Anyone who knows me knows that I drink a freakish amount of Diet Coke. I mean we’re talking ten to twelve can-equivalents per day. Usually in the form of a Double Big Gulp purchased at Palo Alto’s own Hamsterdam, the 7-Eleven on Lytton.
Anyhow, I’ve been really dismayed of late because these hi-tech Coke Freestyle machines keep popping up. Have you seen them? As sexy as a Ferrari (they’re designed by Pinninfarina) and smart as heck (cool technology abounds, like microdosing from DEKA and RFID from Impinj), these machines can dispense up to 127 different products and variants.
Normally, I can resist anything but temptation, yet these touch-screened temptresses have me really flummoxed. Here’s my problem: their straight Diet Coke tends to taste too fizzy for my tender palate, so the soda dispensed from a Freestyle machine cries out for some mellowing flavor. But when I get to the DC sub-menu, this is what I see:
Really? I have to choose between Cherry Diet Coke, Vanilla Diet Coke, and Cherry Vanilla Diet Coke among other putatively tasty concoctions. Sometimes I stand there for a moment and imagine the mouthfeel of Raspberry Diet Coke; will it be sprightly and delightful, or too tart? I’ve never had the nerve to try it.
OK, ok . . . maybe I’m being a little silly, but the whole episode just reeks of the Paradox of Choice, right? For those of you don’t know it, the P.O.C. is a thesis that increased choice leads to increased anxiety. Sometimes, even, too many choices can paralyze and repel us. (Check out the TED Talk given by the idea’s progenitor, Barry Schwartz.)
So what does this have to do with investing? Well here’s the problem: there are a ton of funds out there raising capital right now. This is especially true in Micro-VC, an area where I’ve been spending a good bit of time since 2005. After all, barriers to entry are really low; anyone with a couple of successes on AngelList can try to rustle up $10 or $25 or $50 million for a fund. This year alone, I've met with over 50 such groups looking to raise capital. Some days, Silicon Valley seems like Hollywood North, except the streets aren’t thick with people hawking scripts; rather University Café is abuzz with pitches from cats in search of OPM.
To be fair, every last one’s got a story or some alleged edge and, quite frankly, it can be exhausting to parse the nuance sometimes. The sheer noise in the market stands in stark contrast to something a mentor of mine once said: he’d been an early employee at one of the Endowments Everyone Tries To Emulate and I asked him once how they'd built their portfolio? He replied, “in those early days, we'd just formulate a thesis (say lower mid-market industrial buyouts), meet all the managers (there weren’t that many) and invest in something like one-third to one-half of them.” I bet in 1985 he could have scarcely have imagined the sheer quantity of funds competing for capital today.
And I think LPs are starting to demonstrate the paralytic anxiety associated with too many choices. I had a conversation the other day with a GP who told me that he’d been turned down by an unnamed endowment that reasoned, “VC is a tough space for us because we can’t really tell a credible story around why one firm might prospectively be better than the next.” In response to his frustration, I replied that I thought it took courage for the LP to more or less say, “we don’t know how to distinguish the different varieties of snow.”
Indeed, it can be particularly tough for those flying in from places like Lake Charles looking for investments on behalf of the Southwest Louisiana Janitors Union. The sunny and magical lands of Silicon Valley can be mesmerizing and bewildering for those who swoop in and out.
And I think Micro-VC –- arguably one of the most exciting niches of opportunity right now -– can be a particularly hard place to discern the most opportune risk-adjusted returns, particularly because there are some non-obvious and difficult to ascertain risks specific to the space. Having feet on the street is an important start in making sense of it all. And history and experience make a big difference, too. There are a lot of changes afoot generally in VC right now and if one believes that well-executed venture program can be return enhancing, one is incurring opportunity costs by not participating.
Adding to the anxiety is this gnawing Fear Of Missing Out. Things move pretty quickly; all a $25 million fund needs to get oversubscribed is for a domino or two to fall. Folks raising these funds are quick to remind potential investors that groups like First Round have basically been closed to new investors after their first institutional fundraise. It's kind of reminiscent of the Freestyle machine again. After you've chosen your base beverage, you only get 5 seconds to choose a flavor before returning back to the home screen. If you lolly gag, you're back to square one. At least in the case of a Freestyle, you can punch the Diet Coke button again, it's not gone forever.
Of course one can be overwhelmed by choice and return to the table without a drink and say, “there was just too much going on with that blasted Freestyle machine,” or one can get up to speed themselves or choose a good partner to help them that’s experienced and savvy and can offer inside knowledge like the fact that fountain Diet Coke still contains Saccharin — in addition to the NutraSweet that sweetens canned and bottled DC –- and that’s what makes it oh-so delicious.
For every Barry Schwartz, there is a Malcolm Gladwell.