Saturday, October 30, 2010

Binary Investments, The Middle Kingdom, And Super Exits

Fred Wilson: The Fallacy Of Bimodal Returns: startup returns are not bimodal. They exhibit more of a power law curve. There will certainly be one or two venture deals every year that generate 100x or more. And there will certainly be quite a few total busts. But there are a lot of outcomes in the middle of those two.
Binary is the term used by Ron Conway, the guy in Silicon Valley who invests like he had perennial diarrhea. I read him using the term in a TechCrunch blog post a few weeks back. Binary works for him. It works because he has a track record over almost two decades, or at least a decade and a half, of not having missed out on any good deal in the Valley. He has been in all the top companies. He has also managed to get into FourSquare. And he keeps spreading the love far and wide. This past year I think he put 60% of his money into New York companies.

And the word binary does not explain. There is a method to the madness. For one the guy is super networked. He knows pretty much everybody. There is not a player in tech he can not pick up the phone and call at any time of day or night. And he has focused on people. He bets on people. He has not bothered with "domain expertise." His domain expertise is people. He picks people who think are winners, and he lets them be. He has this hands off approach. I mean, what was he going to teach Sergey and Larry about search? I seriously doubt the guy checks in. The entrepreneurs who need a lot of hand holding might not do well with him, but then even top entrepreneurs need to call up the fire department once in a while. And then who you gonna call? Ghost busters.

I am impressed Ron Conway has carried his binary philosophy all the way to New York. I have not been able to codify his method any more than I have been able to codify Barack Obama's positivity.

Fred Wilson is not the lord of The Middle Kingdom that he professes to be. He is being modest. He has produced hit after hit after hit. No VC in NYC has produced more hits. The thing is his hits are buzz hits so far. Twitter has not gone IPO yet. Zynga has not. FourSquare has not. Fred Wilson is high up in the Himalayas. But he is not the spread the seeds kind. He is the nurturing kind. He has to stay involved. He takes great pride in "domain expertise." He uses the services he invests in, religiously. He stays in touch with not just the founders and cofounders, but also people several layers below. And that makes for a great middle kingdom.

But this post by Fred got me thinking again about something I have been meaning to blog about for over a week now. People talk of super angels. I want to talk of super exits. I think the vast majority of tech startups should have the explicit goal to get bought by bigger companies and bigger companies should get much more transparent in their operations. And the super angels should be the agile matchmakers. They invest in you, and a year or two later they help you sell. If a 25 year old can make a million dollars in two years doing that, what seems to be the problem?

This also applies to music. Thanks to the disruptions of tech, I hope we will still have the Madonnas and U2s of the world, but we will make it possible for a huge crowd of people to become full time music creators who make full time income that they might have made at jobs they did not care much about. I think that has to apply to the tech startup world as well.

Boom or bust is not a great message. That is Russian roulette, not tech entrepreneurship, that is Vegas, not Valley. Binary has a zero in it. And I think there need be very few zeros. For the masses it has to be either you win big, or you win small, or at least you got to follow your passion for a few years and made market rate salary like money and paid your bills, and maybe saved some. And now go start something else, or go get a job. You accumulated a lot of contacts through your last startup.

If big companies are like jellyfish, and all tech startups already are, a startup with an active social media presence is a jellyfish, then you make super exits much more possible. A home run is rare. But you got to take a whole bunch of ones and twos. And you got to take more swings than you will take ones and twos. Binary is in the cloud. On earth you have baseball.

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