Herding cats, in Silicon Valley and beyond

“There is no market for this ingenious new technology! Sorry. A large touchscreen smartphone, and only one single button? People will never buy that” (Nokia executives, two years before the iPhone came out). “People want to type with ease, not on a screen” (Blackberry CEO 2007)!

Even though you have an excellent idea, it does not mean that you will be able to fund your new venture or for that matter get any customers to part with actual money for your new genius solution… We all know this. And many products and ideas die for all the right reasons. Maybe there simply is not enough economy in the product to support a venture. Maybe your solution simply does not solve a customer problem. Maybe you are not the genius you thought? After all, how hard was that PhD, really…

Or, maybe, you’re on to something so profound and disruptive that nobody understands how to estimate it’s market potential? Nobody seems to understands how to measure and assess risk in the venture that you propose? If there is no existing market, most scholars on the subject will tell you that very seldom does the first mover actually win.

History is riddled with stories of early inventors who got put to shame by a later entrant who had the ability to execute faster and bring products to market that people actually wanted to buy, at the right price. Examples are plenty; some that come to mind are Google (not the first search engine) and the iPhone (not the first smartphone). Both of these examples come from the very modern age of Silicon Valley entrepreneurship but you will find more on the same tangent in basically every product category where you have one dominant player.

“So I’m screwed? My BioTech startup is on the verge of creating a new category. Is this why everybody with money (governments, customers and investors) all seem to agree that we are too early, or too risky? Is there nobody out there with vision?”

Sure there is. There are people out there that take risks.

But, nobody today will part with any money until they understand market and technical risk of your venture. And with understand they really mean something that they at least have read about in their Twitter feed, on Techcrunch or have seen others investing in (or, at the very least talked about at that last investor luncheon at the Four Seasons Palo Alto).

With so many opportunities in todays world of extreme abundance (cheaper computing etc.), why make moon-shot bets on things that don’t have enough hype… Hype, as in, talked about in media, among investors and analysts who feed off the aforementioned two categories?

Hype… That sounds just too silly. Would advanced individuals in positions of power really fall for the hype?

You bet. Most people with a lot of intellectual and monetary capital have been fostered, taught and conditioned to control risk and to manage uncertainties. Just think about it for a second. Hundreds and thousands of MBA’s and PhD’s graduate every year from schools that all teach basically the same case studies in business and the same principles of economics.

The top graduates end up being employed by investment banks and corporations where ranks of earlier graduates of the same schools already work. These advanced individuals all know how to calculate financial risk in projects. In addition, they also know that they really want to keep their prestigious jobs. Which adds to the disincentive of being a contrarian. Following the hype will never render you a contrarian. Following the hype, and claiming that you are invested in all the hot business categories can only work in your favor.As they used to say about IT executives in the 1980’s, “you don’t get fired for buying IBM”…

Further to the above, venture money, hedge funds and banks are either regulated by law, or, in the case of VC’s, conditioned by their LP’s to simply "outperform the market”. Which in today’s low interest rate economy does not require more than what historically would be considered a mediocre performance.

Today, most entrepreneurs and investors, with astoundingly few exceptions, flock towards business models and enterprise valuations (pre and post money) that only have one viable option to create enough value to please all stakeholders… Namely the pre or post Series B exit… Follow the hype and engineer for the quick flip! Don’t risk your career!

Change the world or create an app? That is the question.

Rhetorical question. Which company would you like to mention that managed to change the world, or even made even the slightest dent in the universe (quote from Bill Gates) before having a viable revenue model (i.e. being a real company with paying customers). And, don’t say Instagram. If you do, you will just prove the point.

Instagram will not change the world. Sorry.

Instagram, or that new messaging app you are about to create, will not cure cancer. It will not even cure headaches.

So we, the business school graduates, who end up managing those crazy/brilliant scientists (that is how it usually ends up, not the other way round) have been purposed by law, schooling, career ambitions and fiscal policy, among others, to reduce risk.

"If it aint broke don’t try to fix it... Silicon Valley is creating vast amounts of wealth and value to humanity”. Said the investment banker…

Can I please see a show of hands of who is satisfied with how capital in e.g. Silicon Valley, in general, is deployed to conquer some of humanities greatest challenges? Anyone? No?

Not broken huh?

Investment Bankers and money managers cannot, with a strait face, meet their LP’s and explain why they missed that 1% corner in Snapchat because they were evaluating something more profound.

In all fairness, who can blame them? They also have families to feed and Teslas to buy.

No, in all seriousness, bankers as well as most successful entrepreneurs in the valley (that I have met and talked to) prefer tinkering. Placing many bets on solving similar problems is the way to manage risk, hedge your bets... They all seem to prefer incrementally improving existing products and solutions until they fit the market.

PRODUCT MARKET FIT, they shout! LEAN STARTUP AND CUSTOMER DEVELOPMENT, you scream back ! This is how Silicon Valley was created! I read it in that book by Eric Reis… (High fives and bro-hugs for everyone)

Well no, not really. Silicon Valley was in large created by three coinciding forces. A perfect storm, of sorts.

• First you have the obvious part which technological improvements played. The Transistor being the most celebrated example
• Second, the federal government made venture/angel-investing possible by joint investing through tax breaks. Which in fact created a completely new capital class and market for bankers
• And third. The Military, through wartime efforts and far beyond, have been the single largest customer of most of the early (and many present) early stage Silicon Valley companies.

Noteworthy of the three factors above is that they all have to do with creating new markets in very different ways. The transistor was a genius invention for sure. But, without government and military spending through grants and millions in orders, the new market (starting with the transistor radio and leading up to the PC industry) would perhaps not have become what it is today.

So, all we have to do is to invent the next transistor, that’s where it all started? Made out of Nano tubes maybe? Make bigger bets!

Yes, perhaps.

But, even more important, the point above is that basically all investments and intellectual capital today is deployed towards fixing problems in existing markets. Markets that are already well defined and easy to categorize. Markets that everybody else also can quantify and where existing companies are active (and later on can act as acquirers, remember?)…

Markets and compartmentalizing industries

So, who defines the markets? Where is the invisible hand that through some sort of funky black magic has told all bankers, media outlets and entrepreneurs that this is the year for Fin Tech or Ephemeral Messaging or 3D printing? Where does this come from? Why does everyone in Silicon Valley (and, about six to nine months later in the rest of the world) suddenly wake up and realize that “today I have to start a company that makes augmented reality apps for Wearables”… (Remember where you read it first).

The answer to what causes such sheepish behavior could possibly be found in psychology, behavioral economics and ethnography, or perhaps in studies of ant farms. Who really knows?

What I do know is that the hype seemingly and very conveniently changes approximately on a yearly basis. Think about it. How awfully 2012 doesn’t Video Messaging Apps sound? Or, when was the last investment made in Social Analytics… Today, it’s all about the Internet of Things. Well, at least until next year that is, when media, innovation celebrities and influential people who raise funds (i.e. the VC’s who love blogging and stardom more than actually helping entrepreneurs win new markets) need something new to talk about. There are plenty of empty conference venues to fill… And, plenty of corporate executives with more or less severe cases of “Fear-Of-Missing-Out syndrome” (FOMO) to milk for money.

No, it would be much more interesting to see how we can actually work together to create hype for more profound and important topics that can actually impact humanity and affect industry structures at large.

There are plenty of really cool things happening in e.g. Bio Tech that can have impact on billions of people’s daily lives but where current industry dogma and structure create enormous barriers of entry (which in turn spells riskfor investors). The same companies that today depend on their livelihood from existing structures will also fight for maintaining the status quo (taxi and hotels are current, albeit non Bio Tech related examples). These companies also have deep pockets and great relationships with governments and policy makers… Making the risk even higher for funding disruptive innovations.

During the Eisenhower Fellowship we, the fellows, have discussed the above at length and articulated the core problem as being one of risk aversion. And this is not only within the investment community and within large companies. Also governments and public institutions want ever more applied science with shorter and shorter time to market.

Tech incubators, in turn, all talk about de-risking their companies (a word that seems to have caught on heavily on this side of the Atlantic but was new to me).

The idea being that you should find a place in an existing market and value chain where you can compete with slightly better price or quality. “Don’t try to educate the market if you are a startup. That is the fastest way to die…”

Of course this is true (myself and Matt Doerner-Miller even wrote about exactly this in our book last year). If you are a startup, or a new venture within a large company for that matter. You most likely will not have enough resources to both invent a new technology at the same time as you try to educate your customers on new ways of working and buying…

Creating Hype

I strongly believe that organizations such as the Eisenhower Fellowships could have a strong role to play here. As discussed above, new markets are created in part by technological inventions and in part by governments and investors. The latter heavily influenced by hype. As with many fellowships and formal networks we have, at arms length, the possibility to influence all of the above. This is especially true in broad networks (as the Eisenhower Fellowships is) that range from former presidents to scientists to journalists and beyond…

All we need to do now is to figure out how to channel the power of our formal and informal networks towards creating hype that can truly change the world in a profound way… How hard can it be? It’s not like we are trying to herd a flock of cats!