Think Illogically

We know about the Google’s and the Facebook’s, companies that went from zero to tens of billions in the blink of an eye. But have you wondered how the venture capitalists, the people who fund such companies when they are starting, decide how to pick them? Which companies to fund, which ones to ignore?

Paul Graham from the venture fund, Y Combinator, described the very interesting and, of course, counter-intuitive way of thinking (if it was intuitive, would we be asking the question?) that is needed.

Most of us are risk-averse: we dislike losing more than we like winning. So if asked to invest, our first instinct is to ask, “Is it likely to succeed?”

The right question for a venture capitalist, however, is:

“Is it likely to succeed really, really big?”

Which is very hard, because as Graham says:

“You have to ignore the elephant in front of you, the likelihood they'll succeed, and focus instead on the separate and almost invisibly intangible question of whether they'll succeed really big.”

To compound the difficulty:

“That's made harder by the fact that the best startup ideas seem at first like bad ideas. I've written about this before: if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.”

For an example of “ideas that few beside them realize are good”, look no farther than Google. It is tough to imagine now, but there was a time when nobody knew how to make money of Internet search! That was the time when Google got into search; and then went out of their way to ensure others (read Microsoft) didn’t know how much money lay in search!