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Investing in “crazy” startup ideas
On June 26, 2008, Airbnb was attempting to raise $150,000 at a $1.5 million valuation. Founder Brian Chesky was introduced to 8 prominent venture capitalists by his friend Michael Seibel.
All 8 investors passed on the opportunity to buy 10% of Airbnb for $150,000. Today Airbnb is one of the largest hospitality companies in the world. So in hindsight, it seems obvious that these investors should have taken a chance on Airbnb.
But think about it for a minute. The idea behind Airbnb–renting space in your house to strangers–must have seemed bizarre at the time. Nobody did that.
And think about the liability. Many investors probably thought that nobody would let strangers rent their house for a few nights, simply because there was too much risk involved.
Disruptive ideas, such as Airbnb, or Uber, sometimes seem impractical at first glance. Famed VC Ben Horowitz, of Andreessen Horowitz, described this philosophy at a conference in Berlin in 2013. Here is a snippet from Techcrunch’s coverage of the event (emphasis added).
“An idea that gets funded, he noted, has to be a breakthrough idea. It has to be an order of magnitude better than what is currently available. The problem, however, is that those breakthrough ideas – by definition – look like they are insane.
…The key characteristic to look for, says Horowitz, is an incredibly brilliant entrepreneur with a seemingly berserk idea.”
Horowitz gave multiple examples of crazy ideas which worked out quite well, including software in the 1970s, which everyone believed was a tiny market which was always bundled with the computer. He also cited Google, which was dismissed by many investors in the 1990s because nobody thought you could make money from a search engine. This isn’t to say that all “crazy” ideas are going to be successful, of course. There are plenty of wacky companies that quickly failed. Such is the risk when forging new trails; some lead to dead-ends.
The moral of the story is that sometimes great startups might seem crazy at first glance, so we shouldn’t brush off an idea just because it seems different, or strange. The biggest, most disruptive ideas often appear to be “insane”, as Ben Horowitz says.
Take a look at the 57 deals live on Republic, and see if you think any of them fit the “crazy smart” category.
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