the cornice

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

*****

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.

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.

Now that the First Round Capital team has hosted Office Hours in two countries, we thought we might be ready for Texas. In October, we met with more than 50 entrepreneurs in Palo Alto. In January, we heard great ideas from more than 40 entrepreneurs in Vancouver. They say everything is bigger in Texas. Now it’s time to prove it.

On Monday March 16th, Rob Hayes, Christine Herron and I will be hosting Office Hours SXSW . Just like the original Palo Alto edition, we’d love to meet with entrepreneurs, people thinking about becoming entrepreneurs or folks who would like join a start-up. We’ll be available for a bunch of informal ~10 minute chats. No agenda. We’ll provide the napkins to write on and maybe some margaritas while you wait. Maybe. Details below.

Date: Monday, March 16th

Time: 11:00am – 1:00pm

Location: Rio Grande Mexican Restaurant, 301 San Jacinto Blvd, Austin, TX

Please help us load balance meeting times by signing-up at this link to let us know if you plan to attend in the first hour or second hour of the event. It’s first come, first serve, but we’ll be sure to message you with an update. You can find the Facebook Event page here.

And, yes, I’ll be sure to have my ropers on.