Why Aren't There More Googles?

Paul Graham, a renowned entrepreneur and investor, argues that the dearth of Google-like companies is not due to startups selling out early but rather to the conservative nature of Venture Capital (VC) firms. He believes that VCs, driven by consensus and fear of risk, undervalue and often miss out on truly innovative startups.

Google's Resistance to Acquisition

• Google, despite lucrative offers from Microsoft and Yahoo, chose to remain independent.
• Graham asserts that this resistance stemmed not from a deep-seated desire to change the world, but from the fact that Google's founders, Larry Page and Sergey Brin, wanted a higher price than acquirers were willing to pay.
• This pattern repeats with Facebook, who also rejected Yahoo's lowball offer. Graham suggests that turning down acquisition offers is a sign of a startup's potential for success.
• The "balls" to reject lucrative offers are often indicative of a founder's ambition and drive, which are crucial for success in the startup world.

VCs: Conservative Guardians of Innovation

While VCs often portray themselves as champions of innovation, Graham argues that they are, in reality, quite conservative. He draws on his experience with Y Combinator, a startup accelerator, to illustrate his point.

• VCs tend to favor startups with "traction" or a proven track record, overlooking the potential of truly novel ideas.
• They are influenced by consensus within their firms and the wider VC community, often missing the best opportunities.
• Graham believes that the fear of losing money on risky investments, the pressure to invest other people's money, and a lack of technical understanding hinder VCs from embracing truly innovative startups.

The Funding Gap: Bridging the Divide

Graham identifies a funding gap in the startup ecosystem. While early-stage funding is available from angel investors and late-stage funding is provided by VCs, there's a lack of investors willing to provide mid-stage funding to promising startups that still need to refine their product and business model.

• He argues that VCs need to adapt to the changing dynamics of the startup world, where smaller, less expensive startups are emerging.
• He proposes that VCs should consider making more, smaller investments, instead of concentrating their funds on fewer, larger deals.
• This would allow them to invest in more startups, increase their potential for returns, and support innovation at a critical stage.

The Potential of "Dumb" Money

Graham concludes that the lack of "smart money" (VCs with deep understanding of technology) creates opportunities for "dumb money" to enter the market and support innovative startups. He sees this as a positive development, arguing that it will lead to a new breed of investors who are willing to take bigger risks.

• This influx of new investors could bridge the funding gap and nurture the emergence of more Google-like companies.
• It will also encourage a more entrepreneurial and innovative approach to funding.

Conclusion

In essence, Graham argues that the current VC landscape, marked by conservatism and fear of risk, hinders the emergence of more Googles. He calls for a shift in the way VC firms invest, advocating for smaller, more diversified investments. By embracing this approach, VCs can better support innovation and potentially create a new wave of groundbreaking companies, while fostering a more dynamic startup ecosystem.