Over the last few weeks, I’ve been spending a lot of time thinking about irrational exuberance in entrepreneurship and venture capital.
I’m a very careful person when it comes to word choice. So please make no mistake, when I say irrational exuberance, I mean “irrational.”
In 2009, I started my last company. The business was attacking Live Nation’s profitable promotions business from the bottom up (textbook disruption). We grew and had profitable unit economics for some time. But in 2011, we started to see that as the volumes of concerts we coordinated increased our ticket revenue per concert was dropping. Despite the fact that every incremental concert was profitable, the numbers were starting to tell a story that said we couldn’t support our sales model.
This wasn’t the first time the numbers told us to stop. And like every time before, my co-founder wanted to press on. And I’ll never forget the conversation we had as we discussed moving forward. Come hell or high water, Chris reminded me that were going to tackle the market… regardless of all the signs to the contrary. It didn’t matter that our investors were skiddish, that our advisors were changing their tunes, and that we were looking at a long road with no discernable positive outcome at the end. He was all in. The facts be damned. Those would change as he applied more of his blood, sweat, and tears to the problem.
Ultimately, this became the issue we couldn’t overcome. But the more time I spend working with entrepreneurs tackling big problems, the more I realize that every company that’s worth a damn has moments like these. The “Oh fuck” realization where all your assumptions look wrong. At this point, the only options for innovators are to give up and find something more sensible to do or to double down like a crazy person arguing that the laws of gravity only apply to the weak minded.
The rational decision in these situations is almost always to walk away. Your 1% chance at making a few million dollars almost never outweighs the opportunity cost of going to find a safe job at a blue chip company like General Electric. Which is why it’s beneficial to society that so many of us in the industry of innovation share Chris’ irrational exuberance for our ideas. If every human behaved like an economist’s ideal decision maker, nothing interesting would ever get accomplished.
As a group, we’re dependent on a few crazy people ignoring the facts and moving forward. It’s the heart of innovation at some level. Investors may demand predictability out of their companies, but progress depends on irrational drive.
This is part of what makes venture investing so much more difficult than playing in the public markets - and so much more fun. It’s not just about reading the signals, having access to capital, and seeing a PowerPoint. It’s about being bullish about some change in the world that’s impossible to justify on paper alone. When Twitch.tv emerged, who would have bet there would be millions of people would start watching eSports on a daily basis? No one. But some foolhardy entrepreneurs and investors set about building a platform for it anyways. Because there was an outside chance that the facts be damned, with enough blood, sweat, and tears they’d be able to help bring that market forward as well.
Today, the problem I see too frequently is people treating entrepreneurship too rationally. Folks with MBAs or Law degrees who want to leverage the option value of a startup as their path to extraordinary wealth. Increasingly, that’s my biggest turn off. Because I am starting to understand the unique paradox - why missionary entrepreneurs are so much more successful than mercenary entrepreneurs. The world that economists teach us about demand rational actors. But you’d be a fool to assume you can know everything coming your way. There is no such thing as an omniscient rational actor. Invariably the “Oh Fuck” moments will arrive. And I want to support the entrepreneurs with the irrational drive to persevere - protecting their employees, customers and investors - and build something great.
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Image Courtesy of Tom Woodward