Discontinuous Distribution of Innovation

I was emailing not long ago with someone whose company was recently bought by one of the usual suspects (Yahoo/Microsoft/Google/Fox). He is now doing M&A/VC advisory for his new employer — esssentially looking at startups in which said firm is considering taking an equity stake, or even buying outright.

He made an interesting comment, which I’ll excerpt here:

I just realized something that I’m sure you noticed a while ago doing venture investing: The good stuff is really good. It’s amazing how much the good stands above everything else out there. It’s like there is a huge gap between “really good” and everything else, a kind of discontinuous distribution of innovation.

I hadn’t thought about it before, but it initially had the ring of truth. Lots of stuff is way better than everything else. Maybe there is a big gap, and the good stuff is discontinuously distributed.

Maybe, but I doubt it. While really good stuff is rare, I’m not convinced it’s discontinuously so. More worrisome, this sort of talk rapidly turns into self-flattery and ex post rationalizations: I knew back in 1998 when Google came by that it was a good investment, but I couldn’t convince my asshole partners to invest in it. That sort of thing.

We kid ourselves as investors and entrepreneurs when we think we spot stuff and just know. Some of the most successful investments I’ve made were in things that almost certainly seemed broken to many observers (including me). Sure, there was good stuff in there, but there was more than enough busted china and missing pieces to keep me awake wondering whether I’d lost my mind.

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  3. Office Hours and Innovation at Google
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Comments

  1. duncans says:

    Hi Paul,
    I thaink you are absolutely right. As a long time VC and public market investor, I always talked about the time I saw a private co presentation and 15 minutes into the meeting scribbled on the back of a napkin: “I’ll take the whole financing and I want a board seat” and it turned out to be a 30-bagger. I almost never talk about the time I did the same thing and stuck $6 million into a “sure-thing” company and lost 96% of my investment. I also never talk about the times I had to be cajoled, threatened and finally beaten into buying deals that I always argued against and never really believed in. AFTER they went up 20 times, of course, I was always happy to be identified as one of those perceptive pioneers who had “always realized the potential.”
    Some of it is ego and self delusion…but some of it is also the exigencies of marketing. If you want to raise money for your next VC fund, selling yourself as the beneficiary of blind luck and other peoples’ insights doesn’t work nearly as well as portraying yourself as the prescient visionary who recognizes the ten-bagger the second he sees it. And after the 400th time giving that marketing pitch, you can’t help but start to believe it…
    Duncan