Winning Slowly

Screenshot 2014-09-12 21.04.39

Marc’s tweet today was timely, as this is an issue I have thought a lot about through my career (both entrepreneurial and investing.

Silicon Valley has embraced the idea of early testing and market feedback wholeheartedly, and ushered in a much more capital efficient era of startup building.  It used to take $10M+ to get a website off the ground, now it is generally live before the first outside capital comes in.  While this speaks volumes about the state of programming tools, cloud services, and other catalysts to development, it also speaks to the ethos of getting a “minimum viable product” live and in consumers hands.  Once out in the world, best practices of the lean startup encourage you to analyze the metrics and iterate on the product based on what you learn.  Startup construction has moved from art to science.

The risk of this culture shift, to my mind, is that some of the best companies were built on an irrational conviction that something is possible, despite what the metrics say.  In today’s culture, those ideas would generally be euthanized early.  While this mercy killing will generally be right, we may throw away some of the best ideas (often the hardest to prove quickly).

I just read the excellent book “Alchemy of Air“, about the entrepreneurial efforts in Germany at the turn of the 20th century to accomplish nitrogen fixation in a factory — a process that would allow you to manufacture fertilizer (and other more explosive things).  This was a HUGE and obvious market need: if you could manufacture ammonia, and hence nitrogen-based fertilizer, in a factory in Germany, the demand was obvious and large.  You would clearly sell all you could make.  Bosch and BASF worked tirelessly, and it took 15 years, but they figured out how to do it and to make it, and changed (and fed) the world (and fueled, maybe inadvertently, the German war effort in WW1).  Today’s culture in Silicon Valley would generally stop way short of inventing Haber-Bosch, for sure.

BASF was not able to keep their trade secrets secret, and after WW1 the Haber-Bosch process was copied by others and the “monopoly returns” to making ammonia based fertilizer were going to be competed away.  Bosch and BASF needed a new huge market to invent and own, and they settled on another sure thing: the graphs of car penetration in the 1920s looked like smartphone graphs today — and the world was sure to run out of oil within 10-15 years.  BASF invested massive capital to invent synthetic gasoline using Germany’s plentiful coal reserves — but most of the way through development, the great oil fields in Oklahoma and Texas were discovered, and the market price for oil dropped precipitously — and the business case for synthetic gasoline with it, as cost was an order of magnitude higher than the market price.  (The process was funded to completion by the Nazi war effort, and again used to fuel Germany’s war effort, this time in WW2).

If you’re going to pursue an idea hell-or-high-water, it has to be right.  This is hard to do, and with a generation of younger startup founders with less business experience and market perspective, it is harder to to be audaciously right.  I believe it is possible to have unshakeable belief in a business opportunity and pursue it doggedly in the face of no evidence of success, but only for entrepreneurs with unusual business insight and domain expertise.  If you’re young and want to be your own boss, and have programming skills and no mortgage so “why not” — I do think you might be right to try to start a company, but pivoting if the market doesn’t buy what you’re doing is a rational thing.  Some of these entrepreneurs will stumble or by intuition run into some very big ideas, many will learn a lot about being an entrepreneur, and our economy will grow and prosper.  It’s rational to try to “fail fast” as it will give you more swings of the bat.

Others are drawn to entrepreneurship because they have a big idea that they believe deep down to be right, or can see clearly the hole in space and time that this business would fill.  We’ve got room for those guys and gals, too.  They ought to find a patient investor who loves them for that belief, and also believes, and is prepared to support and chase the idea for a reasonable amount of time in the face of what the market tells them.  Often these will be the biggest opportunities.  Also, often, the will be the biggest failures.  It’s risk capital, and that’s a type of risk we should be taking as investors.



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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.

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