Why There Aren't More Googles

I just read a fascinating book - Gut Feelings by Gerd Gigerenzer. It's by the guy who did most of the research that Malcolm Gladwell's Blink is based upon. The central thesis was that people have evolved heuristics for decision making that let them quickly make snap decisions more effectively than gathering full information, but a couple chapters were on an interesting corollary: in the absence of hard data on their performance, most people's decision-making heuristic falls back to "Will I be blamed for this decision?"

He provided a bunch of examples from different professions. For example, doctors' decisions often aren't based on solid evidence-based medicine (which is often contradictory), but rather on "Will I be sued if I do or don't perform this treatment?" If you want the doctor's actual opinion, you should ask "If it were your own mother, what would you recommend?" instead of "What would you recommend I do?" - the former shifts the doctor's perspective so that they're thinking "How can I provide the best care?" rather than "Will this person sue me?" A study of UK magistrates found that 92% of their bail decisions could be predicted by the following heuristic: "Did any of the prosecution, police, or previous court recommend bail?" If not, and the defendant commits a crime, it falls into the category of unforeseeable events and the magistrate can't be blamed for it.

A similar effect may be at work with VCs. It's usually impossible to know, even with hindsight, what the opportunity cost of a lost deal was. If a VC turns down the next Google, chances are nothing happens and the company just fizzles. If a VC invests and it goes bust, however, everyone knows. So it pays for the VC to invest like everyone else does: then they can blame any failure on "Well, this was completely unforeseeable: everyone else was sure they'd be a success too." It's the combination of risk aversion, self-interest, and lack of feedback that drives this. If VCs actually had solid conceptual frameworks and good data for evaluating possible opportunities, they could rely on that rather than on their peers' evaluations. (Maybe this explains Sequoia...)

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 of anything because they are such an anomaly that they shouldn't be used as a guidepost to success. In other words: If you were to operate the way Google did today, 99 times out of 100 you would fail. They are the exception to the rule.

Although, PG's comparison to Facebook is apt, as they're also in the same position as Google was. I'll put my money on them being in the majority though.

I did like Paul's point about VC's, but then again, you could extend that to how pretty much any industry operates. That's why innovation is so profitable, after all.

Except of course, there was a big famous example -- Friendster. http://www.nytimes.com/2006/10/15/business/yourmoney/15frien...

I'm not convinced there are many bold, innovative founders with world-changing inventions that are falling through the cracks. The genius maverick entrepreneur is mostly an imaginary romantic archetype. Many founders these days seem as conservative as investors if you compare the scope of their ideas to Google, Apple, Ebay, Skype, or other projects that did change the world. The modus operandi for founders these days seems to be "aim sorta low and cash out early."

Moving to risk, they key driver here is that investors must take themselves out of the equation when investing.The company must make sense even if they are not involved. This makes them cautious when things are still iffy. Tandem address this problem through a co-entrepreneurship model. We invest both human and financial capital. The human capital is to find our way to clarity together. This gives a greater comfort in taking risk. We feel much more like an entrepreneur.

Of course the Tandem model is not very scalable; we can’t even do the 30-40 that YC will do. We do a handful a year and only where we know our human capital will bring an edge.

I don’t think the VC’s have much incentive to do a co-entrepreneurship model, when they can make nice salaries doing what they do. It is obvious in hindsite that the short haul model of Southwest Airlines was a good business but it was a long time before the incumbent airlines paid it heed. I wouldn;t hold my breath for the VCs to change.

Or they tend to fail spectacularly. The more risk you are willing to take the more you will tend to go towards the extremes: One extreme is huge succes, the other is bankruptcy.

After spending the last 8 month trying to put such a round together, and going through the process with quite a few VCs, It's apparent that this brings 'boldness' way down because all the lead partners need to develop the intuition necessary to be bold-- on what is essentially a hypothesis on market development or consumer demand in a field that is usually not their individual core expertise and in the short time frame that this business allows nowadays. doesn't happen often.

This is why these sort of investments are made by small/ partner-lean funds or through the "strong" partner in a more traditional firm... and there aren't enough of those.

It's not that they don't want to make those sort of investments, its that they're not setup to do so. In our discussions, we've gotten to, at several occasions, a point where our sponsor partner is actively trying to get the deal done, only to fall apart because of this need for uniform consensus of the entire clan.

If I were a VC, I'd focus on streamlining that process through more partner independence as I agree that this is the sort of funding a truely innovative (particularly web software) company needs to establish itself these days and they are mostly missing out...

Maybe I am too much of an "idea guy", but in my opinion the reason why there aren't many googles is simply because there aren't many good ideas around. I don't even consider social networking to be of any significant value (I'm with Maroon on this one). In that regard it was awkward to see Facebook and Google mentioned in the same sentence several times.

Even something as awesome as RSS isn't taking off (and it's been like 5 years already), let alone toys like Twitter that only a certain "inner circle" of people are using talking mostly to themselves. Not good enough.

Yes, yes - "implementation is more important", but without an idea there is nothing to implement to begin with. Most startups I know a little bit about seem more like an excuse for smart and driven people to work together: they aren't building anything particularly innovative. An no, they won't become next google regardless of what VCs or potential acquirers will do, it's a very rare case where I don't agree with Paul at all.

I think I see that because I assume that PG is not being hypocritical; ie. VC's should make bold investments -> YCombinator must already be making bold investments.

I am not under the impression that this message is intentional, it just seems that the argument flows to that point.

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.

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]," ergo ending the disruption gravy train.

That is, it's not necessarily "selling out" that blows things up; it's selling out to companies only driven to "increase market share", etc.

Or something like that.

I also think it is really interesting how your view of how the GOOG acquisition/IPO story played out vs. Umair's version:

"If all Larry, Sergey, and Google's investors had wanted to do was to sell out fast to the highest bidder, they could have done so at any time. But they didn't: they chose to revolutionize something that sucked - and so a tsunami of new value was unlocked."

That clearly doesn't square with how you saw it (even though it's an inspiring revision). I unfortunately lost my copy of Battelle's book before I got this far in the story, otherwise I would weigh in.

Clearly PG, Fred, Umair, and other smart ones agree on the need for more, smaller risks and purposeful management.

At any rate, whoever these "new investors" are that are going to fill the void between bottstrapping at Series A are going to make a FORTUNE. And they can't show up soon enough!

pg, can I ask for examples ? I am genuinely curious.

The reality is that the companies that grow largest are those that foster the growth of an eco-system of smaller dependent companies. The large "focal point" companies, by the nature of their particular market disruption, create opportunities for others to grow new businesses or do old businesses better. But, at the same time that they create opportunity, they limit it (intentionally or not) by ensuring increased competition for the dependent companies.

Creating opportunities means lowering barriers to entry and lowered barriers means increased competition, lowered returns and limited capacity to grow as large as the "focal point" or "platform" company that creates the opportunities.

If anything, VC's have been too liberal, not too conservative, in funding companies. I recently wrote about this at some length. Please consider reading my post at: http://bob.wyman.us/main/2008/04/liquidity-and-c.html

bob wyman

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.

I don't understand the idea behind this sentence. In this context what is a good bet, a company with certain traits or does this refer to a certain type of portfolio strategy, say one that expects most startups to fail and a few to win big? Also, how does the falling cost of startups make the average good bet riskier? Is it because it lowers the barriers for competitors? Or is it because any idiot can say they're doing a startup so it's harder for investors to know which ones are good and which ones are bad? Also, what was investing in hardware startups like in 1985? Are you saying that VCs today evaluate companies with low capital requirements and high risk as if they are capital intensive with low risk? This has multiple implications, and which one(s) was in your head when you wrote this is not entirely clear to me.

EDIT: Rewrote the last few sentences

1. Invests $250-500k

2. Gets back to the applicants with a yes/no decision in 24 hours (can't find the pg essay).

I'm thinking there should be some kind of software, an algorithm, to help such a vc make decisions... what kind of factors would be part of it, and what else would be needed?

This is to say that percentages are what should be considered in measuring "ease" of getting an investment at each stage. 0.001% of groups that desire an early stage angel investment can get it, 30% of angel funded groups can get a successive intermediate investment, 50% of the groups that make it to the intermediate stage can get VC money, etc.

A possible solution is to expand the availability and amount angel/seed financing available to entrepreneurs by an order of magnitude, or more. This could be done by creating a quasi-public market (offshore, since the SEC wouldn't even consider it) that would allow individual investors to buy small pieces of early stage companies.

Individual small investors with a high tolerance for risk and a more certain knowledge of technology, innovation and particular industry sectors would form the basis for this new financing engine for startups. Companies would need to publish some kind of prospectus and they would also be rated by the number and quality of current investors, who would also be ranked.

This is not unlike the angel networks of today -- but would take the model to the next level by allowing millions of individual investors to participate in the $1,000 to $10,000 range in each venture.

it's like rock bands that sell out to major labels for big advances and then sell like 10,000 records and wind up owing the label. and you know the LABEL ruined the band.

good web startups aren't about money, they're about building something new. as fugazi puts it, "when we have nothing left to give there'll be no reason for us to live". basically, google was JUST GETTING STARTED and they KNEW it - they were following a brilliant brand into the infinite sun with no knowledge of how they'd milk it until all of a sudden the answer popped into their (well Bill Gross's) head.

so selling out means you're done developing the product. that is cool if you go design something else, but generally, the product winds up being dead on the vine. big companies buy small companies to scare and posture at other big companies and grab a few headlines.

in order to get acquired, you've got to have a "hit". some bands are one hit wonders. these bands like to work with major labels, which is OK if it makes the radio a bit cooler that summer (cf Cracker). but the major labels buried the Gang of Four, just as surely as they'd snip Twitter's in-house innovation capacity in the bud. That said, if the Twitter guys are "done" with innovating, good for them, go ahead and exit! but i hardly believe Twitter is done developing their product. therefore, NO SALE, and the chance for Twitter to unleash a bidding war for a tiny sliver of equity such as what was engineered by Facebook.

- Srini Kumar MetaNotes.com

I don't disagree this message - but the motivation for writing this seems extremely transparent.

Not every buyout makes sense. Buying out Facebook for the valuation given to them roughly by the MSFT investment looks ridiculous considering Facebook's inability to monetize their traffic.

VCs fundamentally are trying to be risk adverse in a high risk environment. They all want to have a slightly higher success rate than average and do great.

Entrepreneurs always will hit a point where it makes sense to sell out and get rid of the risk on their end of holding on. If you have a portfolio of 100 companies, it makes sense to want each to hold out as long as possible. If you have one company you own a major stake of, it makes sense at a much lower value to liquidate.

I think sometimes it really comes down to guts. We can all site and do the risk analysis on a good or bad investment, but a gut call has to be made in the end. I think for one reason or another most VC's have lost the mindset. It may also be the change in the environment. The dot bomb may have left serious psychological impediments that most VCs do not want to relive so they shy away from these investments even though it can provide sensational returns.

What percentage of YC companies launched till date (launched means the initial YC funding is exhausted) that haven't found angels or VCs? That would prove instructive.

Contrary to what you may heard, while it may be good to start in the middle of a downturn, it is no fun to try to last through a downturn if you are "pre-revenue" and have no investors.

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!

The core problem is how investors are compensated. A managing partner's performance is directly linked to how many bad deals they avoid - avoiding "true negatives", minimizing "false positives". Because of this performance metric, investors are risk-adverse and I can't blame them for it. If we want innovation to be funded, the LP's need to tweak how the managing partners are measured. Managing partners are paid for their "insight" into emerging industries. Well, then penalize them for great deals that they passed on - the "false negatives". They should be accountable for the "false negatives" as much as the "false positives". That's what they are paid to do.

Where have we heard that before ? Oh right the financial crisis.

I don't think more startups translates into more good ideas. Just in more copies and more bad ones. Therefore the cheaper and more plentiful companies get, the more risky they are, and the fewer chances (less funding) really, really good ideas get.

But it's fashionable to startup. So a number of people are putting their "look cool" money (which is often the same type of money Obama spends : someone else's, and therefore plentiful and worthless to them) into little startups who are very sure to fail.

You're heading for a massive bust.

As always it is a very thoughtful and incisive article. However, I have certain reservations on Google trying to sell out, especially after I read The Google Story by David A. Vise and Mark Malseed.

I believe for young people (especially tech students), the idea is not to make a lot of money. It is more of a passion, a will to change the world. Yes, they may have failed as well. I may not say the same for people who are in the industry for long or MBA types.

Also at the same time it is a bit of luck, destiny or hand of God. More @ http://satya-dash.blogspot.com/2008/05/why-we-do-not-see-mor...

It isn't about money or funding or even execution. It is about innovation and timing. Give it time. If someone has a Google worthy idea, it'll emerge because people with copy it, steal it, hack it, flame it, etc.

Or maybe it's because Google hired all the smart people and now they own anyone who has the potential to create another Google like movement, so all the VCs are doing are throwing good money after bad ideas.

I think the reason why angels become a real drivers of innovation these days is because they invest pre-revenue, and the reason why they do it is because they understand the business they invest in and play an active role in it.

Dimitri, founder www.nuospace.com

www.crv.com/AboutCRV/CRVQuickStartFAQ.html

This is a brilliant idea! Ycombinator has been a true innovator -- they saw a gap in the capital markets, they had the guts to go out and fill it, now a lot of guys are copying what they do, but they will always enjoy first mover advantage. Charles River is doing the same thing, filling a gap that everyone knows exists but no one so far has actually filled.

One of my reactions to the Ycombinator standard approach -- $15,000 for 3 months of funding -- is that 3 months is a very show time frame. I am pretty good at what I do, I frankly have a lot more experience than the kids who get Ycombinator funding, I typically work about 70 hours a week, and I know I am quite productive at what I do. I don't go for home runs but at the same time, I don't go for singles. I go for doubles, that is a risk/reward range I am comfortable with. I find it takes about 12 months to get it running reasonably well, and I have done it several times before. I would not want to work on a 3 month time schedule. If I did, I would be going for singles and singles just are not that interesting.

To me, a single is a deal where you end up with $1 million cash out after two years. A double is $5 million after two or three years. A triple would be north of $10 million, no later than four years. Anything north of $25 million is a home run. Anything above $100 is a grand slam home run.

I do not need financing, I just fund them myself, but if I did, the Charles River deal would be much more appealing. Assuming I needed the money, with $250,000, I could get two partners, we each pay ourselves $60,000 a year, perhaps burn up another $50,000 in expenses in one year, for a total burn of $230,000,leaving us $20,000 margin (admittedly, not a lot). But in one year with two really good partners, we could do a hell of a lot of work, perhaps a triple rather than a double.

I really like what Ycombinator is doing but so many of their investments seems unambitious -- two smart college students who whipped something up in a month. Perhaps they might build a company from that, but in some cases, I am skeptical.

James Mitchell jmitchell@kensingtonllc.com

Maybe the trick is to build operate and own an exchange that performs some level of due diligence on the companies and lets people - us, the great unwashed - invest micro amounts via paypal or similar methods. Of course there will be frauds and fools, but let the people decide how to establish 'trust mechanisms'.

If you expect the VCs to be hip to the 'new era' of investing, then perhaps you, as a startup, should show your own hipness by not showing up at the door of Kleiner Perkins, or Sequoia. A true show of your own non-conservatism.

And remember, the expectations for startups and VCs are reversed (which would seem to explain much). Startups are expected to fail, and its OK if they do. VCs are expected to succeed, and its NOT OK if they don't.

I remember reading somewhere the statistics that VC funding during the dot-com bubble days was at its peak. So they were not any better than the individual investors in terms of assessing these dot-coms for their potential. And the common reason VCs gave for those investments was that they knew it was a bubble but they did not want to be left out of the deals.

More on my blog:

http://smoothspan.wordpress.com/2008/04/15/how-to-fix-ventur...

On that, I recall VCs telling me often when I shared an idea: "This is not a company, this is a feature". I think Search is a feature. Isn't it? So is RSS, Widgets, Contact Management (LinkedIn), etc.

Microsoft noticed and placed their bet accordingly.

If you turn down one billion and keep growing, then you get a much higher valuation the next time around.

Yes, and if they were technical guys, they would for the most part be certain that the startup is doing something stupid. Take for example the typical techno-geek reaction to hotmail or the iPod.

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.

A "good chance." You're kidding, right?

With 600 employees in India and only 8 in Silicon Valley, making $1 million profit/ month, seems reasonable to say they could be "another Google."

Just when it all seems bleak, you deliver a bit of common sense. How true it rings.

Thanks.

This goes for YC as well. Surely there are some technically innovative applicants that don't fit the mould of web sites to make quizzes or 10-second cartoons or other such dubious acceptees.

Google itself would have been rejected on at least a couple of grounds: project being too big to make much progress in 3 months (crawling the entire web!), and needing too much money ($15k ought to be enough for anybody!). IIRC they got not only the $100k from Bechtolsheim but also a similar amount from Cheriton.

> And yet it's the bold ideas that generate the biggest returns.

Yet YC sticks with smaller ideas...

> It's remarkable how wedded they are to their standard m.o.

This also seems to apply to YC. Small idea, $15k, 3 months, move your ass to Boston (then move again to SV, where you should have been in the first place), standard terms, no negotiation of the offer if YC accepts you.

So many of these Web 2.0 startups seem to want to grab a piece of the pie by diverting traffic rather than growing the pie by offering something fundamentally useful.

In the early nineties (during a recession in the UK) I started my passion and dream of building a design, manufacturing and distribution company. It was one hell of a chunk to bit off. Imagine 2 years design period, manufacturing cycle is a min of 6 months from ordering components to final assembly, then you have to spend on marketing and get the product into the shops then wait 30 days from the end of month (and if they don't sell you'd be hard pushed to get the cash). So your looking at a 3 year cycle between initial investment, before you make your first dime (and a total investment of at least 200k). So you need rather large pockets or elephant sized balls. I had neither. I had no money when I started whatsoever, however I did succeed (and became the number 1 company in my sector within 5 years) despite external funders rather than because of them. How?

What turns me off from funders now is the experiences I had in trying to raise capital with this venture. The sheer amount of effort and time that went into funding proposals, business plans, meetings with false promises that actually set me back and at one point nearly killed the project before it started. The funders that I had available to me were business 'professionals' working for charities who would make small loans and give small grants of between 2k and 10k. The 10k ones were the worst. I wont go into all the disappointments in detail but there was enough of them for me to totally loose all faith in taking such chances again.

I did get 20K GBP together (40KUSD) in the end mostly by extortion from a very good bank manager who started with a small loan 1k then to 10k and because of all the nightmares along the journey ended up having to keep fueling me to 20K or risk the 10K. It paid off for both of us, I turned into one of his top business accounts and he got kudos of being the man who had the balls to back this nutter (me),

I want to give you 2 examples that give the essence of 2 different strategies for dealing with funding problems: 1) I was at a point where we had launched the first product, we had some first orders, but needed more money to buy more components before we could build them (by this time there was me and 1 other guy who risked everything to join me (another nutter)). I had an option to take a soft loan from a government backed charity who had the responsibility of distributing 400K to startups in an effort to encourage entrepreneurial spirit in the mids of recession. There is no doubt I had the best proposal on the table that they had seen, I was told in confidence that it was a done deal and just a matter of time before it came through. It didn't and shortly after the organization went bust giving precisely nothing to startups. That left me unable to pay the employe for 3 months (who carried on working), and instead of paying for components I found a supplier who would take a chance on me and give me a 2K credit limit, we survived just and the supplier became one of our biggest throughout the business regularly taking cheques off me for 20K a month.

2) at the launch of the second product there was a crisis where one component was no good (manufacture fuckup), we had to reorder with a lead time of min 2 months even if we flew them in. This meant a 3 month delay with nothing for the 4 staff to do and nothing to sell This was all 3 months off but on the cards and no conceivable way round it. Instead I quickly designed (4 weeks) a single stand a lone feature and managed to get it into the shops within 2 months, (mostly using credit again and giving away the first 50 across the country to the shops) then blanket adverting in the best magazines. It worked and we made more money out of this venture than I could have imagined, like I was 50K up a few months later.

Moral of the story. If you can bootstrap it, you will be amazed at what you can achieve with foresight, luck and a little confidence shared by yourself and those that take a risk on you.