Google is an Attractive Nuisance

attractive nuisance (n.): any inherently hazardous object or condition of property that can be expected to attract children to investigate or play (for example, construction sites and discarded large appliances)

No self-respecting startup calls itself “the next Microsoft” any more. Matter of fact, calling yourself such in the Silicon Valley environ feels distinctly passe, like, say, comparing yourself to IBM in 1990. It’s as if you didn’t get the memo.
But with Microsoft an uninspiring entrepreneurial example, who is the next “next Microsoft”? Google, of course. Every article that used to muse (cliched) aloud whether Company X blah-blah-blah is the next Microsoft now muses about whether Company X blah-blah-blah is the next Google.
That is dangerous. To understand why, think of the Next Google from the perspective of a venture capitalist.
Kleiner Perkins invested $12.5-million into Google, in return for which the company got a lottery ticket that turned out to be worth $3-billion or so. The fund from which Kleiner’s Google investment came was Kleiner IX, a $460-million 1999 fund which had a negative return until Google came along. Now, however, it is almost certainly the best-performing fund in its vintage — all sins forgiven by a single investment; and it has returned $900-million to the Kleiner partners alone.
From a venture standpoint getting a Google is deathbed absolution. You can have sinned while investing for your entire fund, following quack investment with quack investment, but if you Get Just One Google you do a low save and pull the whole portfolio off. But the odds are wildly against you, with it being so improbable you ever see a Next Google that chasing after one creates a lottery effect in venture investing, one where investors pay far more overall than the expected value of the investments.
So you’re a VC, what lesson does this teach about creating the next Google? It tells you not to waste time worrying about it. There has been precisely one Google, just like there was one Microsoft. Questing around looking for another Google is a seductive waste of time and money, a species of attractive nuisance not unlike an abandoned refrigerator or an unprotected local pool: Google as role model is more a source of potential liability than an investment thesis.

Related posts:

  1. The Business of Blogging
  2. How DFJ Missed Google (and Yahoo)
  3. Sequoia Does Stealth Distribution of Google Stock
  4. “What’s to Prevent Google From Doing That?”
  5. The New Kids on the Venture Block

Comments

  1. Ben Hyde says:

    Oh, can we have a timeline of what companies have helt the “next” position? I remember Lotus!

  2. Paul K. says:

    Ah the next Lotus! I remember those days all too well! Not to screw things up by inserting hardware companies, but then there’s Data General, which was supposedly the next DEC (ahem).

  3. Brent Buckner says:

    Your concern with “a lottery effect in venture investing, one where investors pay far more overall than the expected value of the investments” seems somewhat at odds with (but not outright contradictory to) your March 3, 2005 post (“Does Price Matter In Venture Investing”).
    Overall, the VC industry’s long-run risk-adjusted return compared with that of mezzanine financing suggests that a lottery mentality may be endemic in the VC world (perhaps not surprising, given the low odds of any particular investee company being a “success”). Such a lottery mentality would kick in at a much lower hurdle than “looking for the next Google”.
    I will stipulate that under the right circumstances lottery tickets have positive expected value.