching themselves as excellent acquisition candidates before they've even gotten out of the gate I can't help but think to myself that we are in the heart of Bubble 2.0. Sadly, only one thing follows Bubble 2.0 and that is Bust 2.0. On the good side, there's always Web 3.0.