Sorry Entrepreneurs: You’re Probably the Rule, Not the Exception

I remember starting a company some years ago, and our investors insisted on filling the board of the company with politically well-connected high-rollers that knew how to do multimillion dollar deals, the reasoning being that all successful companies have these kind of people on their boards.

But this is backwards, it's like saying that all multimillion dollar companies have a canteen for 100 people, so if you build a canteen that will seat 100 people or more you're a asuccess. Yes, all successful companies use an internationally recognized and expensive accouinting firm, yes all successful companies have a welldefined strategy for how to assign e-mail addresses to employees, and yes all successful companies print their annual report on glitted paper.

But that doesn't mean that if my small company builds a 100 people canteen, uses an expensive accounting firm, and prints it's annual report on glitted paper it will be a success. These thing are the effect of success - not the cause.

The cause of Zynga's success isn't that they don't do a lot of marketing and quora's success isn't due to the fact that they don't disclose their numbers. It's an effect.

"There are about 50 or 60 people in this room right now. About 4 to 5 of you will make 10 million dollars; one of you will probably make 100 million. The great thing about this room is that you're all feeling sorry for everyone else."

Entrepreneurs are the exception among society, but when you're comparing exceptional people to each other, yes the differences become tiny.

The real difficulty is for people scouting entrepreneurs. They're observers and the differences between founders and projects probably blurs as they see so many. It's difficult to precisely measure mental agility and fortitude, so they have to use other factors to mitigate risk (e.g. past success, strong team).

An entrepreneur has to fix a problem with the world and overcome the obstacles associated. But analysts have to turn us into objects that make their predictions easier. That may abstract away characteristics which they could miss. For them it must be like trying to predict which marble will roll the farthest down a hill. Possible, but difficult when every marble starts to look the same.

Fred Wilson talked in his blog post about Zynga not doing any advertising when there were only 3-4 founders, and that they built their user base in that way. But their eventual astronomical growth has been largely due to their ability to spend hundreds of millions of dollars on acquisition.

Sorry for the rant but steps that do exist in the traditional process are there for a reason. Correlation does not imply causation yada yada. You should finish high school and at least get a bachelor's. You do need to consider a business plan. You do need to understand the legal aspects. If all we take is shortcuts, then we will never understand what is missing!

I don't agree with their analysis that there is no bubble in Facebook's valuation because Facebook has revenue; you can't look at one company in isolation and say 'they aren't part of a bubble', you need to look at the big picture. Facebook has value because it has a lot of users and information on those users, and can use the information to target ads at those users. As pg has pointed out before, the 2000 dot-com bubble also had players like Yahoo bringing in high advertising revenues. Advertising revenues are much lower now compared to then on a CPC or CPM basis, but, especially for some targeted users / keywords, are still very high, and companies using them probably make a loss paid for from capital unless they have very high LPVs for customers, or from advertising revenue.

In other words, advertising revenue is largely hot air circulating inside the bubble, and VC capital and cross-subsidisation from other areas pays to inject into the bubble. Some companies operate entirely in the bubble - they receive large amounts of bubble advertising revenue and reinject into the bubble by spending it on advertising, to cannibalise someone else's bubble revenue. Bubbles aren't stable - as soon as investors lose confidence in the market, investment will slow down, so there will be less advertising spend, which will reduce both direct and indirect advertising revenue and reduce confidence further.

Note: If you're an ad-sponsored consumer internet startup then users are probably important unless you can quote an insanely high eCPM

1. don't take investment. it over-complicates things, and it's better to get money from customers anyway. it scales up and down better. customers hate you? well, you won't be burning much money because there's nothing much to burn. customers love you? you'll have more money, which in turn makes it easier to acquire more customers

2. don't advertise. less money spent on advertising is more for, oh, product development and "keeping the lights on" and metaphorical Ramen, and less need for investment. also, less advertising means less wiggle room for your product to suck. with less advertising, your product MUST be better, inherently, and people MUST want to tell others about it more, inherently. these are good things. a virtuous cycle.

that said, of course, given two otherwise good products/teams/markets, yes an advantage will go to whoever can advertise more. but it's rare that you have two otherwise identical and equally good products competing at the exact same time and with the same feature set and market. if it happens, fine, advertise. but probably the smarter strategy is to keep your head down and focused on the product, and to pick niches which don't appear to have big money competitors (yet). I believe there's a bottleneck and shortage of talent and taste in the world, with probably time the second most bottleneck, and both money and ideas are much farther down the list. Therefore, advantage goes to those with more talent & taste, under otherwise equal conditions.

take all this with grain of salt, as I'm somewhere between semi-am/semi-pro and wantrepreneur at this point.