When innovators sell out

Great response by Umair Haque to Fred Wilson’s discussion about fixing the venture investment ecosystem.

Let’s revisit the spectre haunting venture capital. Why aren’t there more Googles?

The answer’s very simple. Because every company that had the potential to be economically revolutionary over the last five years sold out long before it ever had the chance to revolutionize anything economically.

Think about that for a second. Every single one: Myspace, Skype, Last.fm, del.icio.us, Right Media, the works. All sold out to behemoths who are destroying, with Kafkaesque precision, every ounce of radical innovation within them.

Let’s replay the Google story. Google, despite serious interest from Microsoft and Yahoo – what must have seemed like lucrative interest at the time – didn’t sell out. Google might simply have been nothing but Yahoo’s or MSN’s search box.

Why isn’t it? Because Google had a deeply felt sense of purpose: a conviction to change the world for the better. Because it did, it held on and revolutionized the advertising value chain – and, in turn, capital markets gave Google an exuberant welcome.

See the point? If all Larry, Sergey, and Google’s investors had wanted to do was to sell out fast to the highest bidder, they could have done so at any time. But they didn’t: they chose to revolutionize something that sucked – and so a tsunami of new value was unlocked. That’s how Google was made.

Now, I agree with Fred. Equity capital markets are myopic, beancounterly, and soulless. But it’s not venture’s job to fix those problems. The real problem is internal: structural inertia and risk-aversion. . . .

The dynamics of old boy’s clubs are almost deterministically predictable: they fight tooth and nail against risk, against the radical, against any kind of change to the status quo. They’re great at “monetization” – cutting deals – but the last thing old boy’s clubs are good at, unfortunately, is sticking up, come hell or high water, for innovation. From music, to publishing, to food, to autos, the outcome of locked-down boardrooms has been innovation stifled and suffocated. . . .

  • Jeff,

    You missed the elephant in the room: Sarbanes-Oxley. That law changed the game, and made the move to being a public company a lot more expensive than it was previously. When an entire segment of the market responds the same way, it’s not about “selling out”. Something bigger is going on.

  • Sam

    But Google is also really guilty of killing innovation. Whatever happened to Grand Central? Or Jaiku? Or Feedburner? All of them continue to exist, but none have done anything since selling to Google.

  • I read The Google Story and if I remember correctly Google tried to sell out to Yahoo for $1 million when they originally came up with the algorithm, but Yahoo didn’t think search was worth anything so rejected them.

  • carson

    I agree with Jeff. Sarbox changed everything. Enormous elephant. What’s needed is the right access to capital, and that means having more options than M&A and IPO. It stifles growth and the creation of new markets. If something like GSTrUE, or OPUS-5 can work, then you have more options. As a result, your decision process changes for the better. They have the potential to help mid-stage companies go the distance without the hassle of going public. That could be huge.

    When a mid-stage company with real revenue and a short path to profitably wants access to capital for growth it has limited options; VC, Strategics, Debt, and later-stage investors.

    VC may not be the best route if the future return doesn’t fit their 5-10x model and you have to take a terrible liquidation preference in return.

    Strategic investment may require giving away important strategic information that limits your edge should the strategic investor be in direct competition with you.

    Debt is dangerous, especially now.

    Later-Stage investors are more attractive than the other three, but they want an exit event eventually and right now it’s either selling the company to a bigger concern, or taking the company public. The company may not want to do either.

    These new private markets could benefit the mid-stage company by providing liquidity to early and later-stage investors AND provide further access to capital at the same time – and without the hassle of going public.

    That is far from selling out – it’s having the right access to capital to grow markets and companies. By providing this kind of access and liquidity, VC’s can look at deals in a new light. The entire capital supply chain of creating new markets can function better.

  • Incisive. What is the Dem parade to 2009 saying about this? (For a perspective on what it means to writing, content management, and content production, see: “The Googling of America: Soliciting Writer Whores to Turn Cheap Tricks” at http://www.associatedcontent.com/article/558671/the_googling_of_america_soliciting.html …) MKM

  • Clyde

    Sam: your missing the point a little bit. The Point of the article was about the little guys selling out too quickly. Of course once you sell to a bigger corp the bigger corp will just look it the smaller corp as another asset in its portfolio. Plus all the companies you named were sub-niches of web 2.o not big enough to be a Google in their own right.

    That is the main reason this is a silly proposition. You have to a company that 1) is making ridiculous cash NOW 2)It has to be the type of site that people will return to on a daily basis so that you can communicate your new ideas to them.

    YouTube.com was the only corp big enough to do 2 but did not generate cash. Still hasn’t. Plus all the lawsuits its going to have fight off. It could not survive as a stand alone.

    Yes guys the problem with investors is they demand profits. Spoken like some one is not now nor ever will have wealth.

  • adsl

    yeah but they are all millionaires. selling out is good

    who cares if all the content i get is from fox / viacom / aol

    they give me my free content .

  • If ONLY I could sell out!

  • Google rather quickly realized they had something of real monetary value and hence the urge to cash in was not too big. The same could not be said about the others who more or less all struggle to deliver what’s essential in a business context: Real revenue and profits. In that respect you could say that these other examples, you mention, got the max value out of their start ups: They got someone else to pay their bills…

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  • Joe_HTH

    LOL! Jeff Jarvis, you are completely full of shit.