Sorry Entrepreneurs: You're Probably the Rule, Not the Exception

I was in the air an average of 30 hours a month for the last two years, so I watched a lot of movies — typically semi-delirious on Ambien– that I wouldn’t ordinarily. One of those was the star-studded rom-com “He’s Just Not That Into You.” Note: You won’t see this movie at the Oscars tonight, or any night, and that’s not because it was cruelly overlooked. But as a plane movie, it sufficed.

I’m assuming most TechCrunch readers are far to Y-chromosomey to have seen it or even admit they’ve seen it, so I’ll fill you in on the thrust of the film. Like most things in life, the simplest explanation is usually the right one: If a guy doesn’t call, he didn’t lose your number, he isn’t away on business in Yemin, he wasn’t kidnapped and held at gunpoint– he just didn’t want to call you. All these fairy-tale stories that lonely girls thrive on about how the jerky guy one day woke up and realized how great you are may have happened to somebody, sometime, but that person was the exception, not the rule.

The somewhat cold message of the film is that you shouldn’t live your life assuming you are the exception. (Of course as rom-coms go, the main character does end up being the exception, undercutting the wisdom of the point. But for the purposes of real life, let’s pretend she didn’t and moved on to someone else.)

Believe it or not, this movie came up in conversation at a dinner party in Silicon Valley the other night. The conversation was about the impact of the over-the-top valuations of Facebook, Groupon, Zynga and Twitter. While there’s a lot of hand-wringing about how crazy these prices are– they’re not reminiscent of the bubble for several obvious reasons. In the late 1990s hundreds of companies were going public at multi-billion dollar valuations in less than a year of operation without revenues. In contrast, we’re talking about four companies, who are still private, mostly raising private funds at these crazy prices, and who — other than Twitter– have very substantial revenues and sharp growth rates. We can argue whether Facebook should be worth $10 billion or $30 billion instead of the recent $70 billion, but no one is arguing that a shift in the stock market would force the company to file bankruptcy and go out of business. That is what happened in 2000. Indeed, Facebook’s valuation grew during the largest economic downturn since the Great Depression.

But the venture capitalist sitting next to me argued that there is one legitimate gripe with these four companies’ prices: Every startup wrongly assumes these four companies are the new rule, and not the exception.

Similarly, every company that says they have no idea how they’ll make money – but that’s ok because Google didn’t either – is confusing the exception with the rule. And likewise, Fred Wilson’s post this week that great companies with great products– like Zynga– don’t need marketing is confusing the exception with the rule. Wilson is right, if he’s talking about the exception. The uproar over the post was because most startups are the rule. In fact, most of the debates you see amid VCs and Super Angels boil down to this distinction: One group is trying to fund only exceptions, the other accepts it’ll probably mostly fund the rule. Recently, a startup came to pitch me that refused to give me any details about its market traction, users or growth– even off the record. When I asked why we should consider the company newsworthy without any information to show the product was well-received, the founder answered, “Well, Quora doesn’t have to give user numbers and TechCrunch writes about them all the time.” Yes, I said, but you aren’t Quora.

Unfortunately the inverse of these exceptions aren’t true: Just because you don’t spend money on marketing doesn’t mean you are a great startup, just because you’re planning on spending two years building a product before you generate revenue doesn’t mean you’ll be the next Google and just because you’re a consumer Web company at this moment in time, doesn’t mean you deserve an outrageous valuation just because Facebook, Groupon, Zynga and Twitter got them.

The economics of venture capital are based on finding the exceptions, but there are typically only a handful in every cycle. The cold truth is it’s binary: You are huge or you are the rest, and there are typically at least four zeros between a number one player, and a number two player. And in the consumer Web, you typically know early on which camp you’re in. Facebook’s valuations have been considered ridiculously outsized since Accel gave it a $100 million valuation.

This isn’t to say there aren’t great successes, millions made and worthy products that come out of companies that are the rule. I’d put TechCrunch in that camp. We weren’t worth a billion dollars, and we probably have made far more money for other people than we ever made ourselves. I’m insanely proud to have been a small part of it. But while great entrepreneurs are dreamers, they’ve always got a foot firmly planted in reality. It’s important to know what camp you’re in, before you burn bridges, pick the wrong partners simply for a higher valuation or get seduced to start a company for the wrong reasons.