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.
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.
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.
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.