There are way more Bay Area tech companies than I can possibly cover, so I have to say no to a lot of story pitches. When I do that, I sometimes trot out the investor analogy. It goes like this: “I’m sort of like an angel or venture investor. Except I’m investing my time rather than my money. I have to be careful not to spread my attention too thin. And I can only afford to invest in companies that, from the signals I’m seeing, have a good chance of succeeding.”
Now, this isn’t a completely ridiculous statement. Some business journalists really do operate from this this mindset. It explains why, at a lot of tech publications, 90 percent of the space goes to about 10 percent of the companies—the ones perceived to have the hottest products, the most prestigious backers, or the cleverest CEOs.
But I think I’m going to stop using the investor analogy. Not only because it comes off as a little imperious, but because it just isn’t accurate. It’s a useful excuse when I’m turning down a pitch, but the truth is that I don’t really think like an investor when I’m deciding what to cover. And it’s a good thing too. If there were actual money riding on my decisions, a) I’d lose all of my capital pretty fast, and b) I’d miss most of what’s interesting about innovation and startup culture.
Still, there are interesting parallels between journalism and investing—they just aren’t captured in my naïve analogy. I’ve had occasion to think about this lately because I’ve been reading The Launch Pad, a forthcoming book about Y Combinator, the Mountain View, CA-based seed fund and startup school. We published my interview with the book’s author, historian Randall Stross, yesterday.
Y Combinator, as you probably know, offers a three-month program devised to help hackers turn their product ideas into fast-growing, fundable companies. Stross was invited to act as a fly on the wall during the summer 2011 session, chronicling the progress of each company toward the climactic Demo Day. The book has lots of juicy material about the startups themselves, the ocean of challenges they faced, and how they managed to keep tacking toward viable business ideas, with occasional navigational help from the YC partners. But some of the most interesting tidbits are in the chapters about the investor side of the startup business.
As YC founder Paul Graham points out in an essay that Stross cites in the book, some investors are a lot more comfortable with risk than others. To Graham, venture investors are actually “fast followers” who mostly “try to notice quickly when something already is winning.” The real risk-takers in Silicon Valley, to him, are the angel investors who write most of the early checks to seed-stage companies. And at YC, the gamblers par excellence are the super-angels Yuri Milner and Ron Conway, who provide an automatic $150,000 investment, on ridiculously easy terms, to every startup admitted to the program.
Basically, Milner’s Start Fund and Conway’s SV Angel are betting that the YC partners have been smart enough to find at least one startup per session with the potential of a Heroku, an Airbnb, or a Dropbox. As long as there’s at least one such company in each batch, then it’s okay if all the rest are duds. (Salesforce.com bought Heroku in 2010 for $212 million, providing YC’s biggest exit to date. Airbnb and Dropbox have stratospheric valuations, which, everyone prays, will eventually translate into big returns.)
According to Stross’s account, Graham was blunt about Milner and Conway’s strategy with the 63 startups in the summer 2011 class. “Sixty-two of you they invested in by accident,” he told the group. “Statistically, there’s an Airbnb or a Dropbox in here somewhere. And they don’t know, especially at the very beginning of the batch, they don’t know which one it is. So they’ve got to offer you all terms that 62 out of 63 of you don’t deserve, to make sure that they get the Dropbox, whoever it is.”
Graham explores a related point in an essay he published this month, “Black Swan Farming.” It doesn’t help YC and its own investors if its companies are only mildly successful, Graham writes. To move the needle, the partners have to look for startups that will be “really big winners,” a task made more difficult by the fact that the best startup ideas look bad at first. (“If a good idea were obviously good, someone else would already have
