Funding The Right Stuff

Editor’s note: Ryan Sarver is a partner at Redpoint Ventures in Silicon Valley.

People are saying that Silicon Valley venture capitalists have lost their way. They argue that we invest far too much money in startups that are either addressing trivial markets or problems that affect a few privileged 20-somethings. “The entire Bay Area appears to have given up on solving anything but its own problems,” wrote Christopher Mims of The Wall Street Journal on July 7 in an article titled “Is Silicon Valley Funding the Wrong Stuff?

While I get his point, I think his conclusions are deeply flawed. His argument misses the mark in two major ways.

First, Mims makes the claim that money isn’t flowing where it should and points at startups focused on food delivery services or anonymous social networks to buttress the claim.

Instead, he proposes that money should go toward “research and development that transforms lives, in fields such as energy, medicine or food safety, rather than just optimizing advertising platforms.”

I think we can all agree that investing in R&D in those fields is worthwhile. But underneath the statement is a knock on areas that aren’t energy, medicine or food safety, and a belief that the companies getting funded today outside of those recognized categories are somehow unworthy.

When Google launched, many people thought it was silly to invest in yet another search engine when there were already plenty of them.

That argument unfortunately falls prey to the misconception that what seems trivial today will always be trivial. History demonstrates otherwise. Look no further than Google, Facebook or Uber, companies Mims himself singles out as transformative.

Every one of these venture-­backed companies was deemed trivial in its infancy. When Google launched, many people thought it was silly to invest in yet another search engine when there were already plenty of them. Google, of course, has gone on to be not just a phenomenal global business but also an innovator in vital areas that range from medicine to energy.

Facebook and Twitter were both considered inconsequential social toys in their early years, only to go on and become fundamental platforms for connecting people, supporting free speech and even taking part in overthrowing oppressive governments. Uber, originally conceived as a way for “privileged 20­-somethings” to get on­-demand private drivers, is already transforming the entire transportation industry, creating 20,000 new jobs a month, and getting people to buy fewer cars because rides are cheap, reliable and always available. WhatsApp began as just another messaging app. But it has made global communication free to users who otherwise could not afford it.

Time and time again, companies at inception are laughed at for being silly or for only solving the needs of a small, usually well-­to-­do population. In time, though, these same companies can evolve and touch hundreds of millions and even billions of people around the world, enriching their lives in ways few imagined.

The second flaw in Mims’ argument is that money isn’t flowing into the right businesses. He notes that 37 percent of venture capital –­­ the highest percentage since data collection began in 1995 ­­– is taken up by software companies as evidence for his criticism. This is a confusing argument since software is such a broad investment category and one that encompasses the very same sectors he would like to see improved. In fact, in many cases, software is exactly how we can fix some of the most vexing problems Mims raises. If you want to address our transportation infrastructure, for instance, you don’t invest in taxi organizations. You invest in software-­driven startups like Uber.

Our job as investors is to see around the corner.

In 2011, Marc Andreessen famously wrote that “software is eating the world.” What he meant by that is that more and more industries are experiencing disruptions and gaining value thanks to software­-driven breakthroughs. If we believe Andreessen, and all the evidence suggests we should, then more investment in software makes total sense.

But back to where venture dollars are actually going. In a recent post by my colleague Tomasz Tunguz, titled “The Hottest Startup Sectors,” we do see that money is flowing in to some fundamentally important areas. The top five fastest-growing categories for early­-stage investments, from 2009 to 2013 are, in order, the Android Ecosystem, Hardware & Software, Big Data, Aerospace, and Health & Wellness.

Sure, we are often wrong, funding plenty of startups that never meet their potential for myriad reasons. Indeed, roughly nine out of 10 venture­-backed companies ultimately fail. This gives cynics plenty of ammunition to suggest that investments and intentions are misguided. But our job as investors is to see around the corner, beyond what is just in front of us and try to sketch out a story where some simple idea can go on to be the next Twitter, Facebook, Google or Uber. Our job is to be optimists, seeing beyond frivolity and instead focusing on the potential for greatness.

We may miss more often than we’d like. But that doesn’t mean we won’t still continue to look out for those seemingly trivial ideas that can transform not just industries but also people’s lives.