Musings on Entrepreneurship and Innovation
Wednesday, February 11, 2004Of Storks and Economic Development
The Economist magazine notes "Too many economists misuse statistics."
[B]linded by statistical wizardry, many economists fail to think about the way in which the world really works...[E]specially when explaining human behavior...even if a relationship exists, the wrong conclusions can be drawn. In medieval Holland, it was noted that there was a correlation between the number of storks living on the roof of a house and the number of children born within it. The relationship was so striking that, according to the rules of maths that govern such things, you could say with great confidence that the results were very unlikely to be merely random. Such a relationship is said to be "statistically significant." But the Dutch folklore of the time that storks somehow increased human fertility was clearly wrong...
Indeed, so pervasive is the cult of statistical significance...that ever more economists dispense altogether with the awkward question of whether the patterns they uncover have anything meaningful to say about the real world.
Medieval superstition and economists are easy targets of derision. But years from now, how many of our theories of economic development will be exposed as superstition based upon spurious correlation? When we put together our laundry lists of characteristics that are highly correlated with economic or entrepreneurial success, how many false loops of causation do we infer because we confuse "common sense" for intellectual laziness?
Top 10 VC Lies
This morning, I was fooling around with the BitPass micropayment system, and I downloaded a couple of Guy Kawasaki's (of Garage Technology Ventures) speeches, including one on the favorite lies of venture capitalists. Three jumped out at me:
We can make a quick decision.
I liked your company, but my partners didn't.
We can open the door for you at major companies.
Why are VCs less than forthright at times? It's all about keeping options open. Early stage investing, in particular, is full of ambiguity. The passage of time -- even a few weeks or months -- can reduce the uncertainty of an investment. By stringing a company along, a VC can, in effect, get a free investment option.
Of course, there is no such thing as a free lunch. It's really difficult to build a trusting relationship with management teams when one engages in deceit - either in commission or omission. Long ago, VCs learned the trick of tapping into their network of peers in order to gauge the prospects and capabilities of entrepreneurs, management teams, and companies. With the maturation of the private equity industry and the professionalization of entrepreneurship, management teams are using their own networks to check out prospective investors. Most of the entrepreneurs I know, when faced with evidence of small lies, tend to infer that darker behavior lurks beneath the surface. The time bought by being evasive or less than forthright can be quite costly, if it negatively effects your ability to attract great deal flow.
A few years back, I referred an entrepreneur friend of mine to Raj Atluru at Draper Fisher Jurveston. It wasn't a fit with DFJ's interests and priorities at the time, and Raj said so straight up, recognizing that he might be missing an opportunity to make a good investment. My friend was disappointed but not discouraged. Furthermore, Raj's prompt, honest response has become an exemplar of VC behavior. My guess is that Raj lost nothing by delivering a quick and unquivocal no. To the contrary, if DFJ's investment criteria and my friend's company every converge, I'm betting that Raj will get the call.