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As the Web transforms the worlds of media, marketing, and finance, venture capitalist Fred Wilson believes there's no better place to invest than New York.
By John Heilemann

(Business 2.0) – A LITTLE OVER TWO YEARS AGO, in March 2003, I wrote the very first Face Time—a column that asked if Silicon Valley was turning into the new Detroit. In support of this suggestion, I cited a bunch of Valley venture capitalists spouting unusually dire assessments of the entrepreneurial condition. The collapse of the bubble, these VCs said, was more than a cyclical slump. It marked the start of a prolonged period in which innovation would be marginal and plodding—and venture capital, like the Valley itself, would be "dead, kaput, over."

Unbeknownst to me, at the moment I was writing those words, Silicon Alley VC Fred Wilson was mulling over similar thoughts—but coming to a different conclusion. Today, Wilson, a co-founder of New York's boom-era Flatiron Partners, declares that March 2003 was "the beginning of the rebirth of venture capitalism."

Certainly it was the beginning of the rebirth of Wilson. With a new sidekick (former AT&T Ventures partner Brad Burnham) and a new firm (christened Union Square Ventures), Wilson recently closed a $125 million fund, which has already financed three startups and is on the brink of backing two more. And with an outspoken blog—Musings of a VC in NYC (avc.blogs.com)—and no shortage of theories about the future of the Internet, Wilson is emerging as the articulate, gung-ho VC voice of the Web 2.0 generation.

None of these developments was etched in stone in the spring of 2003. Now 43, Wilson had come of age as a VC in his years at Flatiron, which he founded with Jerry Colonna in 1996. The firm was flashy right from the get-go, backing a clutch of high-profile media and content plays (TheStreet.com, Inside.com, the Industry Standard). For the first few years, Flatiron could do no wrong, scoring with hits such as GeoCities and StarMedia. But when the bubble popped, so did Flatiron, its media properties imploding one by one, its backing of Kozmo.com becoming everyone's favorite illustration of how crazy the e-commerce dream had driven otherwise sane VCs. In 2001, Wilson and Colonna essentially shut down Flatiron (although they still manage what remains of its portfolio). Looking back on it now, Wilson offers a blunt assessment: "Yeah, boy, we really screwed up a bunch of things."

So when Wilson first contemplated starting a new outfit, he approached the idea with a caution and a rigor lacking at Flatiron's inception. In 1996 he and Colonna raised $150 million in two months without an investing plan. In 2003, before deciding to approach investors, he and Burnham spent nine months reading academic works (including economist Carlota Perez's Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages), analyzing case studies, writing think pieces. "We did it to convince ourselves that it made sense to raise a fund," Wilson tells me. "We needed to be sure there was still a role for venture capital."

Wilson and Burnham did more than convince themselves of all that. They developed what Wilson calls a "thesis" about where the industry is headed. "The reality is that core technology investing—everything from chips to enterprise software to communications equipment, all the stuff that big companies buy—has been on the wane for five to 10 years," Wilson says. "So what's the next wave? The next wave is what we're calling applied technology. The Internet is a computing platform built on top of core technology. Applied technology is what gets built on top of that: It's Web services."

Wilson acknowledges that Web services are nothing new (see "How to Ride the Fifth Wave," page 78). But he argues that the explosion of lightweight services—"apps on top of apps on top of apps"—has only just begun. Igniting that explosion, he contends, is "a seminal change in business: the rise of open-source software. It has proven that peer economies work and can create great value. And people are starting to apply that model to lots of different things."

To Wilson's way of thinking, the shift from core to applied technology has changed the rules of the startup game—and venture capital too. "It's no longer about putting 10 engineers in a garage and building something meaningfully different," he says. "It's about one or two people building something, getting it into users' hands, and iterating." The shift has also influenced what Wilson calls his "template of core beliefs": "Management matters more than technology. Code matters less than functionality and service definition. Patents don't matter much, but differentiation does. And so does scalability—a lot."

All three of Union Square's investments have been guided by these bullet points. There's Instant Information, a startup that's applying the open-source model of collaboration to Wall Street research. There's Tacoda, an online advertising outfit that's working on a system for behavioral ad targeting. And there's Del.icio.us, a startup that describes itself as a "social bookmark manager."

What all these investments reflect, as well, is Wilson's enduring passion for media, marketing, and finance—three industries he thinks will be turned on their heads by the proliferation of Web services. "The Web is going to capture an increasing share of people's attention, and billions of dollars are going to flow in," Wilson says. "What Web 2.0 is about is harnessing those dollars in highly leverageable ways." Pointing to Google and Yahoo as examples, he says, "The potential profitability here is simply amazing."

Wilson may be right about that, but he shouldn't get carried away. If what he's saying is true, the capacity of any firm to defend its position is likely to be vanishingly small. An explosion of Web services, cheaply and quickly produced and released, may prove a massive boon to consumers. But that doesn't mean that it will cough up a plethora of highly profitable companies—or a slew of big scores for VCs. Moreover, none of Union Square's investments at this point exactly has "the next Google" written all over it.

Such skepticism doesn't faze Wilson. What he sees is a landscape littered with opportunity. In terms of startup energy, if not stock-market lunacy, he compares this moment to the headiest days of the bubble. "We have an entrepreneurial frenzy going on—everyone's trying to make a buck again," he says. "But we're better off today. We're older. We're wiser. And now we have a thesis."

Older? Sure. Wiser? I dunno. The jury's still out on that one—call me in three years.

Even so, Wilson's thesis strikes me as broadly correct. For the 20 years before the Internet boom, the information revolution was about computing itself; for the next 20, the main event will be the breakthroughs that computing makes possible. One of Wilson's advantages is that he gets this to his core. A blogger and RSS addict, he's part of a generation that couldn't care less about microprocessor clock speed. And unlike certain Silicon Valley venture capitalists, Wilson hasn't, as he puts it, "made so much damn money that I can't get excited about figuring it all out again."

Wilson, of course, is different from most Valley VCs in ways too numerous to count—starting with the fact that he wouldn't trade his offices off Union Square for digs on Sand Hill Road for all the tea in China. At almost any other moment in high-tech history, being in New York was a distinct disadvantage for a VC; it was like being an arbitrageur in Kansas rather than on Wall Street. But if Wilson is right—and I think he is—that media, marketing, and finance will be among the industries most affected by Web 2.0, he's better off exactly where he is. As tech itself recedes from view and its effects take center stage, the Valley may prove to be the nosebleed section, and New York the ringside seat.