5 Startups That Looked Dumb—Until They Were Worth Billions

Key Concepts

• Overestimating risk and underestimating opportunity
• Underestimating market size and potential
• The anti-portfolio: acknowledging missed investment opportunities
• Reverse engineering successful companies
• The difference between precision and accuracy in forecasting
• Market expanders: products that create new markets
• The hits-driven nature of entrepreneurship and tech investing
• The importance of courage and conviction
• Avoiding ruin: balancing risk and reward
• Levels of outliers: understanding extreme personalities and behaviors

Jeff Bezos Quote and Human Bias

The discussion begins with a Jeff Bezos quote: "It's generally human nature to overestimate risk and underestimate opportunity." Bezos advises entrepreneurs to bias against this, believing risks are smaller and opportunities are larger than perceived. He admits to falling victim to this himself, initially thinking Amazon might only reach $100 million in revenue.

Bessemer's Shopify Memo: Underestimating Potential

The speakers discuss a Bessemer Venture Partners memo from when Shopify was raising $5 million at a $20 million valuation. At the time, Shopify had $5 million in revenue and $132 million in GMV (Gross Merchandise Volume) across 10,000 customers. Bessemer's best-case scenario projected a $400 million exit value. The company is now worth $130 billion and processes close to a trillion dollars in GMV.

• Example: Bessemer initially thought a $500 million acquisition of a Shopify competitor by Oracle was aspirational.
• Example: Some Shopify advisors believed the company would be worth no more than $50 million.
• Quote: The associate at Bessemer joked about including a clause preventing Shopify from selling for less than $50 million.

Personal Examples of Underestimation

One of the speakers shares personal examples of underestimating market potential:

• Calm (Meditation Apps): Initially viewed as a "cute" and small market.
• Snapchat: Dismissed as a "goofy kind of sexting thing."
• Airbnb: Seen as an unpromising attempt to replicate Couchsurfing.
• Uber: Perceived as a niche service for "rich people in San Francisco."
• Musically: The speaker dismissed the idea of lip-syncing and dance videos.

The Anti-Portfolio

Bessemer has an "anti-portfolio" on their website (bvp.com/anti-portfolio), honoring companies they missed, including Airbnb, Apple, eBay, and Google. The speaker emphasizes that a large anti-portfolio is a sign of being actively involved in the business world.

Reverse Engineering and Opportunity Spotting

The speaker describes his skill set as researching and reverse-engineering successful companies to identify market gaps, a technique learned from Brad Jacobs, who started multiple publicly traded companies worth billions. He and his team at HubSpot have developed frameworks and techniques for spotting opportunities.

The Math of Growth and Thrive's Investment Strategy

The speaker discusses the difficulty of understanding exponential growth. He references Thrive Capital's Josh Kushner, who invested in OpenAI at a $250 billion valuation. Kushner's strategy is to find the "Park Avenue" of startups, willing to overspend on companies with the highest potential.

• Analogy: Kushner compares this to real estate, arguing that the best properties in prime locations are always worth the investment.

Bitcoin as Digital Manhattan

The speaker draws a parallel between Kushner's strategy and Michael Saylor's argument for Bitcoin. Saylor views Bitcoin as "digital Manhattan" due to its scarcity (21 million coins), advocating for acquiring as much as possible at any price.

Courage and Conviction

The discussion shifts to the courage required to act on one's convictions. The speaker acknowledges conceptually agreeing with the "digital Manhattan" idea but not fully acting on it.

Avoiding Ruin and the Kelly Criterion

The speaker emphasizes the importance of "avoiding ruin" and not taking disastrously risky financial investments, even with conviction. He references the Kelly Criterion and Warren Buffett's philosophy of not risking what you need for what you don't want.

Risk Tolerance and Outliers

The speaker contrasts his approach with that of entrepreneurs like Elon Musk, who may be willing to risk everything. He questions the wisdom of such extreme risk-taking, suggesting that great achievers are not necessarily wise.

Elon Musk and OpenAI's Funding Dilemma

The speakers discuss a leaked email exchange between Elon Musk, Sam Altman, and Greg Brockman regarding OpenAI's funding. Musk proposed integrating OpenAI with Tesla, while Altman and Brockman explored options like Microsoft partnership and an ICO (Initial Coin Offering). Musk opposed the ICO due to reputational risk.

Levels of Outliers and Extreme Behavior

The speaker emphasizes the vast differences in thinking and behavior among outliers, citing the Collison brothers of Stripe as an example. He describes extreme behaviors in health, finance, technology, and lifestyle choices, such as Peter Thiel shipping his mattress to hotels.

Uber's Market Expansion and Bill Gurley's Blog Post

The discussion returns to market size, referencing Bill Gurley's blog post, "How to Miss by a Mile." Gurley critiqued an NYU professor who argued Uber was overvalued at $17 billion. Gurley argued that Uber's TAM (Total Addressable Market) was underestimated because it created new use cases and expanded the overall market.

• Analogy: Gurley compares this to AT&T underestimating the cell phone market in the 1980s.
• Quote: Aaron Levy, founder of Box, said, "Sizing the market for a disruptor based on the incumbents market is like sizing the car industry based on how many horses there were in 1910."

Sequoia's AI Event and Market Expansion

The speakers discuss Sequoia's AI event, referencing a slide presented by Pat Grady. Grady argued that AI will be bigger than the entire cloud market and the labor market because it replaces both software and labor.

• Example: Uber didn't just take market share from taxis; it created a market three times larger.

The Cynics vs. The Optimists

The speaker states, "In our business, the cynics get to be right, and the optimists get to be rich." He emphasizes that tech investing requires optimism and a willingness to bet on market expansion.

The Uber Professor's Lack of Experience

The speaker reveals that the professor who criticized Uber's valuation had never used the app and lived in areas where taxis were not common.

Quotes from CEOs Who Underestimated Their Market Size

The speakers share quotes from CEOs who initially underestimated their market size:

• Jan Koum (WhatsApp): "We're just trying to make messaging better, not build some big business."
• Sara Blakely (Spanx): "I thought I'd make a little side money, enough to quit my job."
• Head of Nokia's Mobile Gaming Division: "I think mobile games are just a small add-on. It's not a real market."
• Domino's CEO (2010): "Delivery is a convenience, it's not a game-changer."
• Brian Chesky (Airbnb): "We didn't know the size of the market because we were inventing it. If we listened to market research, we would have just made a better couch surfing app."
• Elon Musk: "I don't care about the market size. I care about if we can make something fundamentally different because if you make something great, the market will come."

Conclusion

The conversation emphasizes the importance of recognizing human biases, particularly the tendency to underestimate opportunities and market potential. It highlights the need for courage, conviction, and a willingness to embrace risk while avoiding ruin. The speakers stress that successful entrepreneurship and tech investing require an optimistic mindset and a focus on creating fundamentally different products that can expand existing markets or create entirely new ones.