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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
October 5th, 2007

By Brent Holliday
Greenstone Venture Partners

Un-Conventional Wisdom


“My beloved lets get down to business,
Mental self defensive fitness,
(Yo) bum rush the show,
You gotta go for what you know,
Make everybody see, in order to fight the powers that be.
Lemme hear you say...Fight the Power”
– Public Enemy, Fight The Power

Conventional Wisdom can be a dangerous thing.  By definition, if you follow it, you are with the crowd and not against it, which in society might be good. But in business, particularly in entrepreneurial businesses, being with the crowd is definitely bad.  As an investor in early stage businesses, it is always bad.  Let me explain.

I think of conventional wisdom in its simplest form as “they”.  You know the conversations… they start in childhood.  “They” say that eating too much fatty food is bad for you.  “They” say that living under high voltage lines causes cancer.  “They” say that the US economy is headed for a recession.  Who are “they” anyway?  “They” are not a person, but a collection of evidence, anecdotes and persuasion that offer a conclusion.  A conclusion that is unassailable because “they” are the crowd or the majority.  “They” are a conventional wisdom.

Some of you will have read James Suroweicki’s book titled The Wisdom Of Crowds.  It was a fascinating read in which the authour shows that statistical sampling (a diverse crowd) can lead to a correct answer.  From this nicely written pretence, we got Web 2.0 theory, crowdsourcing and all sorts of new ways Don Tapscott can look cutting edge and remove money from your wallet with yet another book and speaking tour about how the Internet will change your life.  This is NOT what I am talking about.  I am talking about the danger of crowds as it relates to conventional wisdom.  Suroweicki does address this in his book quite well.  He talks about how disastrous answers come from poorly designed “crowds”.  Specifically, the hidden danger is conformity in the crowd.  One theme starts to dominate, more and more people see it as the “safe” bet and it becomes… ta-da… conventional wisdom.  I want to talk about how conventional wisdom created by the crowds can cloud your individual judgment and make you miss an opportunity.

Sometimes conventional wisdom moves to more solid ground and becomes dogma.  If conventional wisdom is defensible, dogma is inscrutable.  Gosh, I hope dogma isn’t wrong…

You are the entrepreneurs.  You are looking for opportunity constantly.  Like some sort of hyper ADD kid, you think of or hear about new ideas or new ways to sell, build or ship your existing products every day and you have to filter those down to the ones that you think will work.  You know that conventional wisdom sucks.  Conventional wisdom said that the Internet was a fad for geeks.  Conventional wisdom said that Internet advertising would never be serious money.  Conventional wisdom said that there was no way the stock market could keep going up in 1997… and 1998… and 1999…  Conventional wisdom said that no one would want a camera in their cell phone.  I could write four pages of what conventional wisdom said about market opportunities that turned out to be wrong.  The trick is to look at what conventional wisdom is saying right now that might be wrong… and place your bets.

Today conventional wisdom says that the US is going into a recession because the consumer is tapped out and cannot save the economy like they did in 2001/2002.  Conventional wisdom today says that there are no more opportunities to create a giant technology company because the glut of private equity and the market dominance of the established gorillas will always lead to you selling out before you can dominate.  Conventional wisdom says that finding early stage venture money in Canada will be harder in the next two years than in the last decade.

As I said, the entrepreneurs get it.  Or rather, they don’t conform and don’t look for opportunities where the crowd thinks they are.  It’s the investors who have a lot of trouble with conventional wisdom.  Let’s look at some examples locally:

Conventional wisdom prevented all local investors, except a handful of angels, to believe that Stewart Butterfield’s idea for an on-line social game was worth investing in.  There was no revenue model proven for gaming at that point… When he turned it into a photo sharing site with clever tagging technology, the revenue model still didn’t make sense and then he sold Flickr to Yahoo.  While it wasn’t an enormous amount of money… it was (and still is) a leader in the new Web 2.0 space.

The conformity of the investor crowd is also known as the herd mentality… it is a cancer on the investment community that they accept conventional wisdom.  Another example: Conventional wisdom is that digital entertainment is a graveyard for investors.  Yet a steady stream of companies with only friends and family money have exited well for their founders in BC in the past 5 years: Radical, Relic, Black Box and some little kids entertainment thingy called Club Penguin.  Now try and get investors to go into that space still… not on your life.  The herd rides on!

What about the investors that go against the grain?  Reject the conformity?  Sequoia is arguably the most successful VC fund in history.  Cisco, Yahoo, Google and YouTube.  Each of these was against conventional wisdom.  Cisco was rejected by most in the earliest days because conventional wisdom was that packet based networks were for niche applications.  Yahoo was rejected because conventional wisdom was that anyone could duplicate a directory of the Internet.  Google was missed by most because it was the 33rd search engine into the market and conventional wisdom was that you needed to be a market leader (remember first mover advantage?).  YouTube was spurned by most because it had a significant cost disadvantage from bandwidth costs with the way it was structured.  Sequoia placed bets against the grain and won big.

You can be safe and go with conventional wisdom… because most of the time, at least for some period of time, it is right.  But the real opportunities to make money are not with the conventional wisdom, but against it.  Clearly risk capital and risky entrepreneurs need to place bets outside of the conventional thinking in order to hit it big.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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