AGILEVC My idle thoughts on tech startups

July 26, 2007

I’ve been thinking of moments of brilliance in the context of technology startups. We often look back at decisions that were made, strategies pursued, or investments completed that ultimately produced exceptional outcomes. But it’s usually only in hindsight that there’s broad acceptance of the “genius” of any of these moves.

Let me give some concrete examples from the recent history of consumer-facing internet startups:

News Corp acquires MySpace for $580M – In retrospect, it’s easy to say that News Corp CEO Rupert Murdoch and former Fox Interactive Media President Ross Levinsohn were brilliant. MySpace is reportedly on track for about $1 billion in revenue this year, and it has given FIM both a platform and the credibility to pursue a bevy of other acquisitions since then(Photobucket, kSolo, NewRoo just to name a few). But just two years ago when the deal was announced, there was plenty of skepticism around the wisdom of the move. The NYT opined that the price was “sure to ignite debate about valuations and durability of new media companies” since MySpace was only two years old. They went on to point out that similar companies have seen “the number of users skyrocket but then decline”. Maybe this whole online media thing has legs after all, huh?

YouTube Avoids Pre-Rolls in Early Days - There are many portions of the YouTube story which now in retrospect look like genius. Sequoia Capital invested a significant amount of capital as the sole VC investor (no syndicate partners with whom to “share” the risk), and the result was a half billion dollar payout to Sequoia upon Google’s acquisition of the company. But what I find interesting was the founders’ decision fairly early on to eschew early revenue opportunites from pre-roll video advertising in order to maintain a clean user experience propelling viral growth. As surveys of YouTube users later indicated, pre-rolls likely would have hampered this viral growth. Time will tell whether Google’s bold move to acquire YouTube for $1.6B was “genius” or not. Keep in mind it was only announced 9 months ago and closed <6 months ago… my hunch is that it will pay off nicely for GOOG. But either way as you look back it seems that Chad, Steve, and Jawed (and Sequoia as VC backers, and members of the board) were correct that in order to become the dominant online video platform, they needed to assiduously avoid anything that dramatically impacted growth.

VC Firm X Invests in Facebook at Y Valuation – You can probably point to two decisions here as datapoints… Accel’s initial investment in FB in 2005 at a reported post-money valuation in the $100M neighboorhood and then Greylock’s subsequent round in 2006 at reported ~$500M valuation. I recall a panel discussion of VCs I attended in late ’05 where a general partner at a respected firm expressed his dubiousness that FB’s valuation from Accel was even remotely merited and cited it as an example of that dreaded “b” word (bubble). Even David Sze, GP at Greylock that led the subsequent investment, had the honesty to admit that at the time he thought the Accel round valuation was “pretty crazy”. But now, having turned down repeated acquisition offers >$1B, it’s widely accepted that Accel will make well in excess of 10x their initial investment and Greylock stands to do quite nicely even with their later stage round.

I don’t mean to pick on those who are skeptical at the time, and there’s always the risk of revisionist history (success always has many proud fathers). But bottom line… genius is easy to recognize in retrospect, but usually hard to spot prospectively. Brilliant decisions are demonstrated primarily by the passage of time (a.k.a. the 4th dimension in physics lingo, for those who may be rusty on their science), and all of the outcomes above also required focus, hard work, and a bit of luck. But in the moment, making a “genius” move frequently requires some cocktail of foresight and courage to be a bit of a contrarian. It’s usually only after time has passed and the chips have settled that genius can be accepted and admired by the rest of us.