Got It Wrong #3: Taste-maker Risk
When considering a prospective investment, I’m looking for a variety of characteristics that Fred and Brad have previously written about extensively. One criteria I want to highlight for the purpose of this post is the “taste-maker risk.” Is the service in the business of trying to pick winners that will appeal to users, or is it a platform in which the users self-select and surface the content that interests them?
For example The New York Times is in the business of picking winners in content and as such is subject to the taste-maker risk. The company’s staff has to pick an op-ed board that they think will appeal to their audience. The editors have to decide what makes the front page and what should get buried. This editorial taste-maker risk is hard to due diligence, and is subject to changing rapidly as key personnel leave or as a fickle audience changes their tastes.
By contrast, a site like Craigslist has no taste-maker risk. They don’t have an editorial staff that determines what posts are good or bad and which ones are in violation of their ToS. Instead, they setup light governance and a flagging system and then let their users decide what is best-of-craigslist, what is ham, and what is spam. Most UGC sites in general avoid the taste-maker risk because the best content in the system will rise to the top through the social architecture of the service, and you as the site owner can sample the data exhaust your users are leaving behind to aid in the curation process.
The taste-maker risk is one risk that has been hard for me to ignore or overcome, and as a result, I have been pessimistic early on about the possibilities of some fantastically successful companies. For example when I first joined USV in ‘06, Softbank and Greycroft closed a $5M round in The Huffington Post. I didn’t understand the investment thesis in that deal because I was distracted by the taste-maker risk. But, in retrospect the growth has been remarkable.
I think part of the success of The Huffington Post is the fact that they address the taste-maker risk using a very analytical and quantitative methodology. Jonah Peretti presented at the Tech Meetup a year ago the technology back-end that the editors use to iterate on each story in real-time, and I was thoroughly impressed. For example, there is an overlay view of the site that editors can use to determine which headlines are attracting clicks and which headlines are duds, and then change them in real-time. I’m sure this is a methodology that seems obvious in retrospect, but at the time of Jonah’s presentation, there were audible gasps of amazement across the room.
So, in hindsight, I think I have a blind spot when it comes to first-party content and editorial choices in web services. The taste-maker risk is a risk, but it’s not nearly as important as I thought it was, and additionally, it’s a risk that smart technologists can navigate well.
Just to drive this point home: one company in the USV portfolio has always been subject to the taste-maker risk (and is still today). It’s Zynga. All social gaming companies that build their own games are subject to this risk. Fred in the comments on his blog awhile back that Zynga is one of the best investments he ever made.