Investor who passed on YouTube explains profit in Web 2.0

An investment guru has told of his regret at missing out on the most valuable investment deal ever when he turned down the chance to invest in YouTube.

Kevin Hartz told weekly technology law podcast OUT-LAW Radio that he was too busy with his own start-up at the time.

Hartz is the founder of payment firm hotel internet access business Connect, payments firm Zoom and events firm Event Brite, but he missed out when given the investment chance of a life time.

"I don't know if I should admit this but I actually passed on investing as a private individual in YouTube last year," Hartz told OUT-LAW Radio. "They had one of the highest returns in the history of all venture investing."

"It was an invitation from another angel investor and I was too busy with my own venture and didn't take a close look at it and obviously in hindsight that was a bit of a mistake," he said.

As well as being an entrepreneur, Hartz is also an investor on his own behalf and a limited partner at Sequoia Capital, which eventually did back YouTube with a $11.5 million investment that could now be worth as much as $500 million, according to some reports.

Hartz was an early investor in payments giant PayPal and in social networking pioneer Friendster, having worked for venture capital companies through the first boom. Though some people have expressed doubts about social networking's ability to earn the vast sums being paid for companies in that sphere, Hartz is sure that they will earn out the investments.

"These businesses are very profitable. They are media properties, they sell advertising but they don't pay for content," he said. "And one of the phenomenons of social networking is that your users are your marketers, and this is very different from traditional business."

"In traditional business you spend in some cases tens of millions of dollars to acquire customers and here you have in the case of Bebo, in the case of Facebook, in the case of MySpace, these companies have their own users promoting this so they're paying zero per customer."

"Given that they are not publishing or creating the content themselves, they're not spending money for any editorial staff, given that they're not paying for customer acquisition and marketing, they're just selling advertising space that becomes a very profitable relationship," he said.

As a PayPal insider Hartz had a front row seat for the development of the social networking and user-generated content companies that are known as Web 2.0.

"When PayPal was acquired by eBay all the management and employees went on to do some very phenomenal things," said Hartz. A new venture fund which invested in Facebook and several social networking pioneers was the result, as was YouTube, which grew out of PayPal.

"Relationships in the Valley are very close and very tight, and very talented teams are important for going off and doing new great things," said Hartz, who was visiting Edinburgh University to talk about the Silicon Valley culture. "You look at the growth of the internet industry in China or India it's showing that things aren't just limited to Silicon Valley. I think it's exportable."