Matthew Mandel

In the early consumer web days, venture firms started investing in businesses that looked very different from the kinds of businesses they were used to. Apparently Accel in particular had some problems building conviction in the new crop of startups

In the end, “Skype looked too weird to us,” [Kevin] Efrusy recalled. “We decided not to do it. And then it proceeded to take off, up, up, up every month.”

Skype was not the partnership’s only painful social-media miss. Accel had also offered term sheets to a quiz company called Tickle and a photo-sharing site called Flikr. Just as with Skype, Accel had felt concerns about both firms and lost out to rival bidders.

The Power Law

Efrusy eventually turned his attention to social media but felt stuck until a friend reached out

“Check out Myspace,” Efrusy’s friend said. “It’s Friendster with fewer prostitutes.”

Efrusy opened his laptop and began counting the suggestive posts on the two websites…

… Efrusy’s laptop research alerted him to a more specific opportunity. So long as Friendster had been the leading example of a social network, its troubles had suggested that the concept faced limits: as with nightclubs, you couldn’t expand the service without tarnishing it. “Myspace told me, wait, there might be something here,” Efrusy said later.

The Power Law

The work Efrusy did thinking about social media dynamics led him to develop a thesis on the space. A network that could avoid the Marxian paradox of staying appealing while increasing membership could be huge. With this thesis on the space in-hand, Efrusy was ready when he heard about Thefacebook.

Efrusy dug out a Stanford alumnus email address, which allowed him to gain access to this thing that Chien had mentioned. The mere fact that he had to do this was a hopeful sign. By restricting admission to users with Stanford emails, Thefacebook was managing the Friendster problem of unwanted guests. It had put up the equivalent of a velvet rope outside a nightclub

The Power Law

Eventually, Accel elbowed its way into the deal, overcoming Zuck and Sean Parker’s allergy to VCs and an attractive bid from the Washington Post (of all places), by signaling high conviction and ultimately paying a higher price than the Post.

As Mallaby tells the story in The Power Law, Accel’s investment in Facebook was a paradigmatic example of the value of thesis-based investing. I think it’s interesting that the example is in a transition period. Naively, you might think that investment theses are most valuable in mature markets where the low-hanging fruit has been plucked and the alpha is in mapping the territory better than others and knowing where there might still be gold to mine. But the value of an investment thesis isn’t just about identifying the right opportunity – it’s about having the conviction to be aggressive when opportunity arises. And having the confidence to be aggressive is most valuable when things are most uncertain, which is to say in market transitions. Fortune favors the bold, and it’s easy to be bold when you feel prepared.