Lessons in Investing: The Rise and Fall of Disruptive Companies

Lessons in Investing: The Rise and Fall of Disruptive Companies

In the fast-paced world of Silicon Valley investing, success is rare and failure is common. This is a reality that Ron Conway, a legendary investor, knows all too well. He acknowledges that about 60% of the companies he invests in end up going out of business, with no return on investment. Another 30% may just break even, while only a slight balance of 10% to 20% actually brings in more than what was initially invested. However, it is this small percentage of successful investments that makes it all worthwhile, allowing Conway to pay for the failures and keep his investing career afloat.

One of Conway's most successful investments to date is Google. Through his firm, SV Angel, he has also backed big players like Facebook, Twitter, and Snap. When asked about the key to his success, Conway attributes it to networking. He compares the founder network to the Mafia, emphasizing the importance of founders recommending value-adding investors to each other. This tight-knit community has been immensely beneficial for SV Angel, keeping them informed and connected.

But not all disruptive companies meet success. Take the case of Napster, for example. It was once the most disruptive company in the music industry, revolutionizing the way people shared and consumed music online. However, due to egos at the record company labels and investor level, Napster ultimately went down in flames. Conway expresses his willingness to invest in founders who gracefully shut down their businesses, highlighting the potential for future collaboration and success.

Another cautionary tale is that of Digg.com, a platform that allowed users to discover and share news articles. At its peak, Digg was a powerhouse, attracting millions of users and generating significant traffic. However, the company's downfall came from its reliance on a select group of power users who had disproportionate influence on the voting system. These power users would submit links, and their followers would blindly upvote them. This led to a loss of trust and authenticity within the community, ultimately causing Digg's demise.

The rise and fall of Digg teaches us a valuable lesson: generating profit as a digital platform is challenging. Taking shortcuts may seem like a tempting strategy, but it is ultimately a losing one. Digg should have prioritized its users and community over its bottom line. While a new entrant can easily replicate a website, they cannot replicate the user base and community that has been built over time. Protecting and nurturing this community should have been Digg's focus, rather than making changes to cater to a mainstream audience.

So what can we learn from these stories of success and failure in the world of disruptive companies? Here are three actionable pieces of advice:

1. Prioritize networking: Building strong relationships within the founder network can be immensely beneficial. Founders who trust and recommend each other to investors create a supportive ecosystem that increases the chances of success.

2. Focus on your users: Your users and community are the lifeblood of your platform. Protecting and nurturing them should be a top priority. Don't compromise their trust for short-term gains.

3. Long-term thinking over short-term shortcuts: Generating profit as a digital platform takes time and patience. Avoid taking shortcuts that may compromise the authenticity and integrity of your platform. Instead, focus on building a sustainable business model that puts your users first.

In conclusion, the rise and fall of disruptive companies teach us valuable lessons about the challenges and opportunities in the world of investing and digital platforms. Success is not guaranteed, but by networking, prioritizing users, and adopting a long-term mindset, we can increase our chances of creating lasting and impactful ventures.