The best outcomes often looked ridiculous first
An investor who backed Twitter when it was a punchline has reason to distrust the obvious. The lesson holds for a portfolio in a way it does not for a single company.
Ideas that most people derided as ridiculous have produced the best outcomes. Don’t do the obvious thing.
When Union Square Ventures invested in Twitter in 2007, the service was widely mocked as a place where people announced what they had eaten for breakfast. Fred Wilson, a partner at the firm, put the pattern into a rule. The line above appears in his write-up of a February 2011 class visit at Harvard Business School, among the takeaways he listed from the session.
The reasoning behind it is about prices. An idea that everyone agrees is good attracts many founders and many investors, so competition is fierce and valuations are high from the start. An idea most people consider foolish attracts few of either. If it turns out to work, the few who backed it own a large share of something nobody else priced correctly. Ridicule, in that reading, is a sign that the market has not yet caught on.
For a venture investor, the logic is sound. Venture returns come from a small number of very large outcomes, and the large outcomes are more likely to come from ideas that did not look promising, since the promising-looking ones were bid up. An investor with twenty or thirty companies can afford many ridiculous bets that stay ridiculous, because a single one that works can return the fund.
A founder’s position is different. A founder usually has one company, not a portfolio. Most ideas that people call ridiculous are ridiculous, and the rare exceptions are only visible afterward. A founder who takes derision as a sign of being on the right track is misreading a filter that works across many bets as a signal about one. Being mocked tells nothing on its own about whether the idea will work.
Derision is also cheap to produce. Commentators mock many new products, and the mockery is aimed at whatever looks unfamiliar, whether or not the business underneath is sound. It carries little information in either direction.
There is also room for the obvious thing, depending on the goal. Opening a good bakery in a neighborhood that lacks one is obvious, and it can be a fine business. It will not produce a venture-scale outcome, which is the only kind of outcome Wilson’s sentence is about.
The useful reading for a founder is narrower than the line. If an idea is dismissed, find out why. If the reasons are about habit or taste, the dismissal may be an opening. If they are about economics, such as customers who cannot pay or costs that cannot fall, the critics may simply be right.