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Why There Aren't More Googles

paulgraham.com

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Re: Why There Aren't More Googles

#41

Post by muerdeme »

Instead of making one $2 million investment, make five $400k investments... If you're investing at a tenth the valuation, you only have to be a tenth as sure.

I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will reduce the variance of the return on investment.

I think it's a tradeoff for the VCs between variance in the portfolio and the amount of work involved in finding 5 times as many companies. Given the amount of funding they deal with, I can understand them leaning towards the companies looking for $2M rounds.

It seems obvious. But I've proposed to several VC firms that they set aside some money and designate one partner to make more, smaller bets, and they react as if I'd proposed the partners all get nose rings.

As I pointed out above, the partner has to be just as sure of each of the 5 bets as he would be of one. I'd react the same way if someone suggested I'd do better at my job if I worked 5 times as hard.

Re: Why There Aren't More Googles

#42

Post by pg »

run4yourlives wrote: post #16

Comparisons to Google are worthless, primarily for 2 reasons: 1. Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure - there was no money in search. They got lucky in finding one -adwords - that worked. 2. Had the timing of their discovery been off, or had the dot-com bubble busted a few months earlier, they would have died. In saying that, they are useless as a measure…

Every logical mind (even within Google) in 1999 would have seen that Google was heading for failure

I didn't think that. I remember telling the powers that be at Yahoo in 1999 (I worked there then) that they ought to buy Google, and it was the only company I ever suggested they buy.

Re: Why There Aren't More Googles

#44

Post by pg »

boredguy8 wrote: post #15

"Any really good new idea will seem bad to most people." This is a very true statement. The danger that I've seen is so often people think, "My idea seems bad to most people, ergo it must be good!" How do you separate the seemingly bad from the actual bad? Figure _that_ out, and you'll make something of yourself.

How do you separate the seemingly bad from the actual bad?

This is basically the business YC is in. The short answer is: practice. One day I'll try writing down the long answer.

Re: Why There Aren't More Googles

#45

Post by muerdeme »

smalter wrote: post #34

this article makes the good point that the mba types who are running vc funds are fundamentally ill-suited for identifying and investing in technology startups. paul graham identified this as true for managers of startups as well; and this is a defining feature of yc--investing in technology people vs. investing in mba types who hire programmers. of course, the logical extension is that the people doing the investing…

whatever value mba vc types did bring to the table, understanding of business management and such, is becoming less relevant with smaller startups and less money to be allocated.

I completely agree. The answer isn't to convince VCs to invest in companies they aren't suited to be messing around with. Something new needs to happen. PG pointing it out to outsiders should help the free market in the right direction...

Re: Why There Aren't More Googles

#46

Post by pg »

muerdeme wrote: post #41

Instead of making one $2 million investment, make five $400k investments... If you're investing at a tenth the valuation, you only have to be a tenth as sure. I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will r…

Suppose your threshold for investing in a startup is an n% confidence that they'll one day have a market cap of a billion dollars.

Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company? You have the same percentage in all these companies that you would have had in the case of a single, big investment, so now you only need one of the 10 to succeed in order to get the same return.

Re: Why There Aren't More Googles

#47

Post by pg »

colortone wrote: post #38

It's great to hear discussion around Umair's thought patterns that add even more depth... I think what he was trying to say might be a little different from PG's interpretation... Umair might have said, "every company that had the potential to be economically revolutionary over the last five years sold out [to an acquirer devoid of strategic imagination or the capabilities to discontinuously continue their trajectory…

That clearly doesn't square with how you saw it

These statements don't conflict. They didn't sell out to the highest bidder, because the highest bidder wasn't offering enough, but they had a number.

Re: Why There Aren't More Googles

#48

Post by muerdeme »

pg wrote: post #46
muerdeme wrote: post #41

Instead of making one $2 million investment, make five $400k investments... If you're investing at a tenth the valuation, you only have to be a tenth as sure. I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will r…

Suppose your threshold for investing in a startup is an n% confidence that they'll one day have a market cap of a billion dollars. Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company? You have the same percentage in all these companies that you would have had in the case of a single, big invest…

This makes complete sense if you assume that a company that only needs a few hundred thousand to "figure things out" has an equal chance of becoming a billion dollar company as a company that is looking for a multi-million dollar investment that "is already taking off." That's evident to us inside, but your own description of the companies is enough to make a VC understandably skittish.

I understand your overall point, and I agree with it, but I don't think this assumption was clear the first time I read through the article.

I wholeheartedly agree that convincing VCs of this isn't the way to go, and that others are going to make a killing by stepping in. My main point is only that the VCs aren't being irrational.

Re: Why There Aren't More Googles

#49

Post by sanj »

How does CRV's QuickStart program fit into all this? They appear to be attempting to bridge the gap and be in a position to put in $250k.

http://www.crv.com/AboutCRV/QuickStart.html

It sounds like a savvy move. But I haven't heard of a single instance of someone using it, successfully or not!

Re: Why There Aren't More Googles

#50

Post by rokhayakebe »

AGE is the reason. SOFTWARE is the YOUNGEST OF ALL SCIENCES.

I doubt that the reason has a lot to do with valuation and acquisition. The simple reason is AGE. the WEB is still young. Seriously the web is really less than 20 years old. And please do not tell me that NASA and the NSA were using the internet 50 years ago. Medecine has been around thousands of years. Same for Architecture and Mathematics etc..... But the science of Computers and Computing is still an INFANT. Whether there are more acquisitions in the future or less, there will be tons of more Computing Innovation just because the field will MATURE. We still have not grasp the full potential of this field and frankly i think Google is just a drop of water in the ocean of possibilities.

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