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The hidden benefits of venture capitalism

By Nicholas Gruen - posted Tuesday, 30 October 2012


Paul Graham is one of Silicon Valley's more interesting entrepreneurs. With a BA in philosophy, a PhD in computer science and two qualifications in painting, he co-founded Viaweb in the 1990s, which gave him the wealth to co-found the incubator Y Combinator. Y Combinator contributes about $14,000 of seed funding and takes about 6 per cent of the startups it incubates. But the real value it adds is in the environment, mentoring and contacts it provides young would-be entrepreneurs.

Y Combinator's alumni includes Scribd, reddit, Airbnb and Dropbox.

Graham also writes eagerly awaited essays, sharing with his internet audience what he tells his startups. One essay's central message was conveyed in its title, Be Good.

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Graham believes internet start-ups shouldn't worry too much about making money. That's not because it's unimportant, but because this puts the cart before the horse. The first commandment is ''make something people want''. Once you've done that, the internet connects you to so many others that the chances are you can turn what people want to good financial account.

Google's peculiar slogan "don't be evil" acquires a new significance in this context. It was founded at Stanford University to build something great from Larry Page's insight that the links on websites provided the information from which one could judge the relative importance of websites.

A year into its life, Google looked like a do-gooding not-for-profit. Its founders weren't having a bar of cluttering up their pristine white search text box with paying advertisements. That would ruin users' experience and degrade users' confidence in the integrity of Google's search results.

When ads finally came, they were separated from Google's main results, protecting user experience and the integrity of the company. Then Google did us another service - their auction system for placing ads not only maximised their own revenue but maximised the usefulness of ads to users. (Wasn't usefulness to users supposed to be the point of advertising all along?)

Like elevators helped people navigate skyscrapers, Google made the riches of the internet navigable. By my back-of-the-envelope calculation that service generates more than a trillion dollars of value each year. So it's not surprising Google can divert $40-odd billion its own way.

Facebook was similar and Twitter has taken years to figure out if it can make money. All were following the Graham formula, doing something great, creating value, at least some of which could be ''monetised'', as they say in the valley.

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And lots of the people I admire do the same thing. They might do it in small ways - putting people in touch with one another to help make worthwhile things happen - even when it's not in their duty statement. If that sounds like something anyone would do, that's not been my experience. If they hear a good idea, lots of people nod approval, but, unless doing more is part of their day job, they leave it there.

A few months ago an email arrived from someone I'd previously emailed because I'd read his blog posts and thought he'd be interested in something or other. Some rapport had built up through various email exchanges and he sent me his new book in the mail. I loaned it to a prominent friend and introduced her to him by email. After thanking me, he concluded that he hoped I didn't mind him asking a personal question:

''You seem to make many introductions, connecting people, etc. I know many people who do this kind of thing, but it's usually either on behalf of people who they know well, or in a fairly obviously self-interested way. It's rather less often that I find people making connections in ways that seem more simply for the common good. Why do you do it?''

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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