Where Einstein Meets Edison

Instagram VCs are celebrating their own obituary

Instagram VCs are celebrating their own obituary

Apr 12, 2012

One billion dollars. 100% leveraging in one week. 280X for Andreesen-Horowitz, the venture capital firm which invested $250,000 in Instagram in 2010. So many records have been broken by the Facebook acquisition of Instagram and these are records that will be very hard to break in the future. No doubt, this is Silicon Valley’s venture capitalists most glorious moment (those who are not crying over missing this bonanza, at least). But should they be celebrating?

The VC glee is understandable, since they believe they have just proven to us all that their system is back in business full-steam ahead. They think that this is what entrepreneurs needed to see in order to take the VC worship to an unprecedented level. After all, they have just demonstrated that the holy grail of venture capitalism is right in front of us: lots of money can be created out of very little effort, time and energy. Hurray!

The only problem is that this is like a lottery ticket vendor celebrating a customer’s winning and trying to convince everyone that there was a method behind the customer’s success. Can future entrepreneurs learn anything from this sale to analytically direct themselves toward a winning strategy? No one, including the Instagram founders, the Facebook executives and their VCs, believes that anything but sheer luck was behind this motherload. They were all at the right place, at the right time, and nothing more. Hi-tech entrepreneurs tend to like risk, but they also tend to understand that buying lottery tickets is a waste of time. More and more entrepreneurs that I speak to, here at MIT, in San Francisco, in Israel and anywhere else are saying that they are starting to realize that it is better to aim for smaller scale ventures, rather than go for the whole jackpot. This trend will endanger the VC model of big hits.

While many pessimists are referring to these events as the initial undercurrents of a new dot com bubble, the real problem lies right on the surface. Many aspiring entrepreneurs, as well as established ones, feel betrayed by the Instagram deal. Not out of envy, but out of fear that they cannot replicate a billion-dollar startup without relying heavily on elements of luck.  No one can claim that there is really anything morally wrong with the VC’s winnings, except for the inevitable message that other entrepreneurs get from it, which is the opposite of what VCs think it is. This message has two parts: the first states that the only way to make a billion-dollar exit is to have extreme luck. The second part is the old mantra that says that the only deals that VCs are looking for are billion-dollar deals. Therefore, the only conclusion from combining these two parts is that if you do not want to rely on luck, you should stay away from the billion-dollar ventures, and inevitably, from VCs.

Getting a company to a $30 million valuation is something that is definitely doable, through hard work, technological brilliance, smart marketing and sharp business strategic thinking. It is also doable by bootstrapping or small-scale fundraising, instead of attempting to approach the big sharks. More and more entrepreneurs are realizing this and the day that the VC drinking-well will dry out, is not too far away. The Instagram deal will mark the beginning of the end of VC Titanics and the beginning of a return to medium-size investment opportunities. The VC-king may be celebrating now, but the bootstrap-jester and the angel-clown are the ones who will live long.

Stav Davis