7 ms·

Chamath Palihapitiya says most of the things VCs have funded are "mostly crap"

85 points by jackgavigan 11y ago

kafkaesq 11y ago
Well, strictly speaking he said "most of the things we’ve funded are mostly crap and largely worthless." Which isn't that far off from the title -- but still, that just wouldn't have been click-baity enough, now would it. So they just had to tweak it, I suppose.
- deleted 11y ago
  [deleted]
- jackgavigan 11y ago
  Fixed. ;-)
ergothus 11y ago
Is there a reason that's surprising? The difference between a great idea and a dumb idea is largely commercial success. Amazon was crazy when it started, now it's huge. Startups are experimentation, and you have to try lots of things to find the right things. I'd be _worried_ if most startups didn't end up "crap" in one way or another - it would mean we were being too conservative in our experimentation. That doesn't mean we have infinite tolerance for "crap", but to say "mostly crap" doesn't seem alarming to me.
- B1FF_PSUVM 11y ago
  > Amazon was crazy when it started, No, it was not. Amazon started out by just selling books, which others had already been doing before Bezos came along. For instance, books.com belonged to an outfit in Ohio that would sell you books through a telnet terminal interface (http yet to come). Amazon marketed better ("a river of one million books") and executed well on the web. Books.com was sold to Barnes&Noble a few years later.
  - ergothus 11y ago
    I'll stand by my position. BOTH Amazon and books.com were crazy initially. Books had never had been proven to be sellable in quantity to an audience that hadn't physically seen them. The web was so young, it was still called the World Wide Web in the media, and everything was expressed in strained superhighway analogies. We can look back on it and say "Of _course_ people will want to do shopping online", but that's with the benefit of hindsight. While it was a _stupid_ idea, it wasn't a well-proven one. Nowadays Amazon can spend quarter after quarter deliberately avoiding profitability, and no one strenuously questions it because it is known they can focus on profitability anytime. Back then it was a far more open question if they had something people would want, and something that wouldn't be easily copied by the established competitors.
    - B1FF_PSUVM 11y ago
      > audience that hadn't physically seen I heard the Sears&Roebuck catalog was quite a hit in its time. Also, some people made some money selling by mail and phone. Crazy stuff.
      - ergothus 11y ago
        Snark is funny, but you're doing exactly what I said: commenting with the benefit of hindsight. Obviously SOME people, ENOUGH of the RIGHT people thought it would work, because Amazon existed, but I'll point out that books WEREN'T big sellers in those catalogs you speak of. I remember when Amazon was founded. (Heck, I was taught how to order from a catalog in Home Ec classes). A lot of people found the idea cute. Laughable. Or maybe just naive. I mean, sure, you could sell SOME stuff in a catalog, but would enough people want to buy books that way? (SciFiFantasy book club ala Columbia House notwithstanding) And that assumed enough people understood these fancy "home computers" to order things. All with enough volume to justify the costs. I mean, we're talking about a time when no one said "Amazon", they'd say "www.amazon.com" (WWW required when you said it!), and that's assuming they didn't say "H.T.T.P. colon. uh, is that forward or backslash?..." and so forth. I mean, had the idea NOT been crazy, it'd have been done earlier. And when it was enacted, lots of smart people had doubts. Lots of rich people didn't try to get their foot in that door. All because there were very realistic doubts. They just turned out to be horribly wrong and Amazon succeeded like crazy.
- S4M 11y ago
  By "crap", I think he means something like "poorly understood copy cats of successful ideas", not "really bad ideas". See the whole quote: > I think what we’ve had is a handful of investors who have extreme vision who make great investments in things that are amazing businesses: Facebook, Google, Uber. And then everybody else reacts to that success by trying to do the thing that most approximates the thing that’s working. As a result, most of those businesses are fundamentally not good, they’re poorly run, and they never should have been invested in in the first place. But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google.
  - sinatra 11y ago
    I can actually see why some VCs would invest that way though. A startup proves that there's a massive market opportunity (think Uber's initial days), it's still not a certainty that that startup will be the eventual winner. So, I can see some VCs thinking: Now that one of the biggest risks (finding whether there's a market at all) is reduced, we can just build a better team and maybe become a much better second-mover. Or, although I am convinced that there's a massive market, I disagree with how the first-mover is trying to handle it.
thaumasiotes 11y ago
In other news, https://en.wikipedia.org/wiki/Sturgeon's_law https://en.wikipedia.org/wiki/Sturgeon's_law . This applies to everything.
bikamonki 11y ago
Which is how the VC roulette works: bet on all numbers hoping at least one will pay many, many times more. No?
- rdl 11y ago
  Except what probably terrifies them: each VC firm probably only bets on, at most, 2/36. And the industry as a whole only really bets on 18/36.
  - econner 11y ago
    Why 36?
    - rdl 11y ago
      Just using the roulette analogy from above. Roulette wheels have 36 numbers (well, they also have 0 and 00. Maybe that's recession and global thermonuclear war.) In reality it is worse because you don't actually know the number of companies, and you don't get presented with the same options as everyone else -- a good part of being a top investor is access to top dealflow.
gtirloni 11y ago
we’d ship in lunch and probably two to three times a week the lunch had maggots in it Can't continue reading past this. They were ordering food from a place that 2-3x a week delivered maggots? Please.
- fapjacks 11y ago
  It raises questions about everything else he says.
  - deleted 11y ago
    [deleted]
  - bobbygoodlatte 11y ago
    Chamath wasn't in charge of the food. I'm sure he told the relevant person within the company and I'm pretty certain that problem didn't last very long.
    - pavel_lishin 11y ago
      > I'm pretty certain that problem didn't last very long. More than once is too long.
      - anxman 11y ago
        I worked at Facebook back when food was a problem. We didn't quite have maggots 2-3x a week but we did have maggots more than once. We used a lot of different caterers but quality was a persistent issue. Randi actually handled a lot of the food services back then. Corporate catering has evolved a lot since 2007 and there are a lot of better product offerings now for startups to use.
    - estomagordo 11y ago
      It's not just that. A place serving maggots several times a week simply does not exist. At least not in the developed world. Or even in the US.
grandalf 11y ago
The broader thing I've realized of late is that so many startups exist simply because they are building something that appeals to VCs, not something that necessarily appeals to any sort of customer. So we have reason to be skeptical of any claim to wisdom from VCs and even any claim to understand relevant metrics or KPIs. Good VCs are humble about this, but others posture behind it. What we should really be wondering is how many bad decisions are made by startups based on pressure from VCs. Since average (non-accredited) investors are prohibited by law from investing in early stage startups, those who are not prohibited get a highly leveraged game which some are bound to play successfully several turns in a row. There is nothing wrong with this, but it's sad to see promising startups make bad decisions because they are simply striving for rapid growth at all cost.
dekhn 11y ago
I'd say that roughly 90% of things VCs fund fail. A VC which could reduce that reliably to 60-70% YoY would be considered godlike. Think of VC investments as a portfolio where you expect most of the investments to fail, but the few that succeed give you 1000% gains. As mentioned elsewhere in the comments, this is consistent with Sturgeon's law (and other power laws).
- st3v3r 11y ago
  See, that illustrates another problem: Everything is considered a failure unless it nets 1000%. Taking a more critical eye toward what you invest in, and having more realistic views of success, and therefore not pushing insane growth on everything, would make things much more successful overall.
partycoder 11y ago
There's a lot of apeness in the world of startups and tech. Is Whatsapp worth $55 dollars per user? If you pay 1 dollar per year and you have no advertisement? Really hard to believe, unless the money is coming from monetizing nosy activities. Doesn't possibly add up.
nxzero 11y ago
Why would an investor complain that other investors are wasting capital on deals unrelated to their investments?
imron 11y ago
Isn't that the whole premise of VC funding though? Invest in a bunch of things, most of which will fail, but make that back from a big payout from the ones that succeed.
- TheOtherHobbes 11y ago
  I'm not sure what the premise of VC funding is. But I'm baffled when VCs invest in businesses that don't have a business plan that demonstrates a reasonable likelihood of actual profit margins within a reasonable pay-off time, as opposed to steady losses of unknown and unstated duration. That's pretty much the definition of a failed business. So when everyone seems very surprised that businesses like this fail, it's even more surprising that they're surprised by it. I think there's a serious opportunity for VCs to fund workable but unspectacular non-unicorns with reasonable but not explosive growth potential. But maybe that's just not exciting enough, while hyper-growth is, even with no profitability. I can't pretend to understand it, because it makes no sense to me.
sidechannel 11y ago
Reminds me of Geordie Rose who said most people in Silicon Valley work on things that don't matter and won't last
PhantomGremlin 11y ago
What was unmentioned in the article, and here in the comments as of yet, is ZIRP, Zero interest-rate policy.[1] Central banks around the world have made it easy to borrow money almost for free. That money must be invested somewhere, because keeping capital in the bank has negative interest rates in many countries! That's a big reason why there's so much venture capital sloshing around. What else are they going to do with it? Buy a German 10 year Bund that returns 0.18% per year, or maybe a US Treasury that's about 2%? Why not take a chance on the next startup instead? After all, maybe Tinder for Cats is the next big thing? [1] https://en.wikipedia.org/wiki/Zero_interest-rate_policy https://en.wikipedia.org/wiki/Zero_interest-rate_policy

85 points by jackgavigan 11y ago

Well, strictly speaking he said "most of the things we’ve funded are mostly crap and largely worthless." Which isn't that far off from the title -- but still, that just wouldn't have been click-baity enough, now would it. So they just had to tweak it, I suppose.

deleted 11y ago
[deleted]
jackgavigan 11y ago
Fixed. ;-)

ergothus 11y ago

Is there a reason that's surprising? The difference between a great idea and a dumb idea is largely commercial success. Amazon was crazy when it started, now it's huge. Startups are experimentation, and you have to try lots of things to find the right things. I'd be _worried_ if most startups didn't end up "crap" in one way or another - it would mean we were being too conservative in our experimentation. That doesn't mean we have infinite tolerance for "crap", but to say "mostly crap" doesn't seem alarming to me.

B1FF_PSUVM 11y ago
> Amazon was crazy when it started, No, it was not. Amazon started out by just selling books, which others had already been doing before Bezos came along. For instance, books.com belonged to an outfit in Ohio that would sell you books through a telnet terminal interface (http yet to come). Amazon marketed better ("a river of one million books") and executed well on the web. Books.com was sold to Barnes&Noble a few years later.
- ergothus 11y ago
  I'll stand by my position. BOTH Amazon and books.com were crazy initially. Books had never had been proven to be sellable in quantity to an audience that hadn't physically seen them. The web was so young, it was still called the World Wide Web in the media, and everything was expressed in strained superhighway analogies. We can look back on it and say "Of _course_ people will want to do shopping online", but that's with the benefit of hindsight. While it was a _stupid_ idea, it wasn't a well-proven one. Nowadays Amazon can spend quarter after quarter deliberately avoiding profitability, and no one strenuously questions it because it is known they can focus on profitability anytime. Back then it was a far more open question if they had something people would want, and something that wouldn't be easily copied by the established competitors.
  - B1FF_PSUVM 11y ago
    > audience that hadn't physically seen I heard the Sears&Roebuck catalog was quite a hit in its time. Also, some people made some money selling by mail and phone. Crazy stuff.
    - ergothus 11y ago
      Snark is funny, but you're doing exactly what I said: commenting with the benefit of hindsight. Obviously SOME people, ENOUGH of the RIGHT people thought it would work, because Amazon existed, but I'll point out that books WEREN'T big sellers in those catalogs you speak of. I remember when Amazon was founded. (Heck, I was taught how to order from a catalog in Home Ec classes). A lot of people found the idea cute. Laughable. Or maybe just naive. I mean, sure, you could sell SOME stuff in a catalog, but would enough people want to buy books that way? (SciFiFantasy book club ala Columbia House notwithstanding) And that assumed enough people understood these fancy "home computers" to order things. All with enough volume to justify the costs. I mean, we're talking about a time when no one said "Amazon", they'd say "www.amazon.com" (WWW required when you said it!), and that's assuming they didn't say "H.T.T.P. colon. uh, is that forward or backslash?..." and so forth. I mean, had the idea NOT been crazy, it'd have been done earlier. And when it was enacted, lots of smart people had doubts. Lots of rich people didn't try to get their foot in that door. All because there were very realistic doubts. They just turned out to be horribly wrong and Amazon succeeded like crazy.
S4M 11y ago
By "crap", I think he means something like "poorly understood copy cats of successful ideas", not "really bad ideas". See the whole quote: > I think what we’ve had is a handful of investors who have extreme vision who make great investments in things that are amazing businesses: Facebook, Google, Uber. And then everybody else reacts to that success by trying to do the thing that most approximates the thing that’s working. As a result, most of those businesses are fundamentally not good, they’re poorly run, and they never should have been invested in in the first place. But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google.
- sinatra 11y ago
  I can actually see why some VCs would invest that way though. A startup proves that there's a massive market opportunity (think Uber's initial days), it's still not a certainty that that startup will be the eventual winner. So, I can see some VCs thinking: Now that one of the biggest risks (finding whether there's a market at all) is reduced, we can just build a better team and maybe become a much better second-mover. Or, although I am convinced that there's a massive market, I disagree with how the first-mover is trying to handle it.

thaumasiotes 11y ago

In other news, https://en.wikipedia.org/wiki/Sturgeon's_law https://en.wikipedia.org/wiki/Sturgeon's_law . This applies to everything.

bikamonki 11y ago

Which is how the VC roulette works: bet on all numbers hoping at least one will pay many, many times more. No?

rdl 11y ago
Except what probably terrifies them: each VC firm probably only bets on, at most, 2/36. And the industry as a whole only really bets on 18/36.
- econner 11y ago
  Why 36?
  - rdl 11y ago
    Just using the roulette analogy from above. Roulette wheels have 36 numbers (well, they also have 0 and 00. Maybe that's recession and global thermonuclear war.) In reality it is worse because you don't actually know the number of companies, and you don't get presented with the same options as everyone else -- a good part of being a top investor is access to top dealflow.

gtirloni 11y ago

we’d ship in lunch and probably two to three times a week the lunch had maggots in it Can't continue reading past this. They were ordering food from a place that 2-3x a week delivered maggots? Please.

fapjacks 11y ago
It raises questions about everything else he says.
- deleted 11y ago
  [deleted]
- bobbygoodlatte 11y ago
  Chamath wasn't in charge of the food. I'm sure he told the relevant person within the company and I'm pretty certain that problem didn't last very long.
  - pavel_lishin 11y ago
    > I'm pretty certain that problem didn't last very long. More than once is too long.
    - anxman 11y ago
      I worked at Facebook back when food was a problem. We didn't quite have maggots 2-3x a week but we did have maggots more than once. We used a lot of different caterers but quality was a persistent issue. Randi actually handled a lot of the food services back then. Corporate catering has evolved a lot since 2007 and there are a lot of better product offerings now for startups to use.
  - estomagordo 11y ago
    It's not just that. A place serving maggots several times a week simply does not exist. At least not in the developed world. Or even in the US.

grandalf 11y ago

The broader thing I've realized of late is that so many startups exist simply because they are building something that appeals to VCs, not something that necessarily appeals to any sort of customer. So we have reason to be skeptical of any claim to wisdom from VCs and even any claim to understand relevant metrics or KPIs. Good VCs are humble about this, but others posture behind it. What we should really be wondering is how many bad decisions are made by startups based on pressure from VCs. Since average (non-accredited) investors are prohibited by law from investing in early stage startups, those who are not prohibited get a highly leveraged game which some are bound to play successfully several turns in a row. There is nothing wrong with this, but it's sad to see promising startups make bad decisions because they are simply striving for rapid growth at all cost.

dekhn 11y ago

I'd say that roughly 90% of things VCs fund fail. A VC which could reduce that reliably to 60-70% YoY would be considered godlike. Think of VC investments as a portfolio where you expect most of the investments to fail, but the few that succeed give you 1000% gains. As mentioned elsewhere in the comments, this is consistent with Sturgeon's law (and other power laws).

st3v3r 11y ago
See, that illustrates another problem: Everything is considered a failure unless it nets 1000%. Taking a more critical eye toward what you invest in, and having more realistic views of success, and therefore not pushing insane growth on everything, would make things much more successful overall.

partycoder 11y ago

There's a lot of apeness in the world of startups and tech. Is Whatsapp worth $55 dollars per user? If you pay 1 dollar per year and you have no advertisement? Really hard to believe, unless the money is coming from monetizing nosy activities. Doesn't possibly add up.

nxzero 11y ago

Why would an investor complain that other investors are wasting capital on deals unrelated to their investments?

imron 11y ago

Isn't that the whole premise of VC funding though? Invest in a bunch of things, most of which will fail, but make that back from a big payout from the ones that succeed.

TheOtherHobbes 11y ago
I'm not sure what the premise of VC funding is. But I'm baffled when VCs invest in businesses that don't have a business plan that demonstrates a reasonable likelihood of actual profit margins within a reasonable pay-off time, as opposed to steady losses of unknown and unstated duration. That's pretty much the definition of a failed business. So when everyone seems very surprised that businesses like this fail, it's even more surprising that they're surprised by it. I think there's a serious opportunity for VCs to fund workable but unspectacular non-unicorns with reasonable but not explosive growth potential. But maybe that's just not exciting enough, while hyper-growth is, even with no profitability. I can't pretend to understand it, because it makes no sense to me.

sidechannel 11y ago

Reminds me of Geordie Rose who said most people in Silicon Valley work on things that don't matter and won't last

PhantomGremlin 11y ago

What was unmentioned in the article, and here in the comments as of yet, is ZIRP, Zero interest-rate policy.[1] Central banks around the world have made it easy to borrow money almost for free. That money must be invested somewhere, because keeping capital in the bank has negative interest rates in many countries! That's a big reason why there's so much venture capital sloshing around. What else are they going to do with it? Buy a German 10 year Bund that returns 0.18% per year, or maybe a US Treasury that's about 2%? Why not take a chance on the next startup instead? After all, maybe Tinder for Cats is the next big thing? [1] https://en.wikipedia.org/wiki/Zero_interest-rate_policy https://en.wikipedia.org/wiki/Zero_interest-rate_policy