YOU ARE THE DECIDERS! (AND the END-GAME)

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December 17, 2006

From Lips of Children, Tips to Ears of Investors

By MATT RICHTEL

SAN FRANCISCO, Dec. 16 — Wanted: investment adviser, the younger the better.

In a nod to the wisdom of youth, many wealthy, highly connected and well-educated technology investors are taking counsel and investment tips from their children, summer interns and twentysomething receptionists.

These venture capital investors say there is good reason to ask young people to help them assess new technology: as the investors themselves are aging, the technology — including social networking Web sites and mobile gadgets — is designed for, used by and sometimes built by people half their age.

“Children are a secret weapon in my arsenal for making investment decisions,” said Heidi Roizen, a managing director at Mobius Venture Capital, a Silicon Valley firm.

Last year, Ms. Roizen asked her daughters, Niki and Marleyna Mohler, ages 13 and 11, to check out a handheld video player she was thinking about backing. The daughters quickly tired of the gadget, so Ms. Roizen did not invest.

And this year, Ms. Roizen bought Niki a subscription to World of Warcraft, the popular online role-playing game. The idea was to get her daughter familiar with the genre so she could offer advice about an investment Ms. Roizen had made in another game company.

“I was a guinea pig, a lab rat,” Niki said of the experience, in a tone that suggested she was also experimenting with sarcasm.

While the idea of testing products on consumers is hardly new, its emergence in the world of venture capitalists is something of a sea change. After all, this is an industry of independent-minded investors who have historically made decisions by trusting their knowledge of engineering, strict analytics and their own gut instincts — along with a bit of the herd mentality.

Unlike the formal consumer tests and focus groups at large companies like Procter & Gamble, these inquiries are taking place closer to home, with friends and family. But their impact can be broad, because venture capitalists not only help steer the development of new ideas but also invest billions of dollars in those ideas on behalf of investment groups and wealthy individuals.

To some, the approach looks like a product of the desperation felt by investors trying to identify the next YouTube or iPod.

“There is something comical, and maybe silly, about relying on kids,” said Paul Romer, a professor of economics at the Stanford Graduate School of Business. “It seems risky.”

But Mr. Romer noted that it was getting tougher to pick the winners among start-ups. Young people, Mr. Romer said, may be better equipped than investors, who tend to be in their 30s or older, to see nuances and identify trends.

“The people making the decisions may not appreciate some of the small differences that might be apparent to end users,” he said.

Those end users include Mariana and Tatiana Megevand, who live in Geneva. Last year, Neil Rimer, their uncle, heard the girls, 14 and 12, talking about one of their favorite Web sites, Stardoll.com.

The site lets visitors create and dress up virtual paper dolls. Mr. Rimer is not just an uncle but also a venture capitalist, a partner with Index Ventures, based in Geneva. He decided that his nieces’ interest constituted one of the better tips he had heard in a while.

“The next Monday I went in and talked about it with my partners,” he said, “and that week we were on the phone to the company.”

Index and other firms, including the venerable Sequoia Capital, have invested more than $10 million in Stardoll this year, and the company has moved to Geneva from Finland. Mr. Rimer says he still talks to the girls about what they like and what they would improve. He has given them some incentive, too: a small stake in Stardoll that could be valuable if the company prospers.

Other firms have started surveying groups of children. IDG Ventures, a Boston firm, recently asked one of its associates to visit its partners’ homes and ask their children to assess a new social networking site.

The trend may indicate the rise of something new in the venture capital industry itself: humility. A notoriously self-assured bunch, these investors are admitting that some innovations may be lost on their g-g-generation.

“The funniest thing is when we sit around and say, ‘I’m not sure because I would never use this,’ ” said Jeff Fagnan, 36, a general partner with Atlas Ventures.

The investors said consulting with younger people would have been unheard of in the dot-com boom of the 1990s. Then, investors were immersed in the very technology they were financing, ordering books on Amazon, downloading music from Napster and buying and selling on eBay. But now, in the so-called Web 2.0 era, venture capitalists’ personal interests have strayed from the sweet spot of innovation: Web sites like MySpace intended to connect people, free Internet calling tools like Skype or software for mobile phones.

And people now in junior high and high school have spent their lives with technology. “This is the first generation for whom the computer is a native language,” said Jim Gauer, managing director of Palomar Ventures, a Los Angeles firm. “We’re all going to have to get re-educated and learn that language.”

Or they can do what Palomar and others have: hire a native speaker. Last summer, the firm had an intern, Adam Gottesfeld, 21, who was heading into his senior year as an international studies major at Princeton. Mr. Gottesfeld so impressed the firm with his technological knowledge that it has offered him a job as an associate when he graduates.

After Niki, Ms. Roizen’s daughter, became proficient at World of Warcraft, her mother took her to visit Perpetual Entertainment, a game company in San Francisco she had invested in. Niki had some criticisms of the company’s game, a role-playing epic called Gods and Heroes, telling its developers that it seemed unpolished and choppy. The game makers, taking advice from Niki and others, improved the product by the time she visited again.

“When she picked me up, she said, ‘Did you like it? Was it more fun?’ And I said yes, the whole car ride home,” Niki said.

Niki is not only teaching, it seems, but also learning about business. A couple of years ago, Ms. Roizen said, her daughter was looking at Neopets.com, a Web site where people play with virtual pets.

“She said, ‘I don’t get their business model,’ ” Ms. Roizen recalled. “She was 11.”

*Bring it on!