Recently Paul Graham wrote about why there aren't more Googles. While I agree with Paul that there appears to be a gap in the venture capital landscape at the moment, some things about his essay have been bothering me.
- Where are all the Googles really getting lost? The
central thesis of Paul's essay seems to be (correct me please if I'm
wrong) is that there aren't more "Googles" because VCs aren't funding
them at the earliest stage.
If a Google is a big, independent innovative startup (more on that below), there are at least three ways a Google can be killed.
- Never funded so never gets off the ground.
- Underfunded so runs into the ground.
- Acquired so ceases to be independent and thus is no longer a Google.
Paul's argument is that the bulk of potential Googles are getting killed via route #1. But let us suppose for a second that is not the case, i.e. potential Googles are raising money as needed, which by definition ends #2 as a source as well.
So then you are left with #3. Now, additionally suppose that most of the time M&A departments are getting it right on offer price. Then there aren't more Googles (big, independent innovative startups) because they were all acquired at the right price. This seems to be a sub-argument of the original post by Umair Haque that Paul answered.
...Myspace, Skype, Last.fm, del.icio.us, Right Media...all sold out to behemoths who are destroying , with Kafkaesque precision, every ounce of radical innovation with them.
Perhaps this crop of acquired potential googles were all (or at least most of) the potential Googles, but just got the right price offered to them, and corporate M&A isn't so bad after all. If there was a secondary market for private equity as Umair and others have suggest, perhaps these startups wouldn't have accepted the offers, and there would be more Googles today.
In other words, I don't see a compelling argument or compelling evidence that explains where exactly the potential Googles are getting killed. Is the essay suggesting that we just take Pauls word for it that it is all on #1, or am I missing something? I am not saying he is wrong, but just that I don't really see a backed up argument (with evidence or otherwise) for why he is right.
- What is the actual evidence?
From the evidence I've seen so far, startups that turn down acquisition offers usually end up doing better.I take Paul at his word that he has evidence on this point. I simply want to know the details. Is this just what you casually recall? Or did you talk to lots of corporate M&A departments about the specific situation of startups turning down offers, and then you tracked down what happened to them? If so, does it break down differently by size of offer? Industry? Market? Or was it some entirely different kind of evidence?
- What does "Googles" mean exactly? The essay doesn't define this term explicitly, and it is one of those things that seems obvious until you try to put a definition on it (at least to me). Btw, I understand and appreciate Paul was replying to Umair Haque's post, which originally used the term. However, I still think it should be defined explicitly so we know what we are talking about exactly. Anyway, the essay hints at the definition this way:
...the reason Google survived to become a big, independent company...So, is a Google just a big, independent company? It can't be just that or Microsoft and Exxon Mobil would be Googles. Is a Google one of the most innovative startups" or just a regular innovative startup? Or do you have to be both independent AND some form of innovative startup to be a Google?
...it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups.
The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.
This exercise strikes me as more than mere semantics. If you have to be one of the most innovative startups, that is by definition a limited number. Not all innovative startups can be the most innovative. So if you do have to be one of the most, it then seems odd to ask why there aren't more Googles since they are then (by definition) the very limited number of most innovative startups at the time.
I gather, therefore, that Paul means a Google is a big, independent innovative startup. You need big in there because his central thesis is that to create Googles you need to fund small companies, so a small startup can't be a Google yet. That leaves independent and innovative.
So does a Google cease being one upon any acquisition? Was MySQL a Google before it was acquired? Or does the market matter and they were too niche (despite a $1B acquisition)? Is Salesforce.com a Google? Was Flickr one before they were acquired? What about Reddit?
Does a Google have to be a software startup? What about a life sciences or medical device company? An innovative construction company? Enough on this issue--hopefully someone will pick this up and attempt to answer these questions.
- There is probably a gap in the VC landscape at the moment, but is it just an expected catchup lag? Despite the above, and like I said at the beginning, I agree with Paul that there seems to be a gap in the VC landscape at the moment. I have two additional thoughts on that.
First, Paul chides VC firms for "still operat[ing] as if they were investing in hardware startups in 1985." I just don't by that there has been no change in the VC landscape since 1985. Startups have been gradually becoming cheaper to start, and the venture capital world has been gradually answering. Granted, maybe the same firms aren't changing as fast as they should be. But there is more Angel investing. There are specialty funds like the new Facebook and iPhone funds. (Yes, I know those probably won't generate "Googles," but it's a start). There are funds like Union Square Ventures. And of course there is Paul's own Y Combinator and other recent additions.
My first point here is that, one should expect a response lag. Perhaps Paul is saying the lag is too long? But, sooner or later, someone will execute a fund like Paul suggests. (There are plenty of Angel funds that operate like this already (200-500K range), so maybe it is here already?) Anyway, if those funds make awesome returns, it won't be long until that model is repeated.
Or will it? Why has it taken so long as it stands? Is the supposed gap more than just a lag? I think it might be, which brings me to my second and final point. Hank Williams and others have pointed out that a lot of the answer may be explained behaviorally. And I agree. But I have a slightly different, or perhaps just complementary, point.
VCs (and angels for that matter) are really investing in people. The earlier you go to the beginning of the startup, the more the people matter because the more likelihood the idea is going to change. Paul has acknowledged this behavior several times in noting that they really concentrate on the founders when making funding decisions at his fund.
At the same time, venture funds have been getting bigger. When you have a big fund and are making small investments, you have to fund a lot of people. Paul addresses this problem this way:
Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure.
This makes sense to me. However, I suspect that VCs have a major psychological hurdle with doing less diligence in this space where people are the main component of the due diligence. If you give away $15K to a team, and the team spends all your money and gets nothing substantive done, fine. But if you give them $400K and that turns into just salary for them with no substantive results, I can see people having a psychological barrier there. It is like people are just stealing your money. So you hesitate, and have lots of meetings, give bad terms, or whatever. Are there ways around this? Absolutely. Probably, VCs should just get over it.
