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How Much of the Startup Ecosystem is a Keynesian Beauty Contest?

8 points by marojejian ↗ HN
I continue to see more versions of Keynes' Beauty Contest Metaphor (http://en.wikipedia.org/wiki/Keynesian_beauty_contest) in the real world.

As a VC, I saw it operate often in the Startup Ecosystem - companies succeeding through mostly, or almost entirely, the perception of what others thought.

When this process does happen it can be destructive - success can be decoupled from the underlying merits of the business.

Though this is dismaying, I comforted myself with the thesis that while this is bound to happen some of the time, most of the time more merit-based factors are the decisive ones. Or perhaps simply most of the money is made off of true value creation.

However, the longer I've been in the business, the more I'm forced to admit that even really strong ventures owe much, if not most of their value to this principle. Without everyone doubling down on the already-declared winner, their valuation would be a fraction of what it was. This is a pernicious thought as an investor or entrepreneur, since it demotivates you from thinking independently about how to create things people need, and rather on simply getting one step ahead of hive-mind-hype-machine, (good band name?)

How much of startup success is attributable to this sort of process? if it is a lot, is this as bad as I'm painting it? If so, what is the source, and what can be done?

4 comments

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greim
I don't have the answer, but I'd expect that long-term success of any startup would still be tied to the merits of the business. It's only in the short term that a startup has to navigate this sort of chaos.
willvarfar
As a VC, can you answer a side question that your question aroused in me?

Do you think VCs in general pick their investments as a Keynesian? Do they invest in things they don't understand and wouldn't themselves want but the pitch of which is sufficiently polished as to fool them into thinking the average VC understands and wants in on this, therefore they want in on this? (cynical ;) )

dreamdu5t
Somewhere between 60-80%.

The "Keynesian beauty contest" seems like a great question for Quora, honestly.

auganov
It depends on how you define success here. If it's getting to a point where business is making profits and is sustainable mid-long term then I'd say it's still mostly about the merits.

Now if we're talking about some guy in the Valley flipping a hyped up company then of course his success was a result of the beauty contest, but whether or not the company he made will succeed is still mostly about the merits. It's not to say it definitely won't.

We need to distinguish between individuals being successful and the whole start up succeeding, if the company is crap in the end somebody will pay for it.

Nonetheless from a stand point of an entrepreneur you have to participate in the beauty contest if you cannot self-fund your start up.