Here’s the problem. Every venture capitalist, in every interview they’ve ever done will tell you the same casual lie: That they invest in people first and ideas second. They’ll tell you they invest only in people they’d want to work with. They’ll tell you that they have the luxury to say no to companies that don’t do things in line with the way they like to work, the way they like to treat people.
You don’t have to look too far into this year’s frenzied pace of dealmaking, and at the price tags of those deals to know that’s complete bullshit. In all too many cases, what venture capitalists are investing in is assholes.
It’s weighing on those who’ve been in the business for decades, and I’ve been having conversations about it all summer. A senior partner at a top firm recounted a partner meeting at breakfast recently.
“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”
His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”
That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”
At some point this business became about funding a founder, not a company. This has coincided with three other theories of venture capital portfolio management that have become prevalent of late. The first is an obsession with a VC’s “social game”—to steal the parlance of reality TV. Since 75% of venturebacked startups are destined to fail, VCs today assume they’ll do less damage overall by writing off a bad performer than doing the hard work to fix it. Even if they oust an ineffective founder, a company may be too damaged to salvage, meantime, the VC has ruined his rep of being “entrepreneur friendly” for nothing.
The second theory is the new valuation math: Given basic liquidation preferences and soft landings at bigger Valley companies, the risk to losing all your money is somewhat protected. Likewise, companies like Facebook and Google have thrown traditional valuation math out the window too, caring only if someone might disrupt them in another ten years.
So the only thing anyone cares about is the upside. VCs—in this point in the cycle—are smart to worry less about erring on the side of paying up too much for a deal than erring on balking at a seemingly high valuation. Especially when the next day Mark Zuckerberg could rewrite every rule by paying $2 billion for a hardware company that doesn’t even have a product on the market. As Bill Gurley of Benchmark says, “You can only lose your money once” if you invest. If you don’t, you can effectively lose that would-be appreciation many times over.
Is it the mantra of a bubble? Maybe.
The third change that rules venture decision making is an acceptance that no one has any clue of what works.
The determiners of success in the Valley are no longer CIOs deciding on huge iron boxes that cost millions a pop. It’s not even whether geeky early adopters will like Twitter or FriendFeed more. It’s what teens around the world want to do on their phones. A hot mobile app has more in common with a movie premiere than a classic Silicon Valley tech company. And increasingly, VCs know they have no clue what’s a good idea and what’s a bad idea. Better to back all the apps showing “hockey stick growth” on college campuses.
The other sad reality is the continual erosion of what Silicon Valley—as a place—stands for, if anything. This used to be a place of misfits and changing the world. Even the legendary assholes had a cause beyond themselves and checks and balances on their board. It just may take another economic collapse to get back to that.
1) By 2018, digital business will require 50 percent less business process workers and 500 percent more key digital business jobs, compared with traditional models.
Near-Term Flag: By year-end 2016, 50 percent of digital transformation initiatives will be unmanageable due to lack of portfolio management skills, leading to a measurable negative lost market share.
2) By 2017, a significant disruptive digital business will be launched that was conceived by a computer algorithm.
Near-Term Flag: Through 2015, the most highly valued initial public offerings (IPOs) will involve companies that combine digital markets with physical logistics to challenge pure physical legacy business ecosystems.
3) By 2018, the total cost of ownership for business operations will be reduced by 30 percent through smart machines and industrialized services.
Near-Term Flag: By 2015, there will be more than 40 vendors with commercially available managed services offerings leveraging smart machines and industrialized services.
4) By 2020, developed world life expectancy will increase by 0.5 years due to widespread adoption of wireless health monitoring technology.
Near-Term Flag: By 2017, costs for diabetic care are reduced by 10 percent through the use of smartphones.
5) By year-end 2016, more than $2 billion in online shopping will be performed exclusively by mobile digital assistants.
Near-Term Flag: By year-end 2015, mobile digital assistants will have taken on tactical mundane processes such as filling out names, addresses and credit card information.
6) By 2017, U.S. customers' mobile engagement behavior will drive mobile commerce revenue in the U.S. to 50 percent of U.S. digital commerce revenue.
Near-Term Flag: A renewed interest in mobile payment will arise in 2015, together with a significant increase in mobile commerce (due in part to the introduction of Apple Pay and similar efforts by competitors, such as Google increasing efforts to drive adoption of its NFC-enabled Google Wallet).
7) By 2017, 70 percent of successful digital business models will rely on deliberately unstable processes designed to shift as customer needs shift.
Near-Term Flag: By the end of 2015, five percent of global organizations will design "supermaneuverable" processes that provide competitive advantage.
8 ) By 2017, 50 percent of consumer product investments will be redirected to customer experience innovations.
Near-Term Flag: By 2015, more than half of traditional consumer products will have native digital extensions.
9) By 2017, nearly 20 percent of durable goods e-tailers will use 3D printing (3DP) to create personalized product offerings.
Near-Term Flag: By 2015, more than 90 percent of durable goods e-tailers will actively seek external partnerships to support the new "personalized" product business models.
10) By 2020, retail businesses that utilize targeted messaging in combination with internal positioning systems (IPS) will see a five percent increase in sales.
Near-Term Flag: By 2016, there will be an increase in the number of offers from retailers focused on customer location and the length of time in store.
1. Most of these will take far longer to play out than pedicted, and many that do play out will have far less impact than supposed
2. The further out these predictions go, the wronger they are
3. At least 30% of these definite trends will be completely different by next year, and the year after, so by 2018 the Top 10 will be unrecognisable.
Trust your instincts about people....one of the most common mistakes young founders make is not to do that enough. They get involved with people who seem impressive, but about whom they feel some misgivings personally. If you're thinking about getting involved with someone—as a cofounder, an employee, an investor, or an acquirer—and you have misgivings about them, trust your gut. If someone seems slippery, or bogus, or a jerk, don't ignore it.
The way to succeed in a startup is not to be an expert on startups, but to be an expert on your users and the problem you're solving for them. [T]he characteristic mistakes of young founders is to go through the motions of starting a startup. They make up some plausible-sounding idea, raise money at a good valuation, rent a cool office, hire a bunch of people. From the outside that seems like what startups do. But the next step after rent a cool office and hire a bunch of people is: gradually realize how completely fucked they are, because while imitating all the outward forms of a startup they have neglected the one thing that's actually essential: making something people want.
The third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. But that doesn't work with startups. There is no boss to trick, only users, and all users care about is whether your product does what they want. Startups are as impersonal as physics. You have to make something people want, and you prosper only to the extent you do.
The dangerous thing is, faking does work to some degree on investors. If you're super good at sounding like you know what you're talking about, you can fool investors for at least one and perhaps even two rounds of funding. But it's not in your interest to. The company is ultimately doomed. All you're doing is wasting your own time riding it down.
Startups are all-consuming. If you start a startup, it will take over your life to a degree you cannot imagine. And if your startup succeeds, it will take over your life for a long time: for several years at the very least, maybe for a decade, maybe for the rest of your working life. So there is a real opportunity cost here.
Yet when it comes to startups, a lot of people seem to think they're supposed to start them while they're still in college. Are you crazy?
...if you want to be a successful startup founder is not some sort of new, vocational version of college focused on "entrepreneurship." It's the classic version of college as education for its own sake. If you want to start a startup after college, what you should do in college is learn powerful things.
You can't tell. Your life so far may have given you some idea what your prospects might be if you tried to become a mathematician, or a professional football player. But unless you've had a very strange life you haven't done much that was like being a startup founder. Starting a startup will change you a lot. So what you're trying to estimate is not just what you are, but what you could grow into, and who can do that?
I've written a whole essay on this, so I won't repeat it all here. But the short version is that if you make a conscious effort to think of startup ideas, the ideas you come up with will not merely be bad, but bad and plausible-sounding, meaning you'll waste a lot of time on them before realizing they're bad.
The way to come up with good startup ideas is to take a step back. Instead of making a conscious effort to think of startup ideas, turn your mind into the type that startup ideas form in without any conscious effort. In fact, so unconsciously that you don't even realize at first that they're startup ideas.
I can't explain in the general case what counts as an interesting problem, I can tell you about a large subset of them. If you think of technology as something that's spreading like a sort of fractal stain, every moving point on the edge represents an interesting problem. So one guaranteed way to turn your mind into the type that has good startup ideas is to get yourself to the leading edge of some technology—to cause yourself, as Paul Buchheit put it, to "live in the future." When you reach that point, ideas that will seem to other people uncannily prescient will seem obvious to you. You may not realize they're startup ideas, but you'll know they're something that ought to exist.
So here is the ultimate advice for young would-be startup founders, boiled down to two words: just learn.