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December 15, 2008

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Great post Rick. I would just add that there are probably different stages of "growth" with the growth business bucket. There is growth that is measured by market reach, adoption and scalability of the product/solution (e.g., Twitter), growth that is measured by the operating margins and profitability of the product/solution (e.g., PayPal) and growth that is measured by the sustainable value of the enterprise (e.g., Google). Companies that can manage through these stages of growth quickly and with as little disruption to the focus and operations of the organization end up being the game changers.

Are there no Game Changer VCs, Rick?

Each of these buckets (except the feature) has a return possibility -- where there is a good, safe return on capital potential as well as a return on investor sweat.

A Game Changer VC might spread investments across these buckets, focusing on and going deep in a specific industry sector.

Conventional VCs play for the 1 out of 10 game changer from their portfolio mix, scuttling the rest. Wouldn't it make good business sense to hedge with a few 2 out of 3s from the other buckets? The smaller returns could baseline out the IRR (with dividends or annuities, even!), giving you more freedom to take the bigger risks, while providing a deeper understanding of the entire ecosystem of a sector.

And if you can turn one of the safer investments into a game changer, that's gravy.

Maybe that's not venture capital -- but it's an interesting model.

Bobby,
Thanks for stopping by. Many VCs do in fact spread it out a little, bet on some things that will have good IRR but also bring other things to the table like knowledge of a space they want to get into, possible companies that could merge into something else, etc.

Your points are good ones.

>R<

Very nice writeup, Rick. My business partner and I have been discussing this very topic on how to categorize businesses.

A few questions for you:

Which category is Twitter? Feature? Or game changer? Can a company go from feature straight to game changer?

Is it possible (i.e. do you know of examples) where say a nice business is tricked by VC funding into thinking it's a game changer? Are there some business that are never meant to grow beyond nice business? Or can every business grow with the right team in place?

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