
Why There Aren't More Googles - ecommercematt
http://www.paulgraham.com/googles.html
======
nostrademons
"Why are VCs so conservative? ..."

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...)

~~~
Alex3917
"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."

This is basically the argument for thesis driven investing. If you Google the
term there is some good stuff, especially the posts by Bill Burnham and Fred
Wilson.

~~~
Xichekolas
Ironic that you mention Fred Wilson, since he (or his doppelganger) apparently
read drafts of PG's essay (and hence presumably influenced it somewhat).

------
run4yourlives
Comparisons to Google are worthless, primarily for 2 reasons:

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.

~~~
pg
_Every logical mind (even within Google) in 1999 would have seen that Google
was heading for failure_

I didn't think that. I remember telling the powers that be at Yahoo in 1999 (I
worked there then) that they ought to buy Google, and it was the only company
I ever suggested they buy.

~~~
aston
Yahoo's MO at the time was to swap in the current "cool kid" of algorithmic
search to fill out Yahoo's own search results. Google didn't really have much
of a business outside of selling their results to folks like Yahoo, so I think
many logical minds would've agreed that Google was heading for failure--short
of being acquired by Yahoo or something other big guy in search.

At the least, you'd have a hard time making a believable argument that they'd
be making billions of dollars a year in less than a half decade. And,
truthfully, an even harder time trying to make that same sort of argument if
they were actually acquired by Yahoo.

------
arn
The startups who turn down acquisition offer do better thing might have a bit
of reporting bias. ie. the ones that fail, we never think about.

Except of course, there was a big famous example -- Friendster.
[http://www.nytimes.com/2006/10/15/business/yourmoney/15frien...](http://www.nytimes.com/2006/10/15/business/yourmoney/15friend.html?_r=2&oref=slogin&oref=slogin)

~~~
sdurkin
Holding off on early acquisition is a necessary but by no means sufficient
condition of massive success.

That is, refusing early offers doesn't guarantee you'll be the next Google,
but accepting one guarantees you won't.

~~~
sunilbhargava
True. Causality vs Correlation. I would imagine that many if not most big
successes had an acquisition offer along the way but could it be that becoming
a google, apple, microsoft or oracle is much more a function of good strategy,
good execution, good markets, good timing and good luck than a function of an
entrepreneur walking away from an acquisition offer?

~~~
sdurkin
This is true. However, I think the point being made here is that while you
need strategy, execution, timing, all of the things you just listed above (and
more), even if you have all of these things, you still can't become "a Google"
if you don't resist early offers.

------
uuilly
I've been quite surprised by the "get more traction" argument. It's like, if I
had traction, what the hell would I need you for! Aren't you supposed to be
the cowboys of investing? Sheesh. Tell me my idea sucks, that I suck or that
my market sucks, anything but "your company doesn't exist yet so we can't fund
it." Sort of a self defeating argument.

~~~
alain94040
When I pitched my previous startup, a few years back, VCs made us jump through
those standard hoops:

us: here's our Powerpoint presentation

VC: nice concept, come back when you have a product

[1 year later]

us: here's our product, let me give you a demo

VC: nice product. Come back when you have one customer.

[6 months later]

us: great news, we just signed XYZ, Inc. (big name) as our first customer.

VC: congratulations. Come back when you have traction (that is, multiple
customers)

....

True story. We eventually got funding, 3 rounds. In another post, I'll discuss
the other lesson I learned in VC funding: don't raise money when you need
money.

Alain - fairsoftware.net

------
menloparkbum
Investment and acquisition issues aside, the reason there aren't more Googles
is because... there aren't that many Googles. Their mission statement is huge:
"organize the world's information. From the get-go they had a unique algorithm
that could do it. They just needed money to keep expanding their
infrastructure.

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."

------
sunilbhargava
We recognized this gap in the capital for young companies a while ago when we
started Tandem Entrepreneurs and I could go on about this in great detail.
However I will just highlight that the gap isn't just with financial capital,
it is with human capital too. Beyond the founders, there are very few who
would join these startups as employees? Why wouldn't a talent entrepreneur not
just do his own? The basic equation of go raise some money and then go hire
people breaks down.

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.

------
mixmax
"the kind of founders who have the balls to turn down a big offer also tend to
be very successful"

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.

~~~
breck
Absolutely agree. I know more people who have turned down big offers and ended
up with $0 than people who have gone on to tremendous success after turning
down an offer. There are definitely other variables involved. But I would
guess:

P(COMPANY TURNED DOWN BUYOUT OFFER(S) | COMPANY BECOMES LARGE SUCCESS) = 1.

But the reverse wouldn't be as good a predictor as PG feels.

------
oraboy
The challenge with the $200k-$500k funding gap is the fact that most VCs make
funding decisions by partner consensus.

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...

------
tx
I am seriously having issues visualizing someone saying _"this is not a good
idea"_ to google founders. Perhaps I am too young or perhaps S&L were terrible
salesmen, but I simply fail to see how come a _relevant search_ seemed like a
bad idea to VCs they talked to: and this is not 1995 we're talking here, back
when Google was starting it was clear to many that _everything_ was going to
be online, and finding stuff _will_ be hard, this is why everyone was into
catalogs/portals.

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.

~~~
paul
Google will be obsolete once the semantic web arrives ;)

I remember being pretty skeptical of Google. Better search seemed like a nice
idea, but it wasn't clear how they were going to compete with the established
players who all had more money, more users, more engineers, more features,
etc. Also, Google wasn't the only company trying to build a better search
engine. It seemed like there was a new one every month.

~~~
schammy
Hate to break it to you, but the semantic web is a fairly tale, and is not
arriving anytime soon.

~~~
listic
He didn't tell it's coming _soon_ , did he

------
murrayh
This essay doesn't quite sit right for me. My skeptical side constructs the
message "invest 400k in YCombinator startups and you will have a piece of the
next Google."

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.

~~~
justindz
I was hoping for examples of YCombinator companies to go with each of the
arguments about success (or failure, but that might be picking on them). That
would have bolstered the assertions and made it sit better with me.

------
boredguy8
"Any really good new idea will seem bad to most people."

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.

~~~
pg
_How do you separate the seemingly bad from the actual bad?_

This is basically the business YC is in. The short answer is: practice. One
day I'll try writing down the long answer.

~~~
freax
You need to take more risks, pg. You need to become... pg-13

------
yariv
The article makes some good points on the effects of funding on startup
success, but it doesn't mention one the "other" reasons there aren't more
Googles (or Microsofts, or Ebays): huge markets that startups can disrupt so
successfully are rare. Facebook, for example, which is probably the biggest
startup success story since Google, could be doing everything right but it may
never be as big as Google because it's playing in a smaller market.

------
smalter
this article makes the good point that the mba types who are running vc funds
are fundamentally ill-suited for identifying and investing in technology
startups. paul graham identified this as true for managers of startups as
well; and this is a defining feature of yc--investing in technology people vs.
investing in mba types who hire programmers. of course, the logical extension
is that the people doing the investing themselves should be technology people
because they alone can recognize value in the technology sector. whatever
value mba vc types did bring to the table, understanding of business
management and such, is becoming less relevant with smaller startups and less
money to be allocated.

~~~
aswanson
whatever value mba vc types did bring to the table

I still don't understand how they are valued at all. They don't invent
anything, don't know how to help people who do, and are often bad at
caretaking what has been built.

This is not meant as a swipe at them, but I honestly do not understand why
they are highly valued.

~~~
pius
They're highly valued?

~~~
aswanson
Just look at the CVs and salary data (if available) at any VC firm, or,
outside of the startup world, grep for median MBA compensation and compare it
to any tech field median salary.

------
ecommercematt
Perhaps an enterprising Angel Group can try to package or commoditize the
process of making Angel-sized (six figure) investments. I'm not sure the term
"Angel Group" would still apply after adopting this model, but Angel Groups
seem well-positioned to evolve into this new "new venture animal."

~~~
pg
Traditional angel groups have so far been a complete disappointment. They're
more conservative than VCs.

But I would not be surprised if a new form of angel group starts to emerge.
There are a couple syndicates of ex-Googlers that look very promising. They
have lots of money, and they were all smart enough to get hired as early
employees at Google.

~~~
ecommercematt
Do you have links or other info on these guys that you're able/inclined to
share?

~~~
sunilbhargava
You should check out Tandem Entrepreneurs. We are not an angel group but co-
entrepreneurs. Have done a couple of YC companies.

~~~
prakash
Tandem looks interesting.

------
colortone
It's great to hear discussion around Umair's thought patterns that add even
more depth...

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
_That clearly doesn't square with how you saw it_

These statements don't conflict. They didn't sell out to the highest bidder,
because the highest bidder wasn't offering enough, but they had a number.

~~~
startingup
I disagree Google had a number. It was clear from many stories that they were
_really_ not interested in selling at all, so they would throw around some
outrageous number ( _knowing_ it was outrageous), so nothing would happen.

Calling such a person a seller-but-for-the-price is incorrect, IMHO.

~~~
pg
Unfortunately I can't name my sources, but they came closer to a deal than
that.

------
huhtenberg
> VC firms present an image of boldly encouraging innovation. Only a handful
> actually do.

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

~~~
pg
Sequoia as a firm is significantly bolder than the others. They really don't
care what other VCs think. I also like David Hornik and Fred Wilson.

~~~
aswanson
Any in the Boston area stand out? I know the east side is a lot more
conservative as a group.

~~~
herdrick
David Hornik is in Boston.

~~~
pg
He was teaching there for a bit but I think he lives in Silicon Valley.

------
bobwyman
The reason there are few Googles or Microsoft's, etc. has more to do with the
structure of competition and markets than it does with the factors outlined in
your essay.

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

------
muerdeme
_Instead of making one $2 million investment, make five $400k investments...
If you're investing at a tenth the valuation, you only have to be a tenth as
sure._

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.

~~~
pg
Suppose your threshold for investing in a startup is an n% confidence that
they'll one day have a market cap of a billion dollars.

Suppose instead you split that investment between 10 companies at a tenth the
valuation. How confident do you have to be that any given one will become a
billion dollar company? You have the same percentage in all these companies
that you would have had in the case of a single, big investment, so now you
only need one of the 10 to succeed in order to get the same return.

~~~
johnrice
There is a tradeoff though--accepting a smaller probability of success
increases the variance, which _deterministically_ drags down the returns. To
see the effect, extend your argument to the extreme case of very very early
valuations. You have $100k to invest, and you invest $1 each in 100k
companies, each with a 1 in a billion chance of being a billion dollar
company. Though your expected value is the same, at the end of the year, most
likely you have no money left to invest for next year. The same effect holds
in less extreme cases--if you increase your variance and lose 50% of your
money, you can't just make it back by having a 50% upswing the next year--you
need a 100% return to recoup it. So variance matters.

------
Alex3917
"The low cost of starting a startup means the average good bet is a riskier
one, but most existing VC firms still operate as if they were investing in
hardware startups in 1985."

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

~~~
aswanson
_as if they are capital intensive with low risk?_

Hardware companies are not inherently low risk because they involve hardware.
They are often, in fact, capital intensive and high risk. See early PC makers,
telecom bust, pen computing, etc...

~~~
Alex3917
My thinking was that it might be easier to judge the risks involved since
starting a hardware company usually requires getting an EE degree and then
spending several years learning by working for an established company. Whereas
since it is possible do a successful web startup with no previous experience
or credentials, VCs have less data points to evaluate the chances of success.

In any event, this debate only underscores my point about the clarity of the
sentence in question.

------
ph0rque
So far, the "design spec" for the next-generation vc seems to be:

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?

------
attack
So the biggest gap is between angels/yc clones and VCs? It appears that there
is a far bigger disparity between potential startups and angels who will fund
them. This may be hard to grasp, depending on where you sit, but there is
still a truly microscopic percentage of the workforce that gets in at the
ground floor of a startup that gets funded by outside angels.

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.

------
bmartyna
It's pretty clear that VCs are more like hedge fund managers than their name
would indicate. Hedging, trend following, even arbitrage are more important to
maintaining the IRR of the fund than developing innovative companies. This is
by necessity, rather than by preference, I imagine. No Managing Partner will
or should allow significant bets to be placed on the roulette wheel of
technology, no matter how interesting or exciting, when the entire fund, and
the livelihood and reputation of the partnership could be at stake.

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.

------
sonicsrini
TOTALLY TIMELY. thank you for this.

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

------
mrtron
This has the sense of a ploy to spur on companies to buyout for huge amounts -
furthering YC's interests. Also suggests VCs should take on more risk -
furthering YC's interests. Urges entrepreneurs to hold out even longer -
furthering YC's interests (if these entrepreneurs are in YC).

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.

------
datalyst
I agree. I recently presented at a local angel and VC conference. Many people
believed in our idea, but we were asking for $500K. I already had a high
profile company who had already signed an agreement to conduct a trial with
us. The $500K was to be used for the trial as well as marketing. I got the
same comments about traction, looking for later stage companies. At this
point, I would rather take a loan out from a bank or arrange some creative
funding than go to a VC again.

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.

------
startingup
Something about this article didn't sit well with me (as with others, judging
from the comments). It felt awfully like "Too many YC companies are out there
looking for that $300-400K, but not enough takers, so the VC system sucks"
kind of argument. To turn it around (and to be the devil's advocate), perhaps
too many YC companies aren't finding takers _because_ the investors don't feel
confident - for whatever reason - like the looming downturn or that they are
in too small a niche or they will find it difficult to find independent
traction against more well-endowed players or whatever?

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.

------
sanj
How does CRV's QuickStart program fit into all this? They appear to be
attempting to bridge the gap and be in a position to put in $250k.

<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!

~~~
Mistone
I applied a while back they said "get some traction"

~~~
sanj
Isn't that what the $250 is supposed to help do?

------
jp510
> The reason there aren't more Googles is not that investors encourage
> innovative startups to sell out, but that they won't even fund them.

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.

------
tomc
"They're riskier - so you just have to spread your money more broadly."

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.

------
ndsatya
Paul,

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...](http://satya-dash.blogspot.com/2008/05/why-we-do-not-see-more-
googles.html)

------
nehrlich
Interestingly, I just went to a talk last week talking about how angel
investors are learning to fill that gap in the funding space
([http://blog.nextny.org/2008/04/11/the-insider-secrets-of-
ang...](http://blog.nextny.org/2008/04/11/the-insider-secrets-of-angel-
investing/)). They are banding together into groups, and using a common
backend platform (AngelSoft) to make it easier for angels to evaluate
investment opportunities. Admittedly, the speaker was the CEO of AngelSoft, so
he's biased (they've identified the funding gap as a market opportunity and
moving towards exploiting it). Seems like an interesting possibility.

------
fredb
I don't think there are more Googles out there because there aren't that many
good ideas floating around. Yes, things move quickly in the age of the
internet, but the truth is, if there were more ideas as good as Google, there
would be more Googles. Duh!

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.

------
lisitski
I think this is really simple answer on the question why VCs are so
conservative. They barely understand business they invest in. That's why they
look for traction so much! Traction is just a mix of financial metrics, and
that's what they really understand. Before you can show a hockey stick chart
showing number of visitors, or better revenue or profit, there is no real
interest from VC side.

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

------
fifthmajor
I didn't have time to read though all comments, however, it appears to me that
Google has a very strong and unique culture that is often credited for
contributing heavily to the company's success. How does this factor into the
why aren't there more Googles question? I don't hear the same things about
Facebook so I wonder if in 10 years will they still be mentioned or spoken
about in the same vein? In any case, the reason I mention this is because it
seems like a very difficult part of a company to place a value upon. Perhaps
this is why "Googles" escape acquisition...

------
JamesMitchell
As noted above, the VC firm Charles River has a seed fund that invests
$250,000 per deal:

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

------
ebipere
It's the longtail of investing. The secret will always be in the filter - how
to seperate the wheat from the chaff. Right now people wait to see what
survives. How does one do this better? No idea - but let us imagine that we
can use The Wisdom of Crowds.

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'.

------
iloveyouocean
How many startups are seeking out the new, untested, crazy!, VC firms as
opposed to the ones with the established track record of blockbusters?

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.

------
jagjit
It is very interesting to learn that VCs also demonstrate herd mentality or
group think when they invest. The same behaviour is also displayed by
professional money/mutual fund managers.

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.

------
BobWarfield
The problems are as much in the beginning as the endgame. I agree that Umair
has it wrong. And I like spreading the net wider. But, all deals are not
cheaper. Google spent a fortune on early R&D, and the world has moved away
from that model, hence reducing the likelihood of building something hard with
real barriers to entry.

More on my blog:

[http://smoothspan.wordpress.com/2008/04/15/how-to-fix-
ventur...](http://smoothspan.wordpress.com/2008/04/15/how-to-fix-venture-
capital-part-2-the-opening-is-as-important-as-the-endgame/)

------
haniff
As a UK business who are setting up 'the next google' what you say is
painfully becoming obvious. The people with the money see us as 'too risky',
basically they are really stupid. We've had to become super sales guys just to
get them to even listen to us or even read the Executive Summary! It's a
strange and bizarre journey. Great to read what you have said, it confirms
what we thought. I suppose the strategy is to focus more on Angel Investors -
something we need to look at more now. www.ibodnet.com

------
kul
we sold early :(

~~~
dcurtis
Yeah, but you're rich. That at least deserves a :/ rather than a :( !

------
bgordon
This is so true. We are a startup and have had to increase the amount we're
asking for to get any interest. Really, a few hundred thousand would take us
miles, but we have to ask for 2M to get in any doors. And even then, we get
lots of "get back to us when you have more traction," just as the article
states. Bad news, VCs: we won't need you when we get more "traction," because
we built monetization into our business model, as a lot of start-ups are now
doing.

------
mmpartee
I attended a great session by David S. Rose, an angel investor and partner in
AngelSoft (doing great things in the Angel Group investing world) at
BarCampMoneyNYC a couple weeks ago and learned that Angel Investors and Angel
Groups are usually the stage between startup and VC. They are more willing to
make smaller investments in less-proven ideas. By the time a company gets to
VC stage, it needs to have a pretty well established.

------
anshu_sharma
The "another tip" part where you articulate how companies should let startups
be run by founders is actually where the difficult part is. I am not sure
Google would be "Google" if it was absorbed into a large company - it would be
a search feature.

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.

------
msk
this is a great post. It rings so true. We are a nearly ten year old
technology firm that has spent years of laser light focus on our product. The
venture industry is a herd that cannot understand innovation if their lives
depended on it and seem to care more about the politics of the venture world
rather than spending time to learn beyond the ridiculous 'elevator pitch'. God
forbid you say your technology is a major innovation and will change an
industry - I think they all would rather have a weather widget on Facebook
than actually shape an industry. I sometimes wonder if VCs are so drawn to the
Midas 8 from Google (which is 10 years old and getting dusty up at the top)
that they emulate the investment strategy of this lucky few rather than
finding their own path. Our company is now talking with Wall Street firms
about raising $100 to $200 Million over the next few months and smart money is
betting we have created a $50 Billion industry that never existed before. We
find it comical as the street has embraced our company while the VC community
continues to chase the "me-toos" while talking the talk.

------
Mistone
With so much activity on YC last week regarding FaceBook - it should at least
be mentioned that one good reason FB is garnering a $15 billion valuation is
they had the confidence/balls to turn down the early offers.

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.

------
lokeshrj
Paul, I don't see why would a startup even need $400k in its initial years.
After all, isn't the average startup just a few friends working out of
someone's basement? At the max their costs include a rented apartment,
computers, a few air flights & food. I am sure I have missed out something
big, what is it?

------
rezult
"Plus most of them are money guys rather than technical guys, so they don't
understand what the startups they're investing in do."

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.

------
nradov
For those needing funding in the middle range one option might be Band of
Angels. <http://www.bandangels.com/entrepreneurs/index.php> I don't really
know much about them, though.

------
gliderceo
Monster Venture lead by Robert Monster is a very good $100,000 to $200,000
investor. He sees value early on and really lets the founders make the most of
the potential startup. I know, because we are one of 18 companies he invested
in 2007.

------
genki831
That was a very well thought out and written essay. I invite you to look at
and join if you feel so inspired a new site called Thinklike. The address is:
<http://www.thinklike.net>.

------
rokhayakebe
AGE is the reason. SOFTWARE is the YOUNGEST OF ALL SCIENCES.

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.

------
mfmosman
"Tip for acquirers: when a startup turns you down, consider raising your
offer, because there's a good chance the outrageous price they want will later
seem a bargain."

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

------
wumi
Zoho rejected Salesforce acquisition offer.

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."

------
anthonykuhn
VCs appear to be just like the rest of us: risk averse and with a fear of
failure. I bet they put on their pants one leg at a time, too. Thanks for the
wake-up call.

------
indus
Quoting from John Battelle's book on Google,"...Page set the price at $1.6m,
but Excite CEO Goerge Bell threw Vinod Kholsa out even at $750,000..". That
was c.1998.

------
mrclark411
I totally agree. We aren't looking for $2M or $20k, we're looking for the
$400k range. Let me know if/when your VC friends get with it.

------
kyro
I feel as if the first part of that was somewhat related to the acquiring of
Auctomatic.

------
tonymeurer
Thanks,Paul.

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

Thanks.

------
nataliehodge
thanks for the vote of confidence, funding deal fell through, but still with
the big idea www.personalpediatrics.com

------
blade
A surprisingly cogent essay... i hope VCs read it.

------
freax
> _The reason there aren't more Googles is not that investors encourage
> innovative startups to sell out, but that they won't even fund them._

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.

~~~
pg
You're wrong. We care mostly about the founders. And we have funded projects
so ambitious that they've taken 2 years to build.

~~~
cperciva
I'm curious: Where does the $15k number fit into that? At one point it was
explained as "this should be enough money for you to live off for three
months" -- if you're funding groups which take 2 years to launch, how are they
supporting themselves for the remaining 21 months?

~~~
lg
you'd figure they can get more money (from angels/vc's) before they launch if
what they've got so far is impressive.

~~~
cperciva
yeah, that's one possibility -- I was hoping to find out if that was what
happened or not. :-)

------
freax
I think what's being overlooked by the article is the actual development of
some good technology -- there seems to be so much focus on the _exit_ rather
than what a startup is actually doing.

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.

~~~
spif
...but if you read the rest of PG articles, you'll see that he says _exactly_
that.

~~~
freax
...but if you look at the companies he _actually_ funds, it ain't so.

[http://www.techcrunch.com/2008/03/14/y-combinator-demo-
day-r...](http://www.techcrunch.com/2008/03/14/y-combinator-demo-day-roundup-
for-spring-2008/)

------
schammy
Great write up, agree 100%. My startup (getclicky.com) was seeking around
$100K about a year ago. We talked to a lot of people but could only find
anyone who was interested in a very small (<10K) or very large (>1M)
investment. That's not what we wanted. At this point we have not taken a cent
of investment and it has worked out fine, we're doing great on our own and it
feels nice to own 100% of our company. But there is definitely a market for
this medium sized investment that is not being fulfilled at all.

------
agentbleu
I come from another perspective, I have lost absolutely all faith in investors
period.

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.

~~~
rms
What were you selling?

~~~
agentbleu
<http://startupcrunch.org/sponsors/intimidation.php>

------
xlnt
I asked Google for permission to use their logo, but they said no.

