Network Effects

Hotmail's performance was a revelation to the partners at DFJ. And if there were any doubts that its success could be replicated, they were laid to rest with the success of Four11. Six months before taking a 15% stake in Hotmail, DFJ had invested $800,000 in Four11 -- a provider of free Internet directory services. Though Four11's growth was not as explosive as Hotmail's, it did exhibit all the symptoms of a viral-marketing success story. In the end, Yahoo! acquired Four11 for $93 million of Yahoo! stock. In less than two years, with a total of less than $5 million invested in Hotmail and in Four11, DFJ walked away with $200 million. "We were on the lookout for viruses from that point on," says John Fisher. "In Tim's case, it almost became a sine qua non for investing in a company." Adds Jurvetson: "I can't think of any consumer Internet company that we'd consider that doesn't come with a viral-marketing element."

DFJ has considered -- and funded -- a portfolio of companies that do fit the viral criteria. NetZero, for example, offers a lifetime of free Internet access in exchange for allowing a one-by-four-inch window to be displayed that broadcasts targeted ads. NetMind, a service that automatically notifies subscribers of changes to their favorite Web pages, has ramped up to 7 million customers in three years. Homestead, another startup, lets users create private Web sites for free. When users send their password that allows family and friends to access the site, it comes with a link encouraging them to set up their own page.

But perhaps the investment with the highest visibility (and certainly the most controversy) that DFJ has made is in Third Voice, an online service that allows users to place the digital equivalent of Post-it notes on any Web page in the world. The way Third Voice works is simple: A user downloads free software that installs itself onto a browser. Once the application is up and running, unobtrusive markers appear on a Web page indicating that other Third Voice users have left comments there. Click on the marker and the comments pop up in a small box. If the user has registered his or her name and email address with Third Voice, they're free to add comments of their own. What's unique is that nothing happens on the Web site itself. The entire transaction is between Third Voice's servers and its clients' browsers, so Web masters have no control over what's being posted on their sites.

That's what makes many Web-site administrators so nervous. Visitors can go to a site that's hawking a product and leave a note that says, "This product sucks." Any Third Voice customer who goes to that site can view the note. Third Voice users can create private lists that allow their postings to be read only by people they choose. So even if Web masters have a Third Voice - enabled browser, they can never be sure they're seeing all the postings on and about their site.

"When you strip down all of the hype, the Web really hasn't changed for the user since the first Mosaic browser was used," says Eng-Siong Tan, Third Voice's ebullient CEO and cofounder. "As a user, what can you really do? You can type in a URL and choose which link to click on, but that's it. It's all a one-way flow. So we thought, 'Why not add a level of interactivity so that users can talk back?' "

When an entrepreneur from another DFJ-funded company showed Jurvetson a mock-up of what Third Voice might look like, he was blown away. "It was just two scraggly screen shots," Jurvetson recalls, "but it caught me. The concept was so simple: You could build a community and add comments on Web pages without involving that Web server. If Yahoo! doesn't want to partner with you, it doesn't matter. If Amazon.com doesn't want to partner with you, it doesn't matter. You can launch your business and get going."

Jurvetson set up a meeting with Eng-Siong later that afternoon. He was amazed by what he saw in the shoddy warehouse-cum-dormitory that was Third Voice's original headquarters in Foster City, California: "The big, high-ceilinged room contained rows of picnic tables on top of which were computers set up closer together than I'd ever seen. And there were 26 people at that time who, I'm sure, were breaking every fire code ever written. Almost all of them seemed to be living there, sleeping on beanbag chairs in the loft upstairs and sharing the only bathroom in the whole place. But despite the Spartan conditions, they exuded an incredible energy."

That energy proved to be infectious. The more Eng-Siong explained the product, the more Jurvetson loved it. After all, Eng-Siong was speaking his language: "The way we put it to Steve was, 'You look for viral marketing in the companies you fund: Well, we've got something that contains not one, but two viral-marketing mechanisms. There's Hotmail and there's ICQ [an instant-messaging service, used by 32 million subscribers, that was acquired by AOL last year]. Would you like to see those two elements combined in one service?' "