I recently watched an interview on Charlie Rose with Nassim Nicholas Taleb and decided his “Black Swan” theory accurately describes the fundamental problem in early-stage technology investing (and innovation in general).
To paraphrase Taleb; the cultural assumption is that all swans are white (and therefore, black swans could not exist). So you think.
Taleb (a partner at an investment firm) believes that scientists, economists, historians, policymakers, businesspeople, and financiers are victims of an illusion of pattern; they overestimate the value of rational explanations of past data and underestimate the prevalence of unexplainable randomness in that data.
Proof
The proof that Silicon Valley suffers from the white swan syndrome lies amongst many in the foolish behavior of investors, the predetermined investment allocations based on the tagging with ambiguous acronyms (such as web2.0, SOA, Cloud computing, CRM etc.) and the mindless herding of primarily unsuccessful ideas (or copies of a few successes) at the many popular technology conferences.
I am inclined to take Taleb’s theory a bit further: I believe the majority of people are victims of an illusion of pattern, established by years of (often irrelevant) education infused with the technology Kool-Aid that confined their thinking to a predetermined direction and scope. It prevented entrepreneurs and investors from ever being able to identify real innovation until it had become part of their past. Hence the excessive number of false positives and false negatives.
Taleb further adds that black swans are the ones that change the industry and that the so-called “unexplainable” events (that have no single precedent in time) redefine the future of the whole industry. And so, the search is on, not just for the investor with the right macroeconomic views, morals, and personality, but also the vision to spot innovation that has no precedent – the black swan.
Noise
The noise in our industry is still drowning out the music. We need to change the way we invest and improve our ability to spot black swans, or otherwise, we will lose the entrepreneurs that can build them. Our excuse today is not the economy but our performance in producing the genuinely disruptive value that can withstand the test of time. We need to put real entrepreneurs on a pedestal and throw the copycats to the curb, quickly.
Albert Einstein was right all along: imagination is more important than knowledge. That applies to investors too.
