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Return and Ridicule

Published August 21, 2017 by Jothy Rosenberg

The following is written by VC Fred Wilson and originally published on his blog. I love his sentiments here; he’s a smart guy who gets it. In the spirit of August vacations, I’ll leave the bulk of the prose to his excellent observations.

Return and Ridicule

I am going down to Princeton today to talk to Ed Zschau’s class on entrepreneurship today. Ed asked me what I wanted to talk about. I told him “return and ridicule”.

I have found that return and ridicule are highly correlated over the years. We have made more money on things that were highly ridiculed than on any other cohort. When I see people laughing at ideas and companies we have backed, I smile. It means we are going to make a lot of money on that investment.

I saw Bill Gurley say that you can only make money by being right about something that most people think is wrong. His logic was that you can’t make money by being wrong. And you can’t make money by being right about something everyone else knows. So you have to be right about something that most people think is wrong. I really like that framework.

The same logic applies to starting companies.

If you start a company in a market everyone knows is going to be big, then you will have a ton of competition. If, however, you start a company in a market everyone is laughing at, you won’t have too many competitors.

This notion also plays into Clayton Christensen‘s framework for disruptive innovation. Many of the most disruptive technologies started out as what Clay calls “toys”. The PC is a great example of that. PCs came out of the homebrew computer movement. Geeks were building computers in their garages. And everyone thought they were nuts. But from that came the Apple Computer and the IBM PC and we were off to the races with personal computers.

Chris Dixon has a great post about hobbyists. He likes to look at what the next homebrew computer club type activities are these days. When I saw Chris yesterday he was talking about drones and asteroids. I laughed. He grinned ear to ear. Chris knows that it’s good to be ridiculed.

So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illquid investments. That is a recipe for disaster. Momentum investing works in highly liquid markets (sometimes). From what I can tell, it almost never works in private markets.

Better to invest in laughing stocks. Because she who laughs last, laughs best.

 

The weekly CEO Column features Dover Founder & CEO Jothy Rosenberg’s thoughts on product, industry, community, leadership, and more. Center stage, every Monday. Be sure to subscribe to the Doverlog to never miss a beat, and continue to check in right here on our site!

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