It doesn’t seem like you’ll catch this news on tech blogs.
Spark Capital, a VC firm which usually invests in hot web 2.0 companies like Twitter and Tumblr, just invested in Frontier Strategy Group, a Washington, DC-based expert network focused on emerging markets.
Expert networks are not sexy like Twitter, but they’re big business. They’re research firms that pay “experts” in specific industries to talk to their clients, who are often financial investors like hedge funds. Expert networks have been in the news lately because of a huge insider trading investigation about expert networks that may or may not have facilitated insider trading for hedge funds.
It’s easy to see how expert networks might get into hot water. Paying people who are working for specific industries or companies to talk to hedge funds can be abused, because they might give out confidential information. The biggest expert networks have big compliance apparatuses, but not all of them.
What does it all have to do with the web, you might wonder? So do we. Spark Capital isn’t the only hot tech investor putting money in expert networks. Silicon Valley fund Floodgate (also an investor in Twitter, and other web 2.0 companies like Digg) is an investor in Business Connect China, a China-focused expert network. And the biggest expert network by far, Gerson Lehrman Group, originally received seed funding from top New York angel Chris Dixon.
Even though we’re sure expert networks make extensive use of the internet to find and target experts, we’re doubtful that the web is their big competitive advantage. Sure, you might say, but the money’s green, right? As long as the company makes money, it’s good for investors.
Well, sure. But Gerson Lehrman, the biggest expert network, is an 800 pound gorilla, accounting for over 60% of the entire sector’s revenue, according to a recent report. Unlike the consumer web where it’s possible for small, nimble startups to dance rings around the slower giants, there are big advantages to scale for expert networks, who can pay lure away experts and pay them more, and sell more to bigger clients. This is all the more true after the big insider trading scandal, which is going to increase compliance costs and raise barriers to entry, as Roger Ehrenberg (yet another web investor) pointed out recently on his blog.
Diversifying into specific areas like China and emerging markets makes sense in theory, but we don’t see how that’s enough differentiation over the long term.
Maybe Spark figures that with scandals shaking the sector, this is the right time to make a contrarian bet, but this seems to us like being contrarian for the sake of being contrarian, unless we’re missing something.
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