There's a Reason It's Called "Venture" Capital
I meet a lot of entrepreneurs. In general, they tend to fit into two categories.
The first type is looking for a quick win. They’re doing largely derivative things, because they think they’ll achieve success quickly and be in a better position to make their next move. Many of these entrepreneurs fail. If you’re copying another start-up, by definition those people are ahead of you. They understand their landscape better because they started earlier. They are more committed to the vision and understand it better than you do because it was their vision to begin with. They have thought more moves ahead than you have.
The second type of entrepreneur runs on pure passion. These are people who chart their own course, who are fixated on a vision and pursue it doggedly. As a category, this is the kind of entrepreneur I would rather invest in. I’m not sure which type will reliably produce more singles and doubles, but I am sure that the second will produce most of the World Series grand slam home runs like Google and Facebook.
Most technology start-ups, regardless of founding team, are going to fail. But in my experience, it’s especially difficult to beat someone else by copying something that they are zealous about and which launched before you did. Foursquare was a fairly easy thing for Facebook to try to copy. But Facebook Places had no impact on Foursquare, despite Facebook’s titanic network effect that was directly relevant. It’s just too difficult to beat an obsessed entrepreneur, even if their vision is pretty easy to clone after the fact.
If I had to give a piece of advice to a budding entrepreneur, I would say this: focus first and foremost on creating value. The more value created, the better. Find something you care about, then aim big. Avoid spammy, churny business models. Stay far away from breakage-dependent models. If you can, go after a giant problem, one of the great problems of our time, a problem that, if solved, would usher in an era of large-scale transformation across industries and nations. It won’t be simple. The really big problems are big problems for a reason. But there are already too many entrepreneurs going for the easy stuff.
There are too many venture capitalists funding them, too.
The venture capital industry in the United States is the envy of the world, and rightly so. But it’s been getting a bit stale. Thirty years ago, former entrepreneurs dominated VC. Over the last 20 years, VC ranks have swelled with recently minted MBAs. Now — I’m an MBA myself. I think business school is great, and I think (depending on the role) the MBA degree adds real value to candidates we hire. All that being said, the MBA trains people to relentlessly de-risk processes and investments.
Many venture capitalists today say they’re looking for the next big idea. But they aren’t really; they’re looking for something derivative, because derivative is safer. These VCs are obsessed with de-risking venture investing. They focus so much on models and metrics that they have stopped focusing on big ideas and vision. All other things being equal, reducing risk is obviously a good thing. But all other things usually are not equal.
There are two particular pitfalls with constantly whittling risk away from venture capital investing:
- It’s only possible to de-risk with a short-term horizon. It becomes exponentially more difficult to de-risk something the further out it is. Slavishly reducing risk over reward necessarily biases investments towards companies that are doing something more transparent. Those companies almost by definition cannot produce grand slam home runs, because transparency dramatically increases the competitiveness of any large market. Either a few winners will share the market and hence each produce solid but unspectacular returns, or one winner will be dominate the sector and very many others, attracted by the transparency, will fail (e.g. Groupon and its legion of clones).
- Every investing strategy, when pursued by most of the players in the market, will perforce deteriorate and fail. And, as far as I can tell, most venture capitalist firms are now pursuing a de-risked and derivative strategy in large part or in whole. Peter Thiel’s Founders Fund, a Knewton investor, has a contrarian approach — what other firm would fund a company whose long-term mission is to colonize the solar system? When I once asked him about his apparently riskier approach, Peter told me: “People do the same old thing because they think it’s less risky. We think it’s actually riskier to do the same thing as everyone else. It’s risky to be a lemming.”
Real vision is tough. It’s unbelievably rare. Business school technocrats are no better at it than anyone else, so they focus on what they are good at: analyzing and steadily optimizing that which they can measure. By definition, they are not optimizing that which isn’t easily measured — which is exactly where the difference lies between home runs and singles in the start-up world. Since these are the people who have come to occupy, en masse, venture capital funds, the industry is now largely characterized by this structural dynamic.
I'd love to see the pendulum swing back a little bit. I’d love to see more of a blend of safer, lower value creation start-ups alongside some bets on enormous value creation. With more adventurous VCs will come bolder and more socially minded entrepreneurs, and vice versa. Together, it is possible to reframe whole industries in order to focus not just on band-aid solutions or ventures applying what worked in sector X over to sector Y, but real systemic solutions for the world’s biggest problems.
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