At Scale-Up, Deviance Is How We Defy the Mean and Beat the Benchmark
The Problem: Venture Capital Regresses toward the Mean
Two features of venture capital induce mediocre results:
- VC is a highly quantified activity. Any detail that can be converted into a countable metric is. Quantification is beneficial in that it lets us measure our performance. Returns matter, and they must be calculated. But such counting also increases the salience and gravity of the central tendencies: the mean, the median, and the mode dominate.
- VC is a highly risky activity. Though startups’ prospects improve as they grow, fully 97% of seed-stage startups fail to exit. This is nothing to fear. Experienced VCs understand that the game is to lose $1…
Venture capital — the business of buying and selling startup equity — is about to change dramatically. Just as we disrupt other industries, it looks like we are about to be disrupted (again). VC is facing a simultaneous squeeze from above and below, and the key to thriving and turning this disruption to our advantage lies in understanding and mastering it. So what’s going on?
Learning from the Music Industry
The coming disruption is hardly unprecedented. Similar changes have swept through several industries lately, and the music industry provides a well-documented example. Remember record companies?
Twenty years ago, record companies made over 90% of their…
When we’re not calculating, scheming, or buying private islands, we VCs spend an astounding amount of time producing content. After actors and gurus, there is perhaps no profession more widely represented on the podcast scene. VCs blog as profusely as a C-list-celebrity-turned-president tweets. Andreessen Horowitz has launched an op-ed section. When we’re not writing books, we’re reviewing books for hallowed publications of impeccable quality, like Bloomberg.
Two aspects of VCs’ prolificness are surprising:
- that we have time for this at all in our 70-hour-plus work weeks and
- that so much of the content is so banal.
The explanation for #1…
In the world of Silicon Valley VCs, class is capital.
Even those who have never heard of Thorsten Veblen or his Theory of the Leisure Class are familiar with his most famous idea: conspicuous consumption. It is familiar because it is everywhere. It is the reason that, even though a wedding ring is completely unnecessary for a happy marriage, a big diamond is still better than a small one. It is the reason why people buy hypercars that they never push above 65 mph. It is the reason influencers exist.
Any purchase that both exceeds the consumer’s basic needs and is highly visible counts as conspicuous consumption. People do it…
The secondary, pre-IPO market for shares is a rough and wild place with great rewards … and great risks.
The joint-stock company and the stock market were … born within just a few years of each other. No sooner had the first publicly owned corporation come into existence with the first-ever initial public offering of shares, than a secondary market sprang up to allow these shares to be bought and sold. It proved to be a remarkably liquid market. (The Ascent of Money, p. 132)
That’s Niall Ferguson describing the early stages of the first market for shares in one of the first limited-liability companies in the Netherlands in the early 17th century. First came the startup. Interestingly, it…
The full version of Alex Lazovsky’s recent Forbes article debunking the hype in recent headlines about Silicon Valley VC.
Storm clouds are gathering on Silicon Valley’s placid horizon. From the east comes new antitrust legislation aimed at tech’s giants. New, critical bureaucrats are promising bothersome new rules. From the west (i.e. the “Far East,” which, of course, is west of Silicon Valley), the Chinese government is hounding their tech champions, like Tencent and Alibaba. Perhaps most alarming of all is the escalating hostility between Menlo Park and Cupertino. This is not even Silicon Valley’s horizon; it’s our living room.
How can and should Silicon Valley VCs react to such dire portents? Chill. Relax. None of this is all that…
In a recent post, we laid out how investing in individuals is paradoxical: on the one hand, all investments are investments in individuals, but actually investing in individuals doesn’t make much moral, legal, or business sense. So the lesson was that investing in individuals was both inevitable and impractical.
In this post, we take a step towards resolving the paradox by reversing the polarity. First, we explain why no investment is really an investment in an individual, and then we explain exactly what kind of individuals to invest in when you inevitably do.
Some Initial Thoughts about an Old-New Idea that Is as Obvious as It Is Insane
Sam Lessin recently published an analytical piece about how, soon, individuals are going to surpass companies as the most valuable brands and attract the smart, forward-thinking equity financing. That’s right: instead of investing in companies composed of teams, products, and business models, VC is going to start investing in individuals.
Given recent events and trends, this thesis is appealing and makes a lot of sense at first glance. So let me first expand on Lessin’s argument and explain a few reasons to back up his point that even he seems not to have thought of.
Then I’ll explain why investing…
Scale-Up’s take on the WSB/Gamestop mischief and how it relates to VC
News about Reddit* performing Occupy Wall St. II: Short Stuff by pumping the stock of a zombie company with an obsolete business model is now harder to avoid on the Internet than a Kardashian’s cosmetic tips. Sharp observers have called this whole episode dumb. And they’re absolutely right. It most certainly is.
The question I’d like to ponder is why it’s dumb and whether venture capital is really any less dumb than the public markets.
According to some, redditors’ power is not only dumb, but “unnatural, insane, and dangerous.” …
Power comes in many flavors. For example, relational power differs from structural power. Relational power exists when one player can influence others’ moves in the game. Structural power, by contrast, is the ability to influence the rules of the game itself. Relational power is about individual decisions; structural power is about the agenda, the rules, the exceptions, and the context in which decisions are made.
Relational power helps to obtain goals in stochastic situations; structural power affects who has what goals and what situations are likely to arise in the first place.
In Silicon Valley, the wealth and renown of…
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