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The venture capital ecosystem bills itself as a meritocratic miasma of genius, with smart founders getting smart money from smart investors. In reality, there is an overwhelming reliance on privileged people bumping into each other at just the right time. This serendipity has spawned some great companies:
- Warby Parker was started because someone in an elite graduate program lost an expensive pair of glasses.
- Apple was started by a couple of guys who met at a hobbyist group in the computer heartland.
- Google’s founders met when one of them toured the other around Stanford for a CS graduate program.
But how many great problems are being ignored because we didn’t get that lucky alignment of particles?
The remodeling industry is a perfect example. It’s an $83 billion market, yet it’s only now starting to see software solutions. The industry itself bemoans neglect by the software industry. The article linked above has some impressive stats about how much waste they experience:
…studies suggest 30 percent of the construction process is re-work, 60 percent of labor is wasted, and only ten percent of losses are due to wasted materials.
Shouldn’t there be companies fighting tooth and nail over that market? Shouldn’t there be tons of solutions out there, spending money like Uber and Blue Apron are to acquire new customers and take a cut of the productivity gains?
I’m in the late-stages of having a garage built at my house and as far as I can tell, software was only used during design, not actual production. One of the contractors we considered seemed to be an Excel wiz, but wasn’t using software tailored for his industry. With better tools, these teams could have spent more hours working and thus made more money, my contractor could have done more jobs in the same amount of time and thus made more money, and yet I could have spent less on all of it and gotten it completed more quickly.
(Did you notice that even I’m relying on the serendipity of my building a garage to illustrate my point that VC relies too much on it?)
In a rational world, every reasonably sized market would have a well-funded ecosystem of software companies vying to take it into the information age. When I got my home equity loan for the garage, I should have been inundated with offers from software companies to help improve the project. Heck, someone should have offered me the loan interest-free if only I required my contractor use their software. Instead, my project is late, costs me more, and makes less money for all the workers because it’s left out of the information technology revolution.
And that’s just one industry, chosen at *cough*random*cough*. What about all of the other industries the software kings have not yet anointed as worthy, filled with deeply skilled and energetic experts who aren’t lucky enough to run in the right circles or live in the right zip codes?
Venture investors famously want passion for the problem they’re investing in solving, so much so that the companies also then demand that any employees also be passionate in turn. And we want our software companies started by developers, by product people, not by business analysts. Or carpenters.
So now to start a company you’ve got to have a software developer thrilled about and experienced in a problem, able to accept the risks that come with starting a company (e.g., losing health insurance and wages), who is living in or can move to San Francisco, and hopefully is a white dude who went to Harvard or Stanford. One way to look at that is how discriminatory it is, but another way is just how much you’re relying on everything lining up just right. It might be that you’ll find a Stanford-educated software developer who deeply cares about building houses and can take the leap into entrepreneurship. But what are the odds that that person has the right insight at the right time, and then can find the right people to partner with?
Twenty years in I’m still awed by the opportunity for software to connect, educate, and empower people, but I’m incredibly disappointed by how little of that opportunity we’ve made progress against. I think our inappropriately slow revolution is in large part thanks to this reliance on randomness. We have got to get past this if we truly want to get the most out of software before the heat death of the universe (coming more quickly now with all the energy spent mining bitcoin). If we can build an environment that does not use serendipity as a crutch, I am convinced we can generate more great companies, and importantly these companies can cover a broader swathe of the economy, and be run by a more representative sample of the market.
Let’s look to biology to see how much of a difference it makes to not have to rely on randomness. Living creatures are full of enzymes, which are basically proteins that speed up the rate of a reaction. These reactions are critical to the function of the organism, and without the enzymes speeding them up, life as we know it could not exist. (Conveniently, I did my senior thesis at Reed College on protein structure, so I’ve got more knowledge about this area than I need.)
In most cases, the reaction that they catalyze (that is, cause to happen) would happen without the enzyme, but it would do so at a far slower rate. For instance, mammalian milk contains the sugar lactose. This sugar will break down in water into glucose and galactose of its own accord, but not quickly enough to digest all the lactose in milk you drink. Mammals have evolved the enzyme lactase, which causes this splitting of lactose into simpler sugars to happen much faster.
Enzymes are incredibly complex — lactase has 1927 amino acids in five separate groups, arranged in an amazing 3D structure:
This huge structure is all necessary to enable the protein to place a lactose molecule near a water molecule in exactly the right arrangement to ensure the reaction happens immediately, every time, instead of eventually, sometimes. For all this structure, the site where the reaction takes place is quite small, just big enough for the two target molecules. Those 1927 amino acids mean the protein is about 37,000 atoms. Lactose is 35 atoms, and water is, ah, 3.
That’s a lot like building a sports stadium just to catalyze the meeting of two people.
How much quicker does the enzyme work? About 75 percent of the world’s human population is lactose intolerant, meaning that if they drink milk as an adult, the lactose will cause adverse reactions instead of safely being broken down in the intestines. The rest express enough lactase that they are able to comfortably metabolize lactose post-childhood, and thus can drink as much milk as they want. Again, remember that lactose breaks down in water on its own, just too slowly to be useful.
So here we have a situation where one of the major sources of calories around the world — cow’s milk — is enabled by this enzyme dramatically speeding up reaction rate.
What does this have to do with venture capital?
Again, venture today is heavily reliant on serendipity; that is, the right people bumping into each other at the right time in the right context. This is exactly how chemical reactions happen normally: Two molecules (e.g., lactose and water) live near each other, and every so often they bump into each other in a way that triggers a reaction. Most of the time, however, they fail to hit exactly the right setup, and nothing happens.
When the enzyme is present, though, its unbelievably complex structure ensures that the water and lactose molecules are placed into exactly the right orientation every time, and bam, magic happens.
The probability of a great company getting founded today is a lot like the probability of lactose degrading naturally: It happens, but slowly and infrequently.
I smile at the idea of complexes the size of sports stadiums built for speed-dating founding teams, but that’s not necessarily what I’m recommending here (although if that’s your plan, I’d love to consult on the project).
Even if we wanted to, I don’t think we could build a structure (physical or otherwise) like this, because we don’t yet understand yet what it takes to build a great software company, which means we can’t construct or evolve a perfect environment in which to make it happen.
All I really know is that what we’re doing now isn’t working. We’re not attacking the right markets, we’re not including enough people, and we’re not having a big enough impact on the economy, all because we’re relying too much on luck and timing.
For our ecosystem to be healthy, for it to be effective at transforming the industries that need it most, it has to do something differently. We can really only increase the rate of great company creation by increasing the rate of experimentation, or increasing the rate of success. Incubators and early stage investors are doing what they can to run more attempts in parallel, somewhat like a generative algorithm, but this is bound to have little impact because the goals — “be worth a billion dollars” — are so separate from the founding event. Investors are starting to figure this out and pull efforts back accordingly.
That leaves us the challenge of finding ways to increase the rate of success.
Of course, I have my own ideas for doing so, but I was always told as a leader my job was to present the challenge to the team and leave the problem of solving it to them.
Consider yourself challenged.
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