That is the part I like the least of the job, or rather actually having to deal with the outcome of the bad news. But the good news are also a constant stream, which makes up for it all.
I'm a fan of MA, but I think people equate him with sainthood. He's not a saint. He's a pioneer that pushed the internet forward, made some mistakes, and now has some wisdom (and money) to dispense. I give his writing some credence, but nobody is perfect. I like that he has made post-browser mistakes. That gives credibility to his writing.
It is both possible and, really, with just a little
inspection, really easy, just a wave of a hand, to
see how to do much better at investing in
information technology than described in the OP.
Below I outline how. The crucial supporting
background is just rock solid, so far essentially
missed by VC but among the most solid in all of
civilization -- no joke. That VC is missing out is
just absurd.
The OP is yet another effort at 'understanding'
venture capital investing. There's something
strange here: At
that is, VC Fred Wilson's blog, is some data that
shows that on average in the US, information
technology venture capital returns in one word suck,
that is, are really poor, bad, low, etc.
So, in trying to understand how venture capital
investing works, at least on average we are trying
to understand something that works poorly.
Below I explain how to do much better, but broadly
that VCs struggle so much, as is clear in the OP, is
from incongruous to absurd.
The OP is awash in some really bad news that shows
that the VCs admit that, really, they don't much
know what the heck they are doing and, instead, are
reading tea leaves and then shooting in the dark;
such nonsense is unnecessary.
Let's consider some quotes from the OP:
"even the top VCs write off half their deals."
Dumb. Each year a VC gets 3000 deals, looks
carefully at maybe 200, invests in maybe 20, and 10
flop. Clearly something's seriously wrong here.
"And of course, you make all your money on
successful and non-consensus."
That the good deals should be so difficult to
evaluate that there should be no "consensus" is
absurd. Sure, detecting the next SnapChat is
difficult, but largely we should set aside such
deals -- based on, what, starting a fad of teenage
girls having fun being 'improper'. Instead it is
possible to have plenty of deals that are fairly
easy to evaluate.
"And let me translate ‘non-consensus’: in sort of
practical terms, it translates to crazy. You are
investing in things that look like they are just
nuts.”
E.g., another SnapChat is that way, and that's why a
VC should not take seriously such deals. E.g.,
someone comes out with a better version of the same
basic idea, but maybe SnapChat is hurt by their
installed base that becomes dragging a big anchor to
responding.
But there are much better deals than SnapChat where
nothing looks "crazy" or "nuts". Putting up with
deals that are crazy or nuts is, well, crazy and
nuts.
“The entire art of venture capital in our view is
the big breakthrough for ideas. The nature of the
big idea is that they are not that predictable.”
Yes, “The entire art ... is the big breakthrough for
ideas"; the problem is that, flatly, VC (1) is
working with "ideas", e.g., SnapChat, that are based
on fads, etc. and, thus, are essentially impossible
to evaluate and (2) VC doesn't understand what
really good, "big breakthrough ... ideas" are, where
to find them, and how to evaluate them. For the
good, big breakthrough ideas, accurate evaluation is
quite doable, and there is little that is' not
"predictable”. VC doesn't understand (1) and (2),
and I explain below.
“Most of the big breakthrough technologies/companies
seem crazy at first: PCs, the internet, Bitcoin,
Airbnb, Uber, 140 characters.. It has to be a
radical product. It has to be something where, when
people look at it, at first they say, ‘I don’t get
it, I don’t understand it. I think it’s too weird, I
think it’s too unusual.’”
“Most of the big breakthrough technologies/companies
seem crazy at first" is only true because VC has
been, to borrow from a movie, "digging in the wrong
place".
“You want to have as much ‘prepared mind’ as you
possibly can. And learn as much as you can about as
many things, as much as you can. You want to enter
as close as you can to a zen-like blank slate of
perfect humility at the beginning of the meeting
saying ‘teach me’…. We try really hard to be
educated by the best entrepreneurs.”
Sorry, I have a serious background in how to
"learn", and my experience is that VCs are quite
poor at it and need to 'put on their game faces' and
'up their game' several notches from some very good
sources, and some popular Silicon Valley coffee or
sandwich shop is NOT such a source.
“You want to tilt into the really radical ideas… but
by their nature you can’t predict what they will
be.” “There will be certain points of time when
everything collides together and reaches critical
mass around a new concept or a new thing that ends
up being hugely relevant to a high percentage of
people or businesses. But it’s really really hard
to predict those. I don’t believe anyone can.”
"Really radical" is fine, maybe often necessary,
but, of course, not nearly sufficient; but it is
just crucial to have ideas that can be evaluated
accurately and to do the evaluations. For "really
really hard to predict those", VCs are "digging in
the wrong place". Instead, with good "breakthrough
ideas", "really radical", provocative, shocking,
"crazy", "nuts" that can be evaluated and that have
a good evaluation, being able to "predict" is
really, really easy.
“We are looking for a magic combination of courage
and genius"
Looking for "magic"? Looking for magic went out of
style back in the "Age of the Reason". Looking for
magic is wandering and shooting in the dark. As I
explain below, there is a way to find the light
switch, turn it on, and see what's happening (thank
you A. Wiles).
“The thing all the venture firms have in common is
they did not invest in most of the great successful
technology companies.”
There is a reason: VC has concentrated on deals,
"digging in the wrong place", that are essentially
impossible to evaluate. Instead, concentrate on
deals that can be evaluated and, then, evaluate
them. What deals are those? I explain below.
"The challenge in the field is all of the great VCs
over the last 50 years, the thing that they all have
in common, is they all failed to invest in most of
the big winners."
Again, the VCs were "digging in the wrong place".
Yes, even in that place sometimes there is some gold
there, but that doesn't much help because the gold
is in a form essentially impossible to recognize,
that is, evaluate. So, dig in the right place where
can recognize, evaluate, the gold that is there.
The right place? I explain below.
The theme of the Andreessen remarks is wandering and
shooting in the dark. But that is unnecessary.
(1) Problem. Pick a "big ass" problem where the
first good or a much better solution will clearly be
a 'must have', not merely a 'nice to have' and will
be very valuable, in the sense of making money, the
green kind. Note the "clearly". If pick a problem
that does not satisfy "clearly", then try again. I
didn't say that the success would be easy to do.
Part of the reason VC has been "digging in the wrong
place" is that it tries to make money with small
problems, where the solution is just 'nice to have'
instead of 'must have'.
The ideal example of a 'big ass' problem, although
not in information technology, would be a safe,
effective, cheap one pill cure for any cancer.
"Breakthrough"? Yup. "Crazy"? Sure; NIH has been
throwing billions a year at that. But it would be a
'must have'; no question about 'product-market fit'.
A 'must have' doesn't have any questions about
'product-market fit'. If looking at projects where
the results have some doubt about 'must have' and
likely need to work on 'product-market fit', then
are looking at the wrong projects, are "digging in
the wrong place".
Another fad for teenage girls does not qualify as a
'must have'. Yes, such a fad might make a $1
billion, but it is too difficult to evaluate.
Instead, I mentioned "clearly" be a 'must have'.
That is, it is crucial to be able to get a good
evaluation early on, and nearly never can do that
with fad products, as, indeed, the Andreessen
remarks so clearly indicate.
(2) Solution. Find the needed solution. Often the
solution will not be easy to find, but this need not
concern VCs since they need look only at deals where
a solution has already been found. If can't find
the needed solution, then return to (1) and try
again. A solution that is difficult to find can
give a technological barrier to entry.
Q. Whatever you are working on, someone else
has already done that.
A. Let's consider that: Take all the people who have
done that. Then, except for rare ties, there must
have been a first such person, and for them no one
else had already done that. So, the claim is false.
Sorry 'bout that. Instead, there really are things
that are significantly and genuinely new.
Q. Then someone else can just reproduce the solution.
A. Some solutions are quite difficult to find, may
be based on original work and/or advanced
prerequisites understood by only a few people,
implemented in software, secure inside a server
farm, and, thus, provide a technological barrier to
entry.
(3) Prove that really have a solution as described.
When have such a proof early on, usually it is just
on paper, especially for solutions in information
technology. Is this possible? Yes, for nearly all
of science and engineering on practical problems,
it's routine and standard. It's how we build a new
airplane engine, a new airplane, a new rocket, a new
satellite, a new application of carbon fiber, etc.
(4) Evaluate the paper solution. Can this be done?
In nearly all of applied science and engineering,
such evaluations are standard and routine; it is
insisted that such evaluations be done. No one puts
up a new satellite with 'agile' techniques
iteratively 'searching for product-market fit'.
There's no counting on "magic". Fads of teenage
girls are just irrelevant.
(5) Develop the solution.
(6) Deliver, sell the solution, the first good or
much better "must have" solution.
Can these six steps be done? Sure; history shows
that there's no doubt. Thankfully for US national
security, the best examples are funded and exploited
by the US DoD.
A great example was the SR-71: Problem: Get
pictures of the USSR. Solution: An airplane that
can fly at Mach 3+ at 80,000+ feet for 2000+ miles
without refueling. Proposed essentially just on
paper by Kelly Johnson and the Lockheed Skunk Works.
The project passed evaluation and went ahead as
planned.
Other examples: GPS and the earlier version by the
US Navy -- proposed on the back of an envelop by
some physicists at the JHU/APL, A seafloor, passive
sonar array. The F-117 stealth plane; flew across
Saddam's anti-aircraft artillery without a scratch;
another Lockheed success. The Keyhole satellite,
that is, a Hubble but aimed at earth.
Outside of the US DoD, the LHC; found the Higgs as
planned. The WMAP satellite -- found the details in
the 3 degree K background radiation as planned and
got enough resolution to permit an estimate of the
big bang 13.7 billion or so years ago.
These projects were evaluated essentially just on
paper and worked as planned.
Generally such science and engineering has a much
better batting average than VC. E.g., in each case,
the SR-71, GPS, the LHC, WMAP, there was a problem
that needed a 'must have' solution, such a solution,
evaluation just on paper, and success. No "magic".
No getting 3000 projects, looking carefully at 200,
picking 20, and having 10 fail.
What should VC do? Sure: Stop "digging in the
wrong place" and, instead, follow steps (1) - (6).
Will VCs get many such project proposals? Well,
likely now they get more than they are willing or
able to evaluate, but with interest in and success
with such projects, they stand to get more such
proposals. Considering how few VC projects pay off
now, VCs don't need to get more than a few dozen
good proposals each year. Digging in the right
place doesn't require moving much dirt to get to a
lot of gold.
Yes, I never expected Marc Andreessen to flip his own bozo bit, but that quote did the trick. Andreessen took the concept of "shooting the messenger" to new depths of stupidity when he said that.
Still, this link is well worth the few minutes it takes to read. His blog has a lot of "Things I've learned from" entries from various people.
I have to call you out on this one. I disagree with Andreessen's statement on Snowden, but it is not an unreasonable position to hold (he did steal secrets and he did damage the capability and reputation of the US in revealing them. I just happen to think he was right to do so)
I suspect I also disagree with Andresseen on provision of comprehensive public healthcare (I am a product of the NHS) and gun control and many other political issues - all of which it is possible to have reasonable people disagree reasonably on.
Just because he holds a different view on this issue to most tech sector, does not make him a bozo. If anything, the potential danger Snowden has alerted us to is the ability of the Administration to shut down political discourse and disagreement through superior knowledge of our lives - ironically we should embrace statements like Andreesseens as something that can and should be openly discussed.
I hear what you're saying, but I believe that anyone who condemns Snowden's crimes while saying nothing about those of Alexander and Clapper is ethically challenged at best. Snowden arguably betrayed his government, while Clapper and Alexander committed offenses of even greater magnitude against the American people. If Andreessen has a beef with anyone, it's with the latter two people.
I personally find it difficult to believe that Snowden's revelations weren't already old news to the influential foreign business and political leaders that are the target of Andreessen's concern trolling. Snowden's sin was bringing the knowledge down the mountain to the rest of us.
It's part of this strange double standard we have for spies - their guys are liars, our guys are cunning. Once upon a time "our" meant "our country". Today it seems to mean "our values". I think that's an improvement.
And to be honest I think Chancellor Merkel, who by all definitions should be cynical as hell, was genuinely shocked by the Stasi like extent of PRISM et al. So I think Snowden did reveal, in convincing ways, that the NSA had gone far far beyond what many thought practical and most thought sane. No matter how cynical a business leader you might be a small part of you thought "everyone" did not really mean everyone till Snowden
> Andreessen took the concept of "shooting the messenger" to new depths of stupidity when he said that.
And yet, not really. With the exception of RSA, American tech. companies are being hammered for the actions of NSA, not for their own "crimes". Even German companies obey German legal directives after all, and Vodafone made clear the other day the extent of government monitoring of networks around the world.
To the extent that Snowden has made clear the reality that government (and not just criminals) can take advantage of the jurisdictional problems of an open Internet, that's not the fault of the U.S. tech sector either. After all, some of the most successful NSA programs are really liaisons with European security agencies that run the actual intake work, not conspiracies with Silicon Valley.
The correct solution for Europe if they want to be free of the possibility of other nations (incl. the USA) doing targeted operations in their networks is to completely balkanize the Internet, which companies like Google and Facebook oppose for obvious reasons.
You can credit Snowden with revealing to the world the types of dangers inherent to an open Internet, but that very same set of revelations is a large part of what's harming the U.S. tech sector. You're right that people may have figured it out eventually, but nations and companies around the world tended to agree not to make too big an issue of it since the benefits of an open Internet were thought to outweigh the risks. But Snowden forced the issue.
The only true solution to the issues he raised, if you're a European citizen, cannot be left to voluntary compliance by the other nations of the world, especially since you can never certify compliance with that. You'd have to instead build out your own Facebook, your own Google, your own tech sector, just like Russia and China have done.
So credit Snowden with opening the eyes of Europe to that reality, but you can't eat your cake and have it too. We've seen region locking spread too far with just with RIAA/MPAA to want to see it infect the rest of the Internet, but that is the message Snowden is responsible for (even if it wasn't the message he meant to send).
It's one thing to be dismayed at what the revelation of facts has done to the tech sector. Nonetheless, they are still facts. Calling Snowden a traitor is a red herring.
One could just as well say that Andreessen's greatest allegiance is to money. So perhaps in that context Snowden is a traitor to Andreessen's cause.
Yes, it's not that Andreessen's lost his mind; just that his role in life means he's in antagonism with people like us.
And Snowden is a traitor to the US government, whose interests are pretty much the same as wealthy elites like Andreessen (to a first approximation). But not a traitor to the world or even just the US population.
...the types of dangers inherent to an open Internet...
You haven't made the case that the NSA's shenanigans are in any way "inherent" to the internet as currently designed and implemented. I would suggest that these phenomena are due far more directly to the current organization of the USA federal government, and to the oligopoly that exists in internet service in that country. I think we ought to give Cerf, Kahn, and Postel a pass on this one.
> You haven't made the case that the NSA's shenanigans are in any way "inherent" to the internet as currently designed and implemented.
Not the NSA's shenanigans, the shenanigans of any properly resourced foreign (or domestic!) intelligence service. After all, the U.S. itself suffers the same problem in reverse from China and Russia and God only knows who else.
If there's anything I've learned from hacktivists, it's that if you leave your stuff on the open Internet it will be exploited eventually, the only question is who will be exploiting it.
You're describing two different classes of threat. The threat posed by bad actors from the other side of the world is necessarily bounded: they can't take more from me than I have "online" in the first place. If I have a bank account, a secret soft-drink formula, or other assets subject to attack, what I spend on defense can be proportional to the assets themselves.
The threat posed by the bad actors affiliated with the state to which I am subject is qualitatively different. Based on intended-private information that can be construed as unlawful or even vaguely against the national interest, they can take away the rest of my life. There's nothing proportional to that.
For me, a16z was just the best VC ever, I thought wow finally somebody different to everyone else, finally a real investor. But that statement just shattered all my high opinions of them, they're just another VC firm/shark/herd investor like everyone else. How sad :((
Presumably you mean that his moral judgement is suspect and therefore you won't follow his principles. That's fine, and I can respect that.
What I cannot agree with is that you can't learn anything from someone you disagree with. I think that's a terrible principle to have.
If you can't learn things from people you don't agree with then you are at risk of groupthink[1] at the very least.
As a specific example, William Churchill's leadership of the British Admiralty during the Gallipoli Campaign[2] in World War 2 was - in my view - completely immoral (as well as terrible ineffective). Indeed, his attitude towards the troops he sent to fight created one of the core national myths[3] of my country.
However to reject learning anything from Churchill because of that would deprive me of a lot.
One can learn a lot from Henry Ford about transforming industries. Does the fact that he had his newspapers publish anti-Semitic writings[4] mean we should ignore him completely?
Does Bill Gate's many ethical failings while building Microsoft into a monopoly mean we can't learn from how he structured his development teams during the browser wars (I didn't realize how ironic this example was until after I wrote it. Maybe Marc Andreessen could have learnt from him too..)
In business there are plenty of people with moral failing in one area or another.
In my view you are better sucking the marrow out of their teaching, and then viewing what they say through the lens of your own ethics.
[3] http://www.ozpolitic.com/forum/YaBB.pl?num=1398405363/61#61 (Sorry for the random forum link, but finding a better short summary of the "the English officers sent the Aussie Diggers to die while they stayed behind" thing is too hard right now.
Yes, true. One can certainly learn from what they have done, but I think what I mean with invalidated is that they immediately lose all of their credibility with a statement like this.
Because of this, people won't be inspired by them anymore and their opinion doesn't have weight anymore, because now everybody knows they are not looking to make a difference in the world, they are only looking out for themselves and their own benefit.
Still have hopes for Ben, I've always admired a16z, but this really sucks
I think you still have to qualify that as 'moral or ethical credibility', and even then limit it to topics relating to government power and accountability.
By all accounts, their treatment of founders is very ethical indeed (by Founders' standards), for example, and I wouldn't expect this to impact their credibility as knowledgable VCs at all.
In short, people are complicated, and applying well-earned admiration in one area to transitively enhance someone's reputation in another is clearly an all too common error (hence celebrity endorsements, etc.)
No, there are simply sentences that fall into this category such as not supporting gay marriage, proclaiming Snowden as a traitor, being anti-abortion, which invalidate everything that the person has ever said or done, because they reveal untenable views like homophobia, ignorance and religious misogonysm.
There are some more views, that reveal racism, but lets leave it at that.
In this particular case, this ignorance reveals the view that mass surveillance is okay, whereas the author seems to miss that every nation that supports mass-surveillance is going towards a Nazi-Germany-like regime. Ever wondered why Germany is so adamant about privacy? Because they remember what happened when a certain entity gained too much control. The thing is, it's not a question if such mass control will be abused at some point. It's just a question of when, maybe in 5 years, maybe in 15, but it will inevitably be abused at some point. Americans don't get that, because they haven't been there.
Firstly, someone being wrong about one thing doesn't mean they're wrong about something else.
Secondly, there are some issues about which people have valid disagreements. This is one of them. Come to think of it, much as I wish it wasn't, gay marriage is also such an issue in most places (though clearly not in Silicon Valley or in Hacker News).
Third, I don't understand how you made the leap from him thinking that Snowden is a traitor, to him thinking that mass surveillance is okay. Maybe he said other things I'm not aware of (seriously - correct me if I'm missing something). But thinking that Snowden is a traitor has nothing to do with views on mass surveillance.
Finally, you are taking an extremely absurd position where the world is entirely black and white - someone says one thing that you disagree with, clearly he thinks terrible things, clearly this invalidates anything he has to say, including on a subject on which he is very knowledgeable, and clearly he's not worth listening to.
That is not a good way to be part of a diverse society, and definitely not a good way to expand your horizons.
Your zeal has lead you to an absurd conclusion. "Invalidate everything they have ever said or done"? That's not how it works... People can be completely wrong about one thing and have good insight into something else.
"be the market" is the advice that comes out of portfolio theory. To say that it applies to one type of investor but not to venture investors is to basically announce that you have absolutely no understanding of portfolio theory.
This is an odd comment. Do you think that Marc Andreessen, who manages one of the most successful portfolios of startups in the history of startups, has "absolutely no understanding of portfolio theory"?
Or do you think an alternate explanation might be more likely? Is it possible that you misunderstood something? Or is it possible that, if Marc is challenging this thesis of portfolio theory, he might be doing so from a place of great experience and be worth listening to?
> Marc Andreessen, who manages one of the most successful portfolios of startups in the history of startups, has "absolutely no understanding of portfolio theory"?
He doesn't need to be above average there. Just like PG, he (mostly) invests in technology he actually comprehends, unlike some other delusionary VC from the investment banking world.
VCs deal in illiquid, information-asymmetric markets where prices are directly negotiated, capital is locked up for an extended period, and deals are large enough that investment is forced to be "lumpy".
If you could somehow invest in a startup "index", it would be great, but there really is no such thing (especially not for the VCs).
If you read section #1 in the article, you'll note that there are a lot of bad picks out there. To review:
- 4,000 startups a year.
- 3,000 seen by a16z.
- 200 are "fundable."
- 15 of those generate 95% of returns.
If a single VC firm were to fund all 4,000 startups (or even a representative sample of them), they'd be out of business in a few years. A "startup index" unbiased by due diligence is a pretty bad idea from an investor perspective.
That said, if you want an example of a seed fund with a pretty broad approach, take a look at the aptly-named 500 Startups.
I love that.