The Venture Advantage Revealed
This post is a bit of a commercial and I have no intention of apologizing for it. In fact, I’m incredibly proud of it.
Many venture capital funds will tell prospective entrepreneurs, “If you take funding from us, you won’t just have one person working on your behalf, you’ll have our entire team pushing for you and opening doors for you every day.” As you might expect some firms are truer to this mantra than others. For founders choosing their funding partners, this is one of the most important areas on which to perform diligence. Ask other companies in a VC’s portfolio how often they interact with multiple members of a VC firm. The answer will reveal an enormous amount about the health and culture of the partnership. As a founder, you want a VC that acts as one team of many people, not many people acting as many individual teams.
Gladwell, Overconfidence & Business
Malcolm Gladwell has written another though provoking piece for the New Yorker. The article is available for a limited time outside of the New Yorker’s pay wall and you can find it here. Although the article was inspired by the fall of Bear Stearns, it’s relevant to all aspects of business which involve a high number of variables and possible outcomes. Worthwhile reading for entrepreneurs and VCs alike. My favorite excerpts follow below:
As novices, we don’t trust our judgment. Then we have some success, and begin to feel a little surer of ourselves. Finally, we get to the top of our game and succumb to the trap of thinking that there’s nothing we can’t master. As we get older and more experienced, we overestimate the accuracy of our judgments, especially when the task before us is difficult and when we’re involved with something of great personal importance
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Perhaps this is part of why we play games: there is something intoxicating about pure expertise, and the real mastery we can attain around a card table or behind the wheel of a racecar emboldens us when we move into the more complex realms. “I’m good at that. I must be good at this, too,” we tell ourselves, forgetting that in wars and on Wall Street [or any business] there is no such thing as absolute expertise, that every step taken toward mastery brings with it an increased risk of mastery’s curse.
Capital Alchemy: Make Fixed Costs Variable
At a web services conference a few weeks back, I remarked that the story behind the show was really that fixed costs will become variable / “flexible” costs costs. This is better than capital efficiency, this is capital alchemy. Only allocate capital the instant it can marry customer demand. In the start-up world the trend is hard to ignore.
It used to be that start-up needed $5 million just to build the infrastructure that was needed to launch a website. That’s $5 million just to test whether or not an idea had any legs. That’s $5 million whether just one person who visited your website or millions did. But today, Amazon Web Services has turned this “fixed” infrastructure costs into variable expense. Get your credit card, sign up for an AWS account, and pay as you go. Tough to imagine companies were once launched any other way.
Another example is CPC advertising. It’s only been in the past decade that we’ve seen widespread adoption of pay-for-performance advertising. Instead of doing a fixed $X0,000 media buy, businesses can bid on keywords knowing that they will only pay if someone clicks their ad. A fixed marketing expense is now variable.
Capital alchemy is a trend that has already revolutionized both the advertising worlds and the web infrastructure worlds. Undoubtedly, it will impact many more sectors of the economy. I’d love to meet with entrepreneurs who have some ideas on where the magic of capital alchemy might strike next.
