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I apply a classic (and important) quote from Jon Blow to give some perspective on the current debate surrounding Steam and Greenlight, and add a few thoughts of my own about the rapidly-changing landscape of indie games.

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How can we make sense of it all?
A few weeks ago, I had dinner with Saumil and Sailesh, co-founders of LocBox.* Instagram had just been acquired by Facebook and there was speculation (later confirmed) about a big up round financing of Path. The recent large financing of Pinterest was still in the air, and the ongoing parlor game of when Facebook would go public and at what price was still being played. A couple of months prior, Zynga had acquired OMGPOP.

Sailesh wondered aloud, “How much time do we have for any of these?” “How many of them can coexist?” and “Do we really need them?” My answers were, respectively: “A lot.” “Many of them.” and “No, but we want them.” That dinner discussion prompted some observations that I am outlining here, and I invite you to share your own observations in the comments below.

In a nutshell, the Internet has evolved from being a need-driven utility medium with only a handful of winners to a discovery-driven entertainment medium with room for multiple winners. The necessary and sufficient conditions for this evolution are now in place — broadband, real names and tablets are the three horsemen of this New New Web. As consumers, entrepreneurs and investors, we should get used to the fact that the online economy is increasingly blurring with the offline economy, and in the limit, that distinction will disappear. As a result, just as in the real world, the Web of entertainment will be much bigger than the Web of utility.

A Theory of Human Motivation
One framework for understanding the consumer Internet is Maslow’s Hierarchy of Needs, which Abraham Maslow put forward as a way of explaining human behavior at large. The core premise is that once our basic needs of food, shelter, safety and belonging are satisfied, we tend to focus on things that are related to creativity, entertainment, education and self-improvement. A key aspect of this framework is that it’s sequential: Unless the basic needs are met, one cannot focus on other things. As an example, a study in 2011 showed that humans who are hungry will spend more on food and less on non-food items compared to those who are not hungry. Using this framework, we can see how consumer adoption of the Web has evolved over the last 20 years, and why all of the ingredients are only now in place for consumers to use the Web for what Maslow called “self-actualization” — a pursuit of one’s full potential, driven by desire, not by necessity.

1992-2012: Web of Need
Between the AOL IPO in 1992 and the Facebook IPO last month, the Internet has largely been in the business of satisfying basic consumer needs. In 1995, the year Netscape went public and made the internet accessible to the masses, I was a young product manager for a consumer Internet company called Global Village Communication. We were a newly minted public company and our hottest product was a “high speed” fax/modem with a speed of 33.6 kbps. Back then, using the Internet as a consumer or making a living off it as a business was rather difficult, and sometimes simply frustrating. In the subsequent years the basic needs of access, browser, email, search and identity were solved by companies such as AOL, Comcast, Netscape, Yahoo, Google, LinkedIn and Facebook.

2012-?: Web of Want
Today, the billion users on Facebook have reached the apex of Maslow’s hierarchy on the web. All of our basic needs have been satisfied. Now we are in pursuit of self-actualization. It is no surprise that on the Web, we are now open to playing games (Zynga, Angry Birds), watching video (YouTube, Hulu), listening to music (Pandora, Spotify), expressing our creativity (Instagram, Twitter, Draw Something), window shopping (Pinterest, Gojee*) and pursuing education (Khan Academy, Empowered*).

The Web Is Becoming Like TV
How do we make sense out of a Web where multiple providers coexist, serving groups of people who share a similar desire? Turns out we already have a very good model for understanding how this can work: Television. Specifically, cable television. The Web is becoming like TV, with hundreds of networks or “channels” that are programmed to serve content to an audience with similar desires and demographics. Pinterest, ShoeDazzle, Joyous and Alt12* programmed for young, affluent women; Machinima, Kixeye and Kabam programmed for mostly male gamers; Gojee* for food enthusiasts; Triposo* for travellers; GAINFitness* for fitness fans and so on.

In this new new Web, an important ingredient to success is a clear understanding of the identity of your users to ensure that you are programming to that user’s interests. The good news is that unlike TV, the Web has a feedback loop. Everything can be measured and as a result the path from concept to success can be more capital efficient by measuring what type of programming is working every step of the way — it’s unlikely that the new new Web will ever produce a Waterworld.

Why Now? Broadband, Real Names & Tablets
As my partner Doug Pepper recently wrote, a key question when evaluating a new opportunity is to ask “Why Now?” Certainly, companies like AOL, Yahoo and Myspace have tried before to program the Web to cater to interests of specific audiences. What’s different now? Three things: Broadband, real names and tablets.

The impact of broadband is obvious; we don’t need or want anything on a slow Web. With broadband penetration at 26 percent in industrialized countries and 3G penetration at about 15 percent of the world’s population, we are just reaching critical mass of nearly 1B users on the fast Web.

Real names are more interesting. In 1993, the New Yorker ran the now famous cartoon; “On the Internet, nobody knows you’re a dog.” This succinctly captured the state of the anonymous Web at the time. Reid Hoffman and Mark Zuckerberg changed that forever. Do we find Q&A on Quora to be more credible than Yahoo! Answers, celebrity profiles on Twitter more engaging than Myspace and pins on Pinterest more relevant than recommendations on early AOL chatrooms? I certainly do, and that is largely because Quora, Twitter and Pinterest take advantage of real names. Real names are blurring the distinction between online and offline behavior.

Finally, the tablet, the last necessary and sufficient piece that fuels the “Web of want.” The PC is perfect for the “Web of need” — when we need something, we can search for it, since we know what we are looking for. Searching is a “lean-forward” experience, typing into our PC, either at work or at the home office. The Web over the last decade has been optimized for this lean-forward search experience — everything from SEO to Web site design to keyword shortcuts in popular browsers makes that efficient. However, smartphones and tablets allow us to move to a “lean-back” experience, flipping through screens using our fingers, often in our living rooms and bedrooms, on the train or at the coffee shop. Tablets make discovery easy and fun, just like flipping channels on TV at leisure. These discoveries prompt us to want things we didn’t think we needed.

Early Signs
This thesis is easy to postulate, but is there any evidence that users are looking to the Web as anything more than a productivity platform? As has been reported, mobile devices now make up 20 percent of all U.S. Web traffic, and this usage peaks in the evening hours, presumably when people are away from their office. Analysis from Flurry* shows that cumulative time spent on mobile apps is closing in on TV. We certainly don’t seem to be using the Web only when we need something.

Economy of Need Versus Want
The economy of Want is different from the economy of Need. We humans tend to spend a lot more time and money on things we want compared to things we need. For example, Americans spend more than five hours a day on leisure and sports (including TV), compared to about three hours spent on eating, drinking and managing household activities. Another difference is that when it comes to satisfying our needs, we tend to settle on one provider and give that one all of our business. Think about how many companies provide us with electricity, water, milk, broadband access, search, email and identity. The Need economy is a winner-take-all market, with one or two companies dominating each need. However, when it comes to providing for our wants, we are open to being served by multiple providers. Think about how many different providers are behind the TV channels we watch, restaurants we visit, destinations we travel to and movies we watch. The Want economy can support multiple winners, each with a sizeable business. Instagram, Path, Pinterest, ShoeDazzle, BeachMint, Angry Birds, CityVille, Kixeye, Kabam, Machinima and Maker Studios can all coexist.

Investing in the Web of Want
The chart below shows that over a long term (including a global recession) an index of luxury stocks (companies such as LVMH, Burberry, BMW, Porsche, Nordstrom) outperforms an index of utility stocks (companies such as Con Edison and Pacific Gas & Electric that offer services we all need). The same applies to an index of media stocks (companies such as CBS, Comcast, News Corp., Time Warner, Viacom) which outperforms both the utilities and the broader stock market. Of course, higher returns come with higher volatility — Nordstrom’s beta is 1.6 and CBS’ beta is 2.2, compared to 0.29 for PG&E. It is this volatility that has cast investing in the Want business as a career-ending move in Silicon Valley for the past 20-plus years. As the Web evolves from serving our needs to satisfying our wants and, in turn, becomes a much larger economy, sitting on the sidelines of the Web of Want may not be an option.

Let’s Not Kill Hollywood
With a billion users looking for self-actualization and with the widespread adoption of broadband, real names and tablets, the Web is poised to become the medium for creativity, education, entertainment, fashion and the pursuit of happiness. As the offline world shows, large, profitable companies can be built that cater to these desires. Entrepreneurs and investors looking to succeed in the new new Web can learn quite a few lessons from our friends in the luxury and entertainment businesses, which have been managing profitable “want” businesses for decades. The fusion of computer science, design, data, low friction and the massive scale of the Internet can result in something that is better than what either Silicon Valley or Hollywood can do alone. It is no wonder that the team that came to this conclusion before anyone else is now managing the most valuable company in the world.

Epilogue
When we go see a movie or splurge on a resort vacation, we don’t stop using electricity, brushing our teeth or checking our email. The Web of Want is not a replacement for the Web of Need, it is an addition. Many of the Internet companies that satisfied our needs in the last 20 or more years of the Web are here to stay. In fact, they will become more entrenched and stable, with low beta, just like the utilities in the offline world. Microsoft has a beta of exactly 1.0 — it is no more volatile than the overall stock market. And for those longing for the days of “real computer science” on the Web, do not despair. Just keep an eye on Rocket Science and Google X Labs — there is plenty of hard-core engineering ahead.

Disclosures: * indicates an InterWest portfolio company. Google Finance was used for all of the stock charts and beta references.

Keval Desai is a Partner at InterWest, where he focuses on investments in early-stage companies that cater to the needs and wants of consumers. He started his career in Silicon Valley in 1991 as a software engineer. He has been a mentor and investor in AngelPad since inception. You can follow him @kevaldesai.

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Back in the early '90s, the definition of 'indie' music went under a transformation. What had started as a tag for any act that released music without the help of a major record label became a way of describing - and selling - a sound and a lifestyle. Once it was all about crudely recorded cassette tapes and direct, intimate fan interaction; today it's Coldplay, with all the corporate fixings.

And now a similar evolutionary shift seems to be taking place in the games industry. Whereas not much more than five years ago the indie game was solely the domain of hobbyists and modders, now, thanks to the speedy ascent of Steam, iOS, XBLA and PSN, indie is everywhere and, increasingly, it's big business.

But as it grows, it becomes harder and harder to pin down what an indie game actually is. There are some games and developers that everyone would agree are resolutely 'indie'. Minecraft and Mojang; Super Meat Boy and Team Meat; World of Goo and 2D Boy. But what about, say, Journey? It might carry all the stylistic trappings of an indie game, but developer thatgamecompany was funded by Sony. Or, to take it one step further, what of Epic? It's self-funded and answers to nobody, but few would label Bulletstorm or Infinity Blade 'indie'.

Read more…

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Steve Anderson's first Instagram photo

Steve Anderson of Baseline Ventures has had an amazing run lately.

He was the first seed investor in Instagram, which sold to Facebook yesterday for about $1 billion. He was also a seed investor in OMGPOP, which sold to Zynga for close to $200 million last month, and Heroku, which Salesforce picked up for about $200 million in 2012.

He's also got early investments in Twitter and Path, which are sure to be two of the biggest success stories of the next couple years.

So how does he pick them?

In the case of Instagram, he met founder Kevin Systrom in January 2010 when Systrom was still at Google. They met at a bar, introduced through another entrepreneur the two of them knew.

Anderson told us, "He had his iPhone and bunch of HTML code he'd hacked together called Brbn. It was a bunch of hypotheses and no real clear answer what to do -- photos, check-in, comments, gamification. Instagram emerged out of that, a paring down of features that were really working."

Through trial and error they quickly decided "that HTML5 wasn't really ready for prime time, that native apps were totally superior." They also decided to "make a sole bet on the iPhone, which was risky at the time."

It paid off -- Instagram got 25,000 users on the first day, showing obvious product market fit. A little more than year later, it was up to 30 million.

The rest is history.

Anderson honed his investing skills working at Kleiner Perkins earlier this decade, and also did stints at eBay in the early days, and on Microsoft's Windows Server team.

We caught up with Anderson this morning. He shared some of his wisdom with us:

  • He wants founders who are thoughtful, but then make forceful decisions. This is important because few people get their idea exactly right on the first try. "As Instagram has proven with Brbn to Instagram, I find it really hard to believe that any one person will have the perfect maniacal vision right from the start .... So that's part of my assessment, hey, does this person have an opinion, based on a worldview that they've developed through listening, paying attention, and pondering. Kevin is the best at that. He's very thoughtful, he ponders, but he's very deliberate once he makes a decision."
  • Founders must be able to code, but he doesn't have strong opinions about languages. "All the scripting languages -- Ruby, Python, NoJS -- those have all very important places as do people who know Objective C for iOS development. Even C++. You don't use it to develop a really cool app like Instagram, but you need C++ if you want to do anything fast tied to hardware, or anything operating-system based."
  • Don't raise more money until you're sure you have product market fit. "What are the goals for [follow-on rounds] of financing? In Kevin's case...the goal was to take all these features [in Brbn] and narrow them to a product that has a great product market fit. Generally speaking, most of my investments are pre product launch, they're just an idea. So getting product market fit is the most important goal of the round. My goal as an investor is to make sure there's enough financing to give companies time to do that, a year to 18 months. The worst scenario is to try to raise more money when you haven't achieved that goal."
  • To be a great seed investor, you need a great network of connections. "As a seed investor, I don't what exists until I find it. With series A, B, C, or growth investments, you already know what you want to invest in. You have to fight for it, convince the team that it's the right investment at the right time and right price. But for me, it's all about networks ... I spend time with entrepreneurs, I meet them mostly through other entrepreneurs."
  • On Y Combinator and other accelerators and incubators. "They did this for people who don't have their own networks or can't grow their networks. How often do you show up to one place and see 80 companies? Of course with that scenario you'll pay a higher price because more people are looking. That's fine. Entrepreneurs have more transparency today than ever before, they can choose the types of investors they want to work with."
  • Anderson is fine with all the other seed and angel investors who have sprung up since he started. "When I went out at Baseline to raise capital, all I heard was crickets. I had to stay the course, adjust, and scrape together what I could. Six years later, there are a lot of investors ... I don't worry, I'm very confident in my ability to add value to young entrepreneurs and young companies. I like working with other investors. It's a big market, it's less about seeing everything and more about seeing your fair amount so you can be able to pick."
  • When to shut down a failing company. "Your goal is product market fit. If you don't have it, eventually you'll run out of cash, say the experiment is wrong, and fold up your tent ... A lot comes down to the entrepreneur. Do you keep doing this against all the feedback, or not? That's why when I invest I want to leave enough room for pivoting or reexamining your goals. After that, most of the time entrepreneurs are realistic near the end and say this isn't working. Those decisions aren't that difficult. It gets more difficult in later stages when you've got millions of dollars in. Usually there, you try to sell the company."

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Half-baked ideas on a topic I'm a bit obsessed with: creating a game engine that accurately models Rules and their fundamental role in gameplay... possibly creating a workflow in which Designers could implement games without the need for programmers.

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