Within 24 hours of each other, both The Wall Street Journal and The
New York Times wrote pieces on "then and now" re the dot-com bubble. Surely
unintentional as it was, I think they provide nice counterpoints to each
other, and also give us a small window into what "innovation" means.
Since the WSJ’s piece was first (yesterday), let’s recap its highlights:
- Recent economic research suggests that "rather than having too many
entrants, the period of the Web bubble may have had too few; at least,
too few of the right kind." - The "right kind" were precisely those startups that eschewed the reigning
wisdom of the day, summarized by the slogan, "Get Big Fast." After
all, there’s only room for so many Amazon’s, eBay’s, and Yahoo’s. - The most successful startups—survivors today—were niche
spots like wrestlinggear.com, which sells equipment to high-school and
college wrestlers. But by definition it’s never going to "get big,"
and certainly not "fast." - “It turns out there were lots of nooks and crannies for entrepreneurial
action,” says Prof. Kirsch. “But those nooks and crannies might have
been $5 million or $10 million businesses — well worth doing, though
not necessarily for VCs.” ("Prof. Kirsch" is David Kirsch, professor
of management at the University of Maryland’s business school and one of
the authors of the study.)
Today, the NYT weighed in with "For
Start-Ups, Web Success on the Cheap," which recounts the now-familiar
(to me, at least) contrast in startup costs today vs., say, in 1999. Using
the cross-platform IM company Meebo as
an example, they recount that it was started by the three founders each
contributing $2,000 from their credit cards. A month after its
debut in September 2005, it was getting 50,000 log-ins daily and needed
more servers: Angels then stepped forward with $100,000, and only
after it was well on its way did a "real" VC firm, Sequoia Capital, get
a seat at the table.
Likewise, Joe Kraus, founder of the hot/not Excite.com during the boom,
said it took $3-million in servers and software to get Excite launched,
but his latest, JotSpot (just acquired
by Google, terms undisclosed) needed a mere $100,000. The primary
reason? Dirt-cheap open source software running on commodity Intel
(or AMD) hardware, as opposed to Sun Solaris server farms with proprietary
everything.
Of course, not everyone’s happy with this plum state of affairs: The
VC ‘s, in particular, are suffering a disconnect between the scale of their
business model and the scale of today’s startups. Here’s the problem
in a nutshell:
"The problem is that as a VC, these companies don’t soak up
enough capital," [Paul] Kedrosky [a venture capitalist and blogger] said.To succeed, a firm with a $250 million fund needs a handful of investments from
$10 million to $15 million that can return payouts of $150 million or more,
Mr. Kedrosky said. But even a twentyfold return on a $1 million investment
will not do much for the success of a large fund, Mr. Kedrosky said.For smaller funds, the economics are far different. For starters, those who manage
them do not earn huge management fees. Instead, they are almost always
among the largest investors in the fund, so they will earn a return if
the investments pay off.
“I think large venture funds in this economic model have a challenge,†said Josh
Kopelman, managing director of First Round Capital.
Or, as
Michael Maples, himself head of a $15-million venture fund that targets small
footprint investments, puts it, "I came to the conlcusion taht $500,000 was
the new $5-million."
All well and fascinating, you are probably saying to yourself about now,
but what has this to do with law firms and innovation?
This:
- Successful innovations are by and large not Big Expensive Bangs, but
small, niche experiments—"nooks and crannies," as Prof. Kirsch
puts it. - "Fail early and small" beats "fail late and big."
- Likewise, "win early and small" tends to lead to "keep winning, incrementally
bigger and bigger."
So when you’re considering "innovation" at your firm, let a thousand flowers
bloom. But have the discipline of the steel-nerved trader (the only
ones who survive): Be merciless about cutting your losses, but be
profligate about letting your winners run.
Successful innovation, in other words, is for agnostics. Admit that
you don’t know in advance what will work. (If you did, would
you be practicing law?) In
the long run, only the market (your partners, your clients) will tell you
whether an innovation is a hit or a dud; so the more experiments you can
seed, the better your odds of some significant victories. And
then, sure, you can say, "I knew it all along…."
