Why Silicon Valley Tech Wunderkinds Overestimate Their Own Smarts and Abilities
forbes.com
forbes.com
the success of consumer startups, especially one that relies on network effects, are often random. That's why so many of the 'How did X get traction' stories on Quora boil down to "It suddenly took off with group foo, we weren't sure why". That's why a lot of these consumer startup founders doing repeat companies fail - they can't replicate the same conditions again.
Enterprise startups are a different story. Since the variables (who the customers are, how much they can pay, how they buy, what they want) are better known and existing relationships counting for a lot, repeat entrepreneurs have a better chance of having a success. Of course, enterprise startups have their own separate issues to deal with.
For example, it's likely that something as big and successful as facebook is due to a once-in-a-lifetime opportunity and idea, but a neighborhood pizza shop can be more likely to be successful due to experience, skill, and non-luck factors.
Consumer startups just happen to usually need to be big in scope in order to succeed.
So outliers like Facebook, apple, etc may actually depend on luck to become as big as they are, but smaller scope enterprises may be more formulaic and repeatable.
If that were true, the fact that VC money is focuses far more on consumer startups would be ridiculous. Surely if enterprise startups succeed more often VC firms would make investments where they could benefit from this fact, likely by structuring deals around taking a percentage of profits since big exits are rare but long spans of profitability would not be. There would be no point in playing the consumer startup lottery as you would be greatly overpaying for risk.
It's the difference between being a gold digger and a merchant.
The gold diggers might or might not find gold, but they all need the tools to look for it.
Being smart, technically good, etc. is all (usually) necessary, but not sufficient. Anyone who thinks otherwise exists in a profound state of self-aggrandizing delusion.
I don't suppose you are trying again, and if you are, what kind of things do you think improve one's odds at success (which is quite different from the 7 habits of successful people stuff). I'm talking about increasing chances by an order of magnitude from 0.000001% to 0.001% (99.99% chance of failure still guaranteed).
I have a general feeling that you should time your entry and exit in founding a company correctly (for example now for the current bubble) - or survive long enough for that to no longer be an issue (in about 5 years to catch the next cycle - the latter is probably more common - pivots and all). You also need to work hard, but you must work hard on problems that are solvable and valuable (at least in the long term). For example working on VR devices right now is not a good idea, but give it 3-4 years, and we're talking.
I get the feeling that TIMING is by far the most important asset a founder has. Or I'm wrong (which is my default assumption).
Or a simpler example: you discover that you're out of milk, drive to the store, pick up a carton, stand in line, pay and drive back. You're tired and your favorite TV show is on in five minutes. If I ask you to throw away the milk and go back to the store for another, does that prove that getting milk isn't a repeatable process?
This is glorious.
If they were confident in their skill and outcome they would plow in their own $40M rather than raise it from XYZ Partners again.
I was told by an early mentor that entrepreneurs should never risk their own money. I don't know why, especially if you believe success in startups is a skill.
The concept of an "exit" meaning success is odd.... on one hand, yes, someone started a business, got it going, and convinced someone (with deeper pockets, usually) to buy it from them. That's certainly a success for the entrepreneur, no question about it - but it doesn't directly say anything about the profitability or longevity of the business they sold.
Back on topic- why would you risk your own personal money if you don't have to? Businesses fail. Shit happens. Nothing is for sure. That money could poof be gone. Back to zero.
That
So it is fine for successful entrepreneurs to take other people's money if they acknowledge that skill alone isn't enough to become successful.
However it is deeply frustrating for somebody to claim their success was 100% skill while at the same time betting other people's money for their next venture, implicitly saying their future success is partially dependent on luck.
A quick search and replace provides the basis for an alternative article called "Why Sand Hill Venture Capitalists Overestimate Their Own Smarts and Abilities":
> Venture Capitalists believe that they can recreate their successes again and again, start-up after start-up.
> In some ways, Sand Hill is set up to support this way of thinking. If you’re successful financing one company and you were the venture capitalist, you deserve all the money from all the engineers running other businesses in Silicon Valley to go start your next capital firm. After all, who are the engineers going to support? Some failed venture capitalists instead?
Makes as much sense.
Remember, it's a luxury to pander to a VC.
Bootstrapping is only for those dirty proles.
The entrepreneur or athlete is so aware of all the hard work and long hours that they put in that they often down play the other factors that play a part in their success.
This often leads them to be defensive when these external factors are brought up as being part of their success.
So instead he teases out what their motivation is (personal expression or making money by broadcasting or something else) and what's keeping them from achieving it (lack of clear stats, or difficulty publishing, etc). That helps him figure out what to build.
I think the founders of Microsoft, Dropbox, Zynga, and many, many others would disagree. Even if we do on average only have one good business idea in our lives, it probably won't be the first one you work on.
The author uses Twitter as an example, which was actually a spinoff of Evan Williams' second company.. he'd already had one great idea, Blogger, which was sold to Google.
If I say most Asians have black hair, and you counter with I disagree because I've seen a blonde Asian; your rebuttal makes zero sense, it's fallacious.
Just say "Hey, where's your data?" instead of "my friend is Asian, and he's a red head so there goes your argument" ...
My prof blew me away one day when he said that Godel had 3 good ideas -- Godel numbering, and two more that I can't remember.
He didn't say it in a way that was meant to put down Godel at all. I took it as an homage to original thought and what it really meant to have a good idea.
hmm... That list seems incomplete.
That said, Gödel had many more great ideas.
Its also a bit disingenuous to completely ignore Jack Dorsey who's founded and working full time for two of the most successful startups around.
Was Broadcast.com a great idea? :D
It was also a success for its shareholders, with a perfectly timed sale just as the dotcom bubble reached its final crescendo.
Not a good idea for Yahoo! though - but then again - you win some, you lose some.
I think (as I remember the story about this) he didn't believe in that idea enough to even want to keep the investors money. Assuming of course he was being truthful about his thoughts on the spinoff.
oh. wait...
;-)
Ideas are a dime a dozen. Many can be great. Execution is what separates the wheat from the chaff. And most of the time, the Minimum Viable Product has become cheaper to produce and iterate, than ever. So the startup costs are minimal.
I would actually say the opposite. People live lives, companies create products. You will have MANY ideas in your life. Make sure to maximize your chances of succeeding in your first venture. If you do, and then you exit, you will have connections, a reputation, a track record, lots of money, and you will be able to own the crap out of your next companies and do whatever you want.
That probably means your first venture shouldn't be the next Google or Facebook, so that you can bear giving away equity in it to people and give them responsibilities. Investors, mentors, coders, designers, marketers, etc. People who do things better than you in their respective fields. If you are reluctant to give up equity, your first startup will be hobbled in its resources, you will have to wear many hats and wear yourself thin. Why do it?
Companies create products. People live lives. Enjoy yours while you are young. Create a group around you that is passionate. What was that Aesop's fable? Oh yes:
http://mythfolklore.net/aesopica/milowinter/13.htm
I think that the individualistic culture in the USA has produced some amazing things, but the power of groups is just beginning. The open source movement is a great example, but as people get better tools to organize themselves, groups will become more and more efficient.
The nice thing about groups is that they can do more. An individual is just a group with one person. If set up right, larger groups are also not as fragile, if one member leaves or decides to take a break. They have more connections, they have more resources to grow.
In short: you will have plenty of ideas. Don't make your first one into something that you will take responsibility for and take on the risk all by yourself. Rather than letting it consume your life, land your first success. You will always be able to own and enjoy your next ideas, and have more OPTIONS to execute them how you want.
After working in an incubator for about 3 months and learning all about the ideas several companies were founded on, I have to disagree with this. I would say I had to hold back laughter for half of them, and not because the idea initially struck me as poor, but because of many, many details within the idea that were not thought through completely, or a company that was put together to solve the wrong problem, or had a better competitor already in the market that they weren't aware of. And these were companies that had made it into an incubator. Supposedly the cream of the crop.
Ideas are valuable and it's difficult to get them right in their entirety. You can't build a company on just any old idea, you have to build it on the whole idea and its extension into the market. A holistic idea.
And those, well, those are hard.
But not everyone are like that. So them, an idea is valuable.
No one can be an entrepreneur until they understand value in the first place.
The fundamental attribution error is so ingrained in our thinking, that it's really difficult to obviate it even when you're writing an article about it.
The tech world buzzes for days and weeks about Instagram being acquired by $1 billion, about securing higher and higher amounts of funding. Often, its deceptively rare that you hear about great people with great ideas that just don't make it off the runway.
So when your venture fails, you're tempted to think its a fluke that can be overcome with a large enough sample size.
Also, when you can get Morgan Stanley to eat 2.3 billion to keep launch day stock at the number you want, you're not overestimating your own smarts. You're doing something far more profitable, you're duplicating the mythic reality distortion field.
This article is kind of like saying that some baseball players overestimate their own skills and underestimate the effects of luck when they hit a home run. But you don't see people writing articles like that because hitting a home run is more obviously difficult than starting a successful company, and you have a lot more data with home runs than you do with companies.
Whenever there's an article like this, it can be tempting to conclude either: 1) "it's just a crapshoot, what's the point of playing the lottery?" 2) "it's just a crapshoot, anyone could have done Facebook." But the fact is luck is involved in everything - so perhaps a better takeaway is: 1) I need more practice and 2) I need more at bats.
It's easy to point out how THAT OTHER industry engages in groupthink, now isn't it...
Besides, tech is worth more than finance, there's a lot more profit there than in banking. The next Google or Facebook will probably be worth more than our largest banks.
Apple + Microsoft in 2012 ($70b in profit) = Goldman + Bank of America + Citi + Wells Fargo + JP Morgan + PNC + BB&T + Morgan Stanley + Blackrock etc.
Heh heh. You are conflating investment banks with commercial banks and mutual fund managers. The goal of deposit taking institutions isn't to make $70b in profit...its to safeguard deposits, make some modest profit ( if any ) by lending out to sound borrowers with collateral. Similarly, if the mutual fund guys take outsize risks by investing in high beta stocks & they end up on the wrong side of the trade, the funds would be unable to attract any investor interest in the future. Even a tiny 1% return over S&P is huge for mutual funds.
Here's a more apples to apples comparison: a. $125 million hedge fund, run out of a 2-room office, with 3 PhDs in Finance from MIT,MIT & Chicago. All the software is VB macros on MS Excel + 3 Bloomberg terminals. Profit $7m in first year. Each guy takes home $2m b. 5 person startup in the Valley gets bought out for $20m. Each co-founder takes home $2m, after the VCs get their share.
a == b. But which would you rather be ? I interviewed with both at one point in time...
The goal of banks is to make money by doing all sorts of things, from trading government paper, to providing liquidity to businesses (credit), to issuing standard loans, to issuing mortgages, to taking standard deposits, to issuing more complex CDs, to issuing credit cards, and on and on. There's no inherent definition limitation, it's up to the banks and the regulators to decide.
The goal of all of those entities I listed is to make money. They're all publicly traded corporations.
A more apples to apples comparison? What are you talking about? The point is to note the fact that there's A LOT more profit in big tech than in big finance.
No its not.You obviously know enough about this topic, yet you make this dubious claim. The goal is to be in the black to not go in the red. That's a very specific accounting goal, look it up.
> The point is to note the fact that there's A LOT more profit in big tech than in big finance.
Please dude. Apple isn't taking that "LOT more profit" and subdividing it among its employees, yeah ? Whereas when you run a tiny hedge fund and take in a tiny $7m, that turns into a tiny $2m windfall for you personally. Lot easier to do if you have the skills, and certainly a lot more lucrative.
Maybe the problem is too many people believe in that.
> I know nothing about Bret Taylor and his new company. However, I do
> know that he used to be the CTO of Facebook and he threw it out the
> window. Chances are his new venture will never give him the opportunity
> he would have had if he’d stayed at Facebook for the next 5 years.
http://imgs.sfgate.com/c/pictures/2001/01/18/bu_valinux2.jpg
ChuckMcM's previous comment summed it up perfectly: http://news.ycombinator.com/item?id=4118949
In this highly complex system of companies and customers and ideas, nothing is constant, and very little is predictable. You can't look at individual points and see the trend, or be able to predict anything from that point. You have to look at the ecosystem statistically, and that's effectively what this article is talking about.
Everyone should understand statistics. Not Stat-10 intro-to-statistics, but the beauty of statistical understanding in the real world, as it applies to you. This article is a great example. If you think systematically, you'll understand your market better, your company better, your employees better, and yourself better, and you won't fall into the fallacies this article points out.
Because that's what they are. Fallacies. Falsehoods. If you believe you fully control your destiny and your outcome, you are necessarily at least partially incorrect.
Even if you consider yourself and your own success and what you believe leads to it, you are still part of a complex system you don't fully understand. However, you can get a much better grasp of it if you don't use yourself as a single-point anecdote. Spot on.
VCs know more about start-ups than he thinks. They do "care" about whether the ventures they fund succeed (obviously, ha) and even so they fund founders who have failed in the past all the time. The pretty low stigma on failure in the Valley is part of what makes the culture so great and why we get so many successes and, dare I say it, skilled entrepreneurs.
As we all know, team and execution are just as important as idea or more so. Once we acknowledge the importance of ability, and the existence of many great successes, successful serial entrepreneurs, and, of course, failures and failed entrepreneurs, it seems like he's just trying to take everyone down a peg.
Surprisingly, his first three takeaways are pretty agreeable, basically just be grateful for your successes and acknowledge there was probably a healthy dose of luck in there. I'm pretty sure his fourth point about investing in people despite past failures is already incorporated into Valley thinking.
From the article:
"And you certainly can’t go through life as an entrepreneur without becoming smarter. You learn from your mistakes, you make great contacts within an industry, you understand better what other competitors are doing."
If that isn't a round about way of talking about entrepreneurship skill building, I'm not sure what is.
The skill you reference has to be developed somewhere – even if that's just watching others and learning from the litany of mistakes out there... otherwise it's an innate ability and that's exactly what the author is arguing against in this piece.
If anything, I feel as though the author still falls into the trap of believing in the mythical "great idea". There are plenty of really good ideas out there – they just need to match up with the right environmental factors (time, money, competitors, etc. etc.) and the right people at the right point in their lives. Good ideas don't execute (and thus succeed or fail) in a vacuum – and so, just like the fundamental attribution error the author mentions early on, as it applies to people, the same thing goes for ideas.
Which, incidentally, everyone is susceptible to. It just makes people bitter when millions of dollars change hands because of it.
Not just ideas.
You need not only the idea but everything coming together at the right time including being able to team up with the right people, get money, and not to sound like a broken record, luck and the right timing.
At one point things get to the tipping point. With twitter it may have been the arab spring let's say. That might have been the point where non-techies and your aunt heard about it and it jumped some shark.
For instance, do you think investors are 'at least as likely to succeed by investing in “failed” entrepreneurs as “successful” ones'?
"Getting Final Cut": http://log.scifihifi.com/post/25094818476/getting-final-cut
"Why you need your own company": http://sivers.org/laboratory
The Drunkard's Walk: How Randomness Rules Our Lives : http://www.amazon.com/The-Drunkards-Walk-Randomness-Rules/dp...
Of course why not spread the bets over multiple companies and encourage risky ideas. We are all watching the football game but not suffering the concussions.
To put it in simpler terms, luck is a far more important factor than skill in determining whether any given entrepreneur or startup succeeds.
Unfortunately he had to add a bunch of nonsense commentary like the Bret Taylor stuff, but his main premise is certainly accurate.
It also applies to VC's and Angels. They are praised when they get in early on companies that end up making a fortune. Some of them are surely great investors - others are just blindly throwing darts and end up getting insanely lucky. Good luck trying to explain to that TechCrunch.