Why Journalists Shouldn’t Try to Think Like Investors
There are way more Bay Area tech companies than I can possibly cover, so I have to say no to a lot of story pitches. When I do that, I sometimes trot out the investor analogy. It goes like this: “I’m sort of like an angel or venture investor. Except I’m investing my time rather than my money. I have to be careful not to spread my attention too thin. And I can only afford to invest in companies that, from the signals I’m seeing, have a good chance of succeeding.”
Now, this isn’t a completely ridiculous statement. Some business journalists really do operate from this this mindset. It explains why, at a lot of tech publications, 90 percent of the space goes to about 10 percent of the companies—the ones perceived to have the hottest products, the most prestigious backers, or the cleverest CEOs.
But I think I’m going to stop using the investor analogy. Not only because it comes off as a little imperious, but because it just isn’t accurate. It’s a useful excuse when I’m turning down a pitch, but the truth is that I don’t really think like an investor when I’m deciding what to cover. And it’s a good thing too. If there were actual money riding on my decisions, a) I’d lose all of my capital pretty fast, and b) I’d miss most of what’s interesting about innovation and startup culture.
Still, there are interesting parallels between journalism and investing—they just aren’t captured in my naïve analogy. I’ve had occasion to think about this lately because I’ve been reading The Launch Pad, a forthcoming book about Y Combinator, the Mountain View, CA-based seed fund and startup school. We published my interview with the book’s author, historian Randall Stross, yesterday.
Y Combinator, as you probably know, offers a three-month program devised to help hackers turn their product ideas into fast-growing, fundable companies. Stross was invited to act as a fly on the wall during the summer 2011 session, chronicling the progress of each company toward the climactic Demo Day. The book has lots of juicy material about the startups themselves, the ocean of challenges they faced, and how they managed to keep tacking toward viable business ideas, with occasional navigational help from the YC partners. But some of the most interesting tidbits are in the chapters about the investor side of the startup business.
As YC founder Paul Graham points out in an essay that Stross cites in the book, some investors are a lot more comfortable with risk than others. To Graham, venture investors are actually “fast followers” who mostly “try to notice quickly when something already is winning.” The real risk-takers in Silicon Valley, to him, are the angel investors who write most of the early checks to seed-stage companies. And at YC, the gamblers par excellence are the super-angels Yuri Milner and Ron Conway, who provide an automatic $150,000 investment, on ridiculously easy terms, to every startup admitted to the program.
Basically, Milner’s Start Fund and Conway’s SV Angel are betting that the YC partners have been smart enough to find at least one startup per session with the potential of a Heroku, an Airbnb, or a Dropbox. As long as there’s at least one such company in each batch, then it’s okay if all the rest are duds. (Salesforce.com bought Heroku in 2010 for $212 million, providing YC’s biggest exit to date. Airbnb and Dropbox have stratospheric valuations, which, everyone prays, will eventually translate into big returns.)
According to Stross’s account, Graham was blunt about Milner and Conway’s strategy with the 63 startups in the summer 2011 class. “Sixty-two of you they invested in by accident,” he told the group. “Statistically, there’s an Airbnb or a Dropbox in here somewhere. And they don’t know, especially at the very beginning of the batch, they don’t know which one it is. So they’ve got to offer you all terms that 62 out of 63 of you don’t deserve, to make sure that they get the Dropbox, whoever it is.”
Graham explores a related point in an essay he published this month, “Black Swan Farming.” It doesn’t help YC and its own investors if its companies are only mildly successful, Graham writes. To move the needle, the partners have to look for startups that will be “really big winners,” a task made more difficult by the fact that the best startup ideas look bad at first. (“If a good idea were obviously good, someone else would already have done it,” Graham explains. “So the most successful founders tend to work on ideas that few beside them realize are good.”)
The important point is that for YC, it’s all a numbers game. “The big winners could generate 10,000x returns,” Graham writes. “That means for each big winner we could pick a thousand companies that returned nothing and still end up 10x ahead.”
Now, if you’re a tech journalist with an investor mindset, you’re not angling for a huge financial return. It’s more about looking prescient. You want to be the writer who discovers the next Steve Jobs or Mark Zuckerberg. You’re willing to slog through interviews with a thousand mildly promising startups—and ignore a thousand less flashy ones—in order to find the gem. All along, you’re hoping that the products these companies are developing will be as game-changing as they seem to think. But you’re secretly wondering whether they’re wasting their time, and yours.
Here’s my main point: This is an insidious and destructive way for a writer to think. It makes perfect sense for an investor like Paul Graham, but it has nothing to do with journalism, which is supposed to be about helping people understand the truth of things. And the truth, in the innovation ecosystem, is that startups fizzle all the time, for all sorts of interesting reasons.
This isn’t tragic; it’s inevitable, given the small percentage of ideas that really are world-changing. And it may even be necessary, if you look at failure as a training exercise for entrepreneurs who will go on to create more value later. In other words, it’s just as important to understand the causes of failure at the thousand companies that returned nothing as it is to understand the causes of success at the one company that won big.
If I were to check back on all the startups I’ve profiled for Xconomy over the last five years and tally up my own “investment” record, I think it would be pretty mixed. In “Black Swan Farming,” Graham takes himself to task for being too cautious; he thinks YC should admit even more frogs with improbable-seeming, potentially unfundable ideas, reasoning that the outsized returns from the rare prince would justify the risk. But caution has never been my problem. I’ve been running a virtual affirmative action program for frogs. And if they never turn into royalty, I’m not upset.
No offense intended to any of the smart entrepreneurs I’ve covered—many of whom have hit the big time. I’m just saying that I try to base my coverage decisions on how interesting a company is, not whether I think they’ll succeed. And when I say “interesting,” I mean: likely to reveal some kind of lesson about technology or entrepreneurship that might be useful to readers.
In this sense, I think I’m a lot more like 500 Startups founder Dave McClure, who penned an entertaining piece this week called “Screw the Black Swans.” It’s a direct response to Graham’s essay. McClure writes of his own accelerator: “We’re happy to discover we have a few black swans, but our mission is to groom ugly ducklings.” He says the goal at 500 Startups is to teach promising entrepreneurs how to hustle, rather than to find great entrepreneurs and win them big investments.
That’s pretty similar to the way I feel. Thank goodness that my job here at Xconomy isn’t to pick winners or balance risk and reward. Rather, it’s to report on how entrepreneurs think, how the process of getting new technologies to market is changing, and how entrepreneurship contributes to overall economic growth. If I get to do that often enough, then hopefully my readers are the big winners.