Condemned to repeat...?

Just five years ago, the world watched firm after VC firm, confess that they had strayed far from their areas of expertise when investing in online consumer businesses. At the height of the craze, the phrase "grow big fast or go home" seemed to be the sole rationale for wasting billions.
Almost universally, venture firms said, 'You know, we're not comfortable working with consumer stuff, we're really technology- and engineering-based firms, we made a mistake going into these businesses and we promise never to do it again ".

How their tunes have changed.

Today there is probably no hotter sector among venture investors than the same breed of Web companies that had fallen so quickly out of favor.

RazorGator, a site for finding tickets to sold-out sports and music events, received $26 million last month from Kleiner Perkins Caufield & Byers, among others. Also last month, Thefacebook.com, a Web site wildly popular with college students, got $12.7 million in financing from Accel Ventures.

Venture has always been a business in which all but the boldest run in herds, chasing the latest trends. The shift back to Internet ventures serving consumers is also fueled by a paucity of promising investment opportunities in telecommunications and software right now.

The problem is that you've got all these software V.C.'s, they don't know what to do with themselves. They look at the billions Kleiner Perkins and Sequoia Capital made on Google. They see some of their venture capital brethren enjoying large payouts as their Internet start-ups are acquired for hundreds of millions of dollars by Internet giants like Yahoo and Google.

Now they seem to think these are deals that make people a lot of money, and enterprise software is largely dead. By default, they've decided they're consumer Internet venture capitalists.

There are, of course, some sound reasons for the renewed interest in the Internet beyond Google envy. The widespread adoption of broadband, for instance, makes the Internet more useful and more used by consumers than it was, say, five years ago.

In 1999, a Web site that drew millions of visitors had a hard time turning those visitors into profits. Now the same site can do a robust business selling advertising as companies large and small collectively pour billions into Internet marketing.

Another difference this time around is that Web sites like RazorGator and Thefacebook had drawn an impressive number of users before seeking venture financing. By contrast, big checks were written in the late 1990's to finance consumer sites before they had much, if any, traction, while V.C.'s spouted phrases like "if you snooze you lose."

Even now, lots of venture capitalists - many with no experience in Internet consumer ventures - seem little chastened by the past flameouts. Success with online consumer companies depends on a deep knowledge of marketing, among other skills. But that has not stopped V.C.'s, who only a year ago had focused on, say, optical networking, from getting into the Internet.

VCs who swore never to look at non-linear verticals like online consumer businesses are beginning to dial successful internet VCs with proven expertise, wanting to co-invest. The experts think it's great that the Internet consumer space is heating up again. But they as well agree that the consumer is also quickly becoming a space where lots of venture capitalists are diving in without a clue. Will they ever learn…?

But that is the nature of venture investing. An area is underfunded until it grows hot, and then it's quickly overfunded. The venture business tends to be characterized by booms and busts.

There will be some big winners in this round, but many more losers along the way.