mikepk.com about current projects contact

Here's a secret: you are terrible at evaluating startup ideas

July 30, 2010

Yes, you. Now don't get defensive, there's a reason why I know you are terrible at it, you are a human being. So pardon me when, as an entrepreneur, I dismiss your description of my startup as a "dipshit company", especially when it's a judgement based on a five second cursory examination. Everyone likes to think they know a good idea / good startup when they see one. Everyone is wrong.

Here's another secret: the people who seemingly make their living by evaluating startup ideas, they're terrible at it too. You know how I know? They're human beings too.

"Wait a second", I hear you counter, "what about all the money made by venture capitalists?" Well there's a phenomenon that deserves a little attention, but the key is, they don't actually make their money by evaluating startup ideas. VC's have learned to make money from startups with a system. A system not that unlike a gambling system. VC's use a large bankroll (like professional gamblers) and evaluate factors that tip odds of success (and especially really big success) slightly in their favor. The idea is not one of them. I think in their heart of hearts, most VC's know they're no good at evaluating startup ideas. In fact, I would argue the most dangerous and inept VC's are the one's that think they can evaluate what a good idea is (and I think this is why Angel investors traditionally lose money).

Here's my last secret: those crazy sons'o'bitches that are pouring their heart and soul into starting something? They're no good at judging startup ideas either.

strategic_plan.jpgHey we're human too. What we do have is passion. We've also learned that by doing things, by learning through experimentation, we can figure out why our idea sucks (because 99% of the time it does) and how to make it better. This is the core of the lean startup movement, and historically how the majority of companies have risen to greatness (with something *other* than their initial idea).

This mini rant was inspired by Fred Wilson; "Lead Investors, Dipshit Companies, and Funding Every Entrepreneur". When we were building Grazr, all those years ago, it was intensely frustrating all of the drive-by-idea-critiques that never bothered to dig into what we were really offering. We made a ton of mistakes, but the initial idea wasn't one of them.

Here's the part I really like that resonates with me:

Mike Arrington expressed the contrary opinion, apparently held by many VCs (not me), that this mini explosion in angel investing is creating a bunch of "dipshit companies." I don't know what a dipshit company is. I haven't seen one. If you listen to the chatter on the Techcrunch comment threads, you will see that people think Twitter and Foursquare are dipshit companies. Fine. Many great companies have been built on a wall of derision and I personally think those two are going to join that list of laughed at great companies (and maybe already have). My point is you just don't know what is a crazy idea and what is a brilliant idea. And you don't know what is a great team and what is a weak team. Of course, we have our opinions on that. We make those judgment calls every day. But we are often wrong. VCs are wrong more often than they are right. It is good for VCs if 10x or 100x companies get angel funding. That is more opportunity for us.

Always love Fred's perspective.