Logic of the Lemmings: Making sense of the VC pile-ons

Ok, so we’re all doing social TV now.  Geolocation is so 2009.  Haven’t you heard?  Kinda seems like that sometimes, right—that the venture capital community seems to chase after the bright shiny object of the moment in droves and then just as quickly moves on to the next new new thing.  I can be frustrating for entrepreneurs who can’t seem to get a VCs interest until someone else is interested as well, but there’s actually a logic behind it, believe it or not. 

Building a successful company is super hard.  Not only do you need a great team, a great idea, and be fishing in a big enough pond, but often times you also need some serious unfair advantages.  Take Twitter, for example.  No startup on the face of the earth has ever gotten so much free PR in the history of entrepreneurship.  That occurred to me one day last summer when I was watching Fox Saturday Baseball Game of the Week: Red Sox-Angels.  They got into a Twitter conversation that lasted a full six minutes.  What would it have cost to buy up that much national airtime during the broadcast for a commercial?  Now, it’s everywhere—making their cost of acquiring a customer essentially zero.  That’s an unfair advantage.

This is especially the case when you’re doing something not just super hard—but ridiculously hard.  Want to build a version of Facebook that protects your privacy privileges?  Good luck trying that *before* Facebook pissed off a lot of influential users and sent the media and even the government into a tizzy.  After?  Get out of jail free and collect nearly $200k dilution-free on Kickstarter because you’ve got the ire of the crowds behind you at the right moment.

Sometimes, when smart, influential people start to focus on a theme or specifically a company, it pays to start watching it.  Sometimes it pays to jump on board before a lot of big questions have been answered—simply because you can feel the market starting to notice it and create mindshare momentum.  The “minds-eye” of the market has focused its gaze upon you and is lifting you into prominence.  The trick is figuring out the timing.  Back when I was at Union Square Ventures, Fred started to get really excited about podcasting.  We looked at every podcasting deal on the market.  I even started referring to him as a podhead.  Turns out the initial market buzz didn’t come to fulfillment—a false signal of a wave that never materialized.  Luckily, we didn’t pull the trigger on anything—but we were certainly early to thinking about it. 

Momentum at the right time paves the way for startup success.  I remember one day last summer when Dennis Crowley and I both went to pitch the same biz dev partner—me with Path 101 and him with Foursquare.  I just had just written about Foursquare on my blog, so I was actually invited to his biz dev meeting, too.  In fact, I think that’s how this potential partner learned about Foursquare.  Everyone was singing Foursquare’s praises and trying to figure out ways to work with him—well before he was even ready to take on a partner.  It starkly contrasted with how my Path 101 meeting went—it lasted 15 minutes and it was clear that I was pushing a boulder up a steep, steep hill.  They just weren’t interested. 

Markets have a funny way of deciding what’s hot—and when your number comes up, it’s like a whirlwind.  When it doesn’t, you might as well be trying to draw blood from a stone.  That can make or break a company—and so it’s really not surprising when VCs play the momentum game.  It’s simply more likely for a startup to be successful when the media is focused on what they’re doing, when biz dev partners make what you’re up to a priority, and when you get the kind of buzz that makes all the best people want to work at your startup.  It takes a lot to achieve escape velocity as a startup.  Sometimes you get their on your own power, but sometimes you clearly get help from a wave.

Take this one company I saw super early a few months ago—probably even too early.  I met this awesome, super smart guy proposing to do something terrifically difficult—something that even if he succeeded, I wasn’t exactly convinced he could get a lot of users for it.  People are busy, they have lots of pains, priorities, responsibilities—unless you can start a meme and wave of change—which isn’t exactly easy to do, customer acquisition costs can be quite high.  I told him I just couldn’t get there on it.

Undaunted, he went back to work, got some great partners on board, and kept plugging away.

Then, something happened… the right people started to notice what he was up to and talk about it.  You could feel it coming up in conversation more and more.  The media picked up on the idea and you could sense the wave starting to build.  With the right media attention, open doors at biz dev partners, and a spark to motivate consumers—the risk/return profile of the deal starts to look a little bit different—a lot different.  It might seem like lemming behavior, but momentum and enthusiasm is an important factor to getting off the ground.  Was I wrong to turn the company down the first time?  Maybe… maybe not.  I’m certainly more supportive of it now.  What I’m definitely right about though is that if these early signals of interest in the company are the beginnings of a wave of attention, the company will have a lot higher chance of success and that really chances the profile of the deal.

The question I haven’t answered yet is whether or not an investment alone creates a wave—I don’t think so, not unless the market is primed to receive the company… which is why you tend not to get paid off having early conviction on a company the rest of the world simply isn’t ready for.