The wildly popular Instagram, when a16z invested $250,000 in the photo-sharing app in 2010, it was a relatively unknown startup. However, with the right timing and market conditions, Instagram quickly gained traction and was acquired by Facebook for $1 billion just two years later. This investment turned out to be a massive success for the investors, but it also involved an element of luck, as this rapid rise of Instagram was not foreseen. Similarly, the story of Slack, an internal tool for a gaming company pivoting to become one of the fastest-growing software tools. Or Reddit which started with the idea of building a mobile delivery app but ended up as a social network, all the way to an IPO…there are innumerable examples of such outliers which were not foreseen. Behind all the bravado and visionary talk, even the founders can’t know how big the bet could be. Uber is one of the most valuable startups in the world at about $69 billion. Its first pitch deck says that its realistic success scenario is that it gets 5% traffic of the 5 top US cities. It is currently in 72 countries and 10,500 cities worldwide. All this points to the fact that there’s definitely a fair bit of unpredictability involved. But to what degree? Is this completely a game of chance? Is it totally random? Is it Russian roulette at worst and a game of probability at best? Talking of probability theory, it reminds me of Infinite Monkey theorem, a concept that suggests that given an infinite amount of time, a monkey hitting keys at random on a typewriter keyboard will almost surely type a given text, such as the complete works of William Shakespeare. When applied to startup investment, it’s like saying if you have an infinite number of startups and an infinite number of investors, eventually one of those startups will achieve the success of a company like Google or Facebook. That is a sobering thought given how accurately the power law plays out in our part of the world. We do know the way Venture Capital works – Get a number of VCs to invest in a lot of start-ups, Few of them will eventually turn out to be big winners. Does it sound pretty much like the Monkey typing their keys to being a Shakespeare? Are we just a little more evolved species of the same monkeys as far as selecting & investing in startups is concerned? Clearly in the startup realm, success is so unpredictable that even the most seasoned investors struggle to foresee outcomes. Identifying winners upfront is uncertain. Bessemer’s anti-portfolio, where they passed on major successes, illustrates this. Even investors like Sanjeev Bikhchandani, despite notable wins in Zomato & Policy Bazar, have missed opportunities with companies like Flipkart, Snapdeal, Ola, and Big Basket. Despite this randomness, there is a breed of VCs who consistently outperform the others by a big order of magnitude. They understand that while wild success is attributed to variance, wild success itself is built on mild success. And mild success can only be explained by skill & labour. What a good VC must do is to at least ensure the investee bet is a strong one and they must be prepared to work hard for that. They use a combination of thorough research, strategic decision-making, data-driven investment practices, due diligence, diversification..pretty much everything to build a smart portfolio. Prepared Mind approach by Accel, Keiretsu approach by Kleiner Perkins, Hands on by Benchmark, Active Roadmapping by Bessemer, Aircraft Carrier by Sequoia, Early-stage bets by YC…all points to the fact that it may very well be a game of chance but equally important is the fact that chance only favors the prepared mind. Hard work will put you in places where good luck can find you. As they say, anyone can be a fisherman in May. But in the long run, seizing opportunities requires preparation, foresight, and the ability to adapt to evolving situations. It encourages us to remain vigilant for right opportunities & moments of alignment, to capitalize on them with intention and preparedness, and to recognise that success often lies at the intersection of readiness and opportunity. And that to me is wherein lies the difference between an exceptional VC and an average one, between being a Shakespeare and a monkey. To paraphrase Stephen Hawking – “We are just an advanced breed of monkeys on a minor planet of a very average star. But we can understand the (Startup) Universe. That makes us something very special.”
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