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Investing in an amazing startup is like buying the hot new gadget that’s just come on the market. Just being able to lay down your cash, either for an investment or a gadget is a good social signal, telling the rest of the herd that you’re cool.

But sometimes you get the iPod and sometimes you get the Microsoft Zune. (Here’s a Wikipedia link in case you don’t remember the Zune, the necessity of which may just drive home this particular point.) One tells the world that you have taste and money and one of them tells the world that, well, you bought a gadget that turned out to be not nearly as cool as something else on the market.

Venture Capital Works the Same Way

There’s not really a good way to predict precisely what investment opportunities are going to do better than others: putting your money into a company that has barely an idea of what they may offer customers, let alone any source of revenue, is risky. If it wasn’t risky, after all, we’d all be startup billionaires.

But that means that investors still have to make a decision to invest in this opportunity but to pass on that one.

Investors can weed out some of the options on the table. Details like potential audience size and the relative spending power of that audience can help an investor exclude anyone that can’t make the risk worthwhile. But there’s still far more startups looking for capital than there are investors ready to put money on the line.

That leaves gut instinct to guide an investor through choosing where to invest. Gut instinct, more often than not, takes you to the company you want to see in the world — the seriously cool offer.

The Cool Factor Minimizes Diversity

Choosing companies to invest in based mostly on what seems cool — on what will signal to your friends that you are awesome — limits investments dramatically. What’s cool right now? Well, that depends on your friends. If your friends each have their own bucket load of money and they all live in San Francisco, though, they’re going to define ‘cool’ very specifically. Buying things online is cool, hence all the Bitcoin startups. Being able to pay someone else to deal with the sucky parts of life is cool, hence the appeal of getting things done by Magic. Wine, beer, and whiskey are all cool, hence more startups around those beverages than non-alcoholic drinks.

What’s not cool? How many apps have you seen get funding for simplfying divorces? What about effective logistics management? What about anything for the unexotic underclass?

The lack of diversity isn’t just a question of picking startups with ideas that seem cool to the right people, either. What people are most likely to have ideas that you think are cool? People who are very similar to you across a spectrum of characteristics.

Is There a Solution?

The venture capital system is based, ultimately, on gut instinct. There’s no real way to predict that one startup will succeed or another will fail, which means that investors have to decide based on whatever criteria they choose. Coolness is no better and no worse than any other decision-making tool, especially when someone is deciding how to invest their own money.

Want to see a dramatic uptick in diversity among venture-backed startups? Get investors with a much wider collective definition of cool — more women, more people of color, more parents, more military veterans, and so on. Of coures, there’s a chicken and an egg problem that people who do not already match investors’ ideas of good founders are less likely to have money to invest. That’s a harder problem, though I can see some options (though all come with their own particular problems):

  • Figure out a way to encourage more people to bundle small investments together into startups
  • Add more diverse decision makers at investment firms
  • Use governments and non-profits to come up with investment capital

A more practical option may be to look for more opportunities to opt out of the venture capital system in general. There are plenty of arguments for other strategies: venture capital is likely creating another bubble, it’s creating businesses focused only on exits, and it’s definitely driving price wars.

Bootstrapping, or taking only a small round of investment from friends and family, is the fastest route away from venture capital. It won’t work for all companies — anything needing a big upfront investment in research or equipment is out — but bootstrapping is always worth considering. And the number of ideas that can be bootstrapped today is surprising; 3D printers, marketplaces offering time on expensive equipment, and amazingly cheap software tools have brought down the cost of building anything.

Image by Flickr user Got Credit

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The 2014 Annual Report from Berkshire Hathaway came out recently. I always look forward to reading Warren Buffett’s letter to shareholders, but I found this year’s report especially worth reading.

2015 is the fiftieth anniversary of Buffett Partnership Ltd. taking control Berkshire Hathaway (then a faltering textile manufacturer). The textile manufacturing part of the business has been gone since the 1980s, but Buffett seems to be doing just fine.

A few points specifically stood out while I was reading.

  • Buffet doesn’t like a lot of the standard numbers used to calculate a company’s worth (even though the companies owned by Berkshire Hathaway tend to be successful by those metrics). He’s clearly comfortable with all sorts of financial metrics, but keeps score by his own numbers. That’s a set of characteristics well worth copying.
  • Berkshire Hathaway owns nine companies that, if those companies were independent, would be members of the Fortune 500. Berkshire Hathaway also owns BNSF, which transports about 15 percent of all intercity freight in the U.S. (more than any other company in the country).
  • Airbnb got a mention as a viable option for travelers to Omaha for Berkshire Hathaway’s annual meeting, which drew 39,000 people last year. I wonder just how much that mention is worth to Airbnb — and how many of Berkshire Hathaway’s shareholders were willing to use Airbnb before that subtle endorsement.
  • Berkshire Hathaway’s federal income tax return runs 24,100 pages. The company files an additional 3,400 state income tax returns. Even more impressive? Those documents are prepared by the Berkshire Hathaway office in Omaha, which has a staff of 25. The same 25 people are responsible for setting up an annual meeting for 39,000 attendees and a few other minor matters.
  • That huge stack of paperwork, however, would be far larger if all of Berkshire Hathaway’s subsidiaries operated independently. Buffett’s approach to running companies is as bare bones as possible. I expect that sort of lean leadership to be a major trend in years to come.

In honor of the 50th anniversary, Buffett wrote a more extended look at Berkshire Hathaway’s past then he normally does in these letters. He admitted a few crucial mistakes that he learned from, making this letter perhaps more valuable to read than most years. Berkshire Hathaway’s annual report from 1964 is also included at the end of this year’s.

If you’re an entrepreneur who hopes to grow your business beyond just covering your own expenses, read this year’s report — and maybe check into some of the past reports.

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The Writer’s Bundle Returns; Act Fast!

The Writer’s Bundle is back — for the next three days. I’m a fan of this bundle and you may remember me promoting it in the past. There’s always books or courses in here that I love or want for myself. Here’s a quick rundown of this year’s bundle: Kindle Launch Plan: $1,400 in 30 […]

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IFTTT’s Do Apps Are Pretty Cool

IFTTT released a new set of apps that have kept me pretty entertained lately as I’ve worked on figuring out just how to use them. The apps are: Do Button Do Camera Do Note All three are available for iOS and for Android. Each app allows you to set up a certain action that happens […]

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A New Use for Hemingway: Ghostwriting

I’ve been finding Hemingway surprisingly useful when working on ghost-writing projects lately. It’s a useful sort of a writing hack to get some quick insights when you’re trying to mimic someone else’s writing style. Of course, Hemingway is fundamentally intended to help writers sound more like the man himself. But it does that by highlighting […]

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How To Level Up

Stagnation is a very real threat, especially when you do creative work every day. Clients are only ever interested in what you can already do and repeats of what you have already done. (While I can’t speak from experience, I assume the same is true of employers.) Doing just what is expected of you is […]

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Why Freelancers Should Embrace Dwolla

Payment processing is something of a pet peeve for me. Getting paid through a site like PayPal is very convenient, but I have to give up 2.9 percent of my income (plus an added 30 cent fee) on every transaction. Consider what that means I’m paying: Income Payment to PayPal $100 $3.12 $1,000 $29.30 $10,000 […]

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HabitRPG is My New Favorite Productivity Tool

A few friends convinced me to join HabitRPG a few weeks ago. Since then, I’ve become an enthusiastic convert! The idea behind HabitRPG is that we can treat our to-do lists like a game. We can get points for knocking items off the list, level up, and even help friends defeat bigger monsters. HabitRPG offers […]

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HTML is the New Latin

Latin is a strange language. No one speaks it as their first language and few people speak it regularly outside of Vatican City. Yet many schools still offer Latin classes and most of us know a few words (even if we aren’t always aware that we do). We still use Latin roots for forming new […]

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