"We Like To Invest In College Dropouts With Insane Ideas Going After Tiny Markets With No Way To Monetize." ~Ben Horowitz
Adam Rifkin stashed this in @a16z
Frederic Landanois writes:
At the DLD conference in Munich today, venture capitalist Ben Horowitz took the stage to discuss why he and his firmAndreessen Horowitz invest in a company and its founders. Last year, he said, Andreessen Horowitz found 2,355 companies that were potentially worth investing in that passed the company’s initial screen. In the end, Andreesen Horowitz only closed 24 deals (excluding seed deals). The companies that made it, he cheekily argued, are those started by “college dropouts with insane ideas going after tiny markets with no way to monetize.”
Let's see, PandaWhale was started by 2 college dropouts.
PandaWhale has an insane product in a tiny market with no way to monetize.
The only thing we're missing is winning the lottery and being 1 of the 24 companies a16z liked.
24 deals out of 2355 -- that's a 1% acceptance rate. That's tough.
Every meeting I've walked out of with a16z (and I've lost count how many companies I've been involved with that pitched them) even though I know they weren't going to fund the company, I felt it was the best VC meeting I ever had & they really understood what we were trying to do, sometimes even better than we did.
Perhaps that's why they didn't fund those companies?
Thought they knew more about the space than the companies did?
Well in the kerosene case, it was because we had no idea how we were going to monetize it--or more specifically how much it could be monetized for once we found a method. Here it is almost 5 years later and it turns out that automated media tagging is the hottest thing again.
Consumer images. We say a lot about ourselves when we post pictures of ourselves or our families or friends. A picture used to be worth a thousand words, but the advent of Big Data has introduced a significant multiplier. The key will be the introduction of sophisticated tagging algorithms that can analyze images either in real time when pictures are taken or uploaded or en masse after they are aggregated from various Web sites.
There's an old adage in venture capital: it hurts more to be too early than to be too late.
Perhaps they knew it was too early then?
Talking about crazy ideas, Horowitz noted that in 1975, software wasn’t something people would invest in because it always came with the computer. The market was too small, you couldn’t sell it yourself and most people thought something like Altair Basic wasn’t a viable product. Still, that’s what Microsoft essentially did. In 1998, web search was considered to be a bad idea and investment because most of the search companies that had already launched weren’t able to make any money, yet Google figured it out. Other examples of companies that started with a bad idea that then turned into a major company noted by Horowitz were theOdeo podcasting service that turned into Twitter and Burbn, which turned into Instagram.
An idea that gets funded, he noted, has to be a breakthrough idea. It has to be an order of magnitude better than what is currently available. The problem, however, is that those breakthrough ideas – by definition – look like they are insane. Even the smartest people will pass on great companies because they know too much about the old paradigm that they can’t comprehend the breakthrough. Airbnb, for example, sounds like a crazy idea – even the name, he noted, sounds like it’s a bad idea. Now, more people rent Airbnb hotel rooms in New York than Hilton hotel rooms.
The key characteristic to look for, says Horowitz, is an incredibly brilliant entrepreneur with a seemingly berserk idea. Who are these great entrepreneurs? Using the college droputs Mark Zuckerberg, Steve Jobs, Larry Ellison and Bill Gates as his examples, Horowitz said that what he looks for are brilliance, courage and a breakthrough idea. Unless you have the brilliance to pursue it, you don’t get into college and unless you have courage and a breakthrough idea, you don’t drop out (though I think Horowitz was really talking about elite colleges here).
Horowitz also noted that even though Silicon Valley is often accused of having great ideas but problems with coming up with good business models, Horowitz argued that companies like Amazon, Facebook, Twitter and others were often underestimated in the beginning and that many analysts believed they could never turn into profitable businesses. All of these ideas initially looked crazy and impossible to monetize, yet all of these companies eventually figured it out.
It's a good story. We just have to remember how incredibly against the odds each of these companies were.
Henry Blodget adds:
Horowitz says the entrepreneur is vastly more important than the idea--because if an idea is lousy, a great entrepreneur will see that quickly and then change the idea. Horowitz ran through several examples of this, which includedPayPal, Google, and other massive home runs.
Great entrepreneurs, Horowitz said, have two key qualities:
The reason for the first one is obvious.
The reason for the second one, Horowitz says, is that the other virtues that everyone wants to see in successful people--honesty, integrity, etc.--all flow from courage. And if you don't have courage, in times of stress, honesty, integrity, and other virtues can quickly go by the wayside.
Specifically, Horowitz says, if you don't have courage, you won't be honest when being honest will hurt you (when the idea that you've staked your company and reputation on turns out to be lousy, for example).
And if you don't have courage, you won't have the guts to walk away from a good, safe opportunity to pursue an opportunity that most people think is crazy.
All four men were on tracks that would lead to success.
And they all walked away.
In hindsight, that looks easy to do--an obvious decision.
At the time, it was likely anything but.
So in addition to brilliance, Ben Horowitz says, Andreessen Horowitz looks for entrepreneurs who have courage.
Courage is key. Courage is hard. Courage.
So essentially founders need Wizard of Oz qualities.
Brain. Heart. Courage.
I just re-read Ben Horowitz's thoughts on going after tiny markets with no way to monetize.
I'm convinced that it's really, really, really, really, really, really, REALLY hard.
Next to impossible hard.
So hard that only 1% of companies THAT GET LOOKED AT BY A16Z get a chance to do it.
Let's say a16z only looks at 1% of the companies that come their way.
Then your chances of surviving long enough to get funded are 1 in 10,000.
Some companies do it. 99.99% of companies do not.