Irrationality as a teacher has limits

Giff Constable startups

looneytunesI’ve seen references to Steve Blank’s startup guide (for lack of a better description) “4 Steps to the Epiphany” and recently picked it up.  There is a lot of good stuff in the book, and I can see what the accolades have been about.  Like all business books, you have to decide for yourself which concepts you love and want to adopt.  However, after Blank spent a fair bit of time examining the Webvan flame-out as a counter-example, it has spurred a little mini rant:

Companies from the dotcom bubble do not define how “tech used to do business”.

The dotcom bubble was an exercise in rewarded irrationality.  Entrepreneurs and their investors attempted to massively accelerate technology adoption curves and spur cultural change by spending money, and quite obviously that didn’t work.  Businesses were created off of press releases, not value.  A lot of stupid things were tried (although there were also good ideas which were just way ahead of their time, many of which we see attaining success today 10 years later). Yada yada.  Everyone who was there knows the story.

It was built off of rewarded irrationality.  If you were a conservative seed-stage entrepreneur, you saw funding instead go to the pitches that said “we will exit in 16 months”.  If you were a conservative early-stage company, you saw big exits go to companies that spent like money grew on trees (and it looked like if you get plugged in the right way, it did grow on trees). And on the other side, if you were a conservative investor, you saw huge windfalls go to your neighbor or competing VC fund who bought into the craze.

The same dynamics were at work again with the recent housing and mortgage crisis.  It doesn’t take a rocket scientist to know that if the reward system incentivizes irrational behavior, irrational behavior will ensue.

All of this behavior makes for a fascinating study of human psychology and economies, and some glaring examples of what not to do, but it does not provide a solid foundation for studying “how business has been done” in the tech sector.

I’m sure Blank wasn’t trying to say that, but it still got my goat as someone who entered tech before the bubble.  It doesn’t take many dotcom examples before I’m muttering, “yeah yeah, how about some lessons from a more rational time period!”

Still, it is a book that offers excellent food-for-thought for any entrepreneur!