Why (Private) Investors are Herd Animals
It’s a common complaint – venture investors are driven by what other investors think, and therefore lack imagination and spine.
There’s some truth to it – it is human nature, after all, to look for social proof and authority when making decisions. However, that’s not the whole story.
In public markets, Investors make their decisions to invest in parallel, and in theory, most of the relevant information about a company is publicly disclosed, by law. Businesses are also much more mature, and therefore easier to value. Finally, the market is very liquid and very deep, so there isn’t much uncertainty about the supply of money available and availability of money in the future.
In a public market, it’s unlikely that I have access to private data about a company’s prospects, and if I do, I buy or sell the stock and move the price. Your ability to act on my knowledge is zero – by the time you learn about it, it will already be built into the price.
By contrast, in private markets, there is a lot more non-public information scattered across many individuals, and they have the luxury of deciding in series. Businesses are brand new and immature, and very difficult to value. The market is shallow and illiquid, and a “Keynesian Beauty Contest” means that you want to finance a company now just because it is likely to be financed in the future.
Therefore, when you see other investors piling into a company, you can infer: – They probably know something about the company or the market that you don’t, given that a lot of the information (quality of founders, state of competition, true size of market, etc.) is private and scattered across many minds
- This company is more likely to get financed in the future, since it seems able to attract many, high quality investors (the aforementioned Keynesian Beauty Contest)
- And you *still have time to act at the same price* on this new information
That last fact more than any other causes Investors to move in herds.
It is rational for private investors to move in herds. They have the strong incentive – limited and diffuse knowledge. More importantly, they have the means – financings in which the price doesn’t change as the investors decide in series.
Who has time for meetings?
A lot of entrepreneurs assume that the initial way to engage with an investor is to *insist* on a meeting. It’s a relatively safe assumption that anyone on the buy side (an investor, an advertiser, an executive at a large company) receives far more requests for meetings than they can follow up on, and are constantly looking for excuses to say “no.”
Synchronous activities, such as phone calls, screencasts, videos, and webex conferences are almost as bad. If you’re trying to get the attention of an investor or exec at a major company, and don’t want to waste either your time or their time, pay very, very close attention to the cost of their time and you’ll fare better. In order of escalation, one should proceed as follows:
- Introduction – have your introducer send them an email *without putting you in the to or cc line.* That way, if the target does not wish to engage, you haven’t put them in the awkward position of having to supply an excuse or a turndown. The introducer protects their ability to be taken seriously this way.
- Once you have a response / interest, send something written for them to look over and offer a phone call, webex, or meeting as next steps. Written always beats a video or screencast, since most intelligent people can read a lot faster than they can listen. A webex demo is a crutch – if your product has to be explained, it probably isn’t ready for the average consumer. And if it’s in beta, you should at least know how to open up a password-protected demo version.
- If the target displays interest in learning more, then you can move to a call or in-person meeting.
People who insist on a webex demo or in-person meeting at the outset are forcing the target to make a high-cost decision, and are subtly signaling that they don’t value their own time, and certainly don’t value the targets’ time. They might think that they are demonstrating persistence, but one wants to see persistence in chasing the product, not in chasing dead-ends.
In short, your high-value targets don’t have time for meetings between un-screened parties, and since you’re busy building a company, you shouldn’t have time for them either.
Venture Hacks Meetup and Panel at SXSW
For those of you going to SXSW, I’ll be on the Seed Combinators Panel on Monday March 15 3:30pm. I’m joining Paul Graham, David Cohen, Marc Nathan, and Joshua Baer to talk about YStars, TechCombinators, SeedBoxes, and the like. Here’s the Plancast if you want me to “count you in.”
I’m also throwing a meetup on SundayMarch 14 5-7pm in the Four Seasons Lobby Lounge at 98 San Jacinto Blvd.
If you’re a Venture Hacker, please come talk to me about your startup and venture hacking at these two events. I’m looking forward to pressing the flesh and kissing some babies.
Please RSVP on Facebook xor Plancast so we can get a headcount. Gracias.
Docverse and Mixer Labs exit stage right
Congratulations to portfolio companies DocVerse (now at Google) and Mixer Labs (now at Twitter). The best part was getting to know and work with people that I genuinely liked and now consider friends.
The iPad is imPortant
Perhaps not in this incarnation – remember the first iPod? But the concept is very, very important for two reasons:
- It’s the first computing device that’s social in the real world. The iPhone is something that one person uses at a time. The Laptop screen faces you – two people using it at one time is awkward. iPad style devices can be shared in the real world – imagine laying it flat and playing multiplayer games facing each other, or watching a movie together, or even showing someone a web page – far easier than on any other device.
- It runs the iPhone OS. Why do users need to know what a file system is? Or map the interactions of a moving block of plastic onto a screen (mice)? Or worry about memory management? Or multiple levels of trash-delete? Or the concept of multiple, mounted volumes? Or which network you’re connected to?
Basically, the iPad is (a) usable by the other 5.5 Billion humans, and (b) it can enhance real, physical human interactions. These two facts alone make it a worthy successor to the iPod and iPhone. Steve isn’t ready to start filling niche markets just yet. He’s still looking to rule the world.
Y Combinator vs. Graduate School
Y Combinator* is the new Graduate School.
In some ways, it’s better:
- You pay to go to graduate school. YC pays you.
- After school, you get a job. After YC, you create jobs.
- You repeat the works of the greats in school. YC expects you to do original work.
- In school, you are graded on an arbitrary scale by arbitrary people. After YC, you are graded by the real world.
Some day, most schools in most disciplines will be like this.
* – Of course, “Y Combinator” is a generic term for Techstars, I/O Ventures, SeedCamp, Capital Factory, Founders Institute, and all of the other similar pre-angel incubators.
Why You Need to be in Silicon Valley
For years I didn’t believe this. I thought that you could take advantage of the benefits of Boston, Seattle, NY, Austin – cheaper talent, no echo chamber, local Universities, etc.. But I give up. I found myself telling an entrepreneur why he had to be in Silicon Valley if he wanted to succeed. Most of my points are about Consumer Internet businesses…
I won’t belabor the obvious reasons – the Investors are here, the best engineers and entrepreneurs self-select and come here, Stanford and Berkeley, yadda yadda.
Instead, here are some points that you may not have considered:
- Especially on the Consumer Internet, modern businesses are becoming winner-take-all (thanks to leverage and network effects). Therefore, if you’re 10% better than the competition, you win, likely the whole market. You need every possible edge…
- All of the companies that you need to partner with are out here. Business development doesn’t happen in formal meetings. It happens in informal coffees, parties, and relationships.
- If you are here, your network will be using all of the latest tools – Twitter, Foursquare, Quora, Nexus One, etc., before other networks in other cities will. These networks hit critical mass here earlier and are thus more valuable to the early adopters here. You’ll have a 3-month+ head start on people outside to see what’s coming next. Imagine trying to design next year’s clothing without firsthand immersion in this year’s fashion, in Milan or Paris.
Sure, it’s possible to build a great Consumer Internet business starting out somewhere else, but given that these are winner-take-all businesses, do you want to start out that far behind the curve?
Live Appearance
More of a warning so you know where not to go, I suppose…
I’ll be on a panel at the “Future of Funding” event in San Mateo on February 18th.
More information here:
The Growth of Small Firms
February 18, 2010
11:00-12:00pm
Description: There are an increasing number of venture capital firms with smaller and smaller fund sizes. These firms are starting to see some interesting returns, while remaining popular with entrepreneurs. What is working? What is not? This panel will explore how some of the small firms are investing and looking for big wins.
Fellow Panelists:
- Moderator: Matt Marshall, CEO and Editor, VentureBeat
- Mike Maples Jr., Managing Partner, Maples Investments
- Rob Hayes, Partner, First Round Capital
- Reid Hoffman, Partner, Greylock Partners
If you’d like to attend and if we know each other, please contact me and I might be able to obtain a discounted pass for you.
