Investing in the Misunderstood

Fred Wilson has some words of advice for people looking for places to invest their money:

When people ask me, "how do you know which companies and services are going to be the biggest successes?", I usually tell them to look for the companies and services that are mocked and misunderstood. For some reason, that correlates highly with the biggest breakout successes.

That seems reasonable, to a point. If you see momentum toward a product or technology that "doesn't make sense to me", odds are you're missing something. And the more investors who say, "That doesn't make sense, so I'm not going to invest in it," the more opportunity there is for those who see its virtues, or don't see its virtues but trust in the wisdom of the crowd, to become early investors in a technology that may turn out to be the next big thing.

As a VC, Wilson has experience investing money in ventures that fail. So I don't want to read too much into his defense of Twitter, a phenomenal social success that has had great difficulty translating traffic into revenue.

For years, every post, column, or article written about Twitter would have comment after comment making fun of a service where people "told the world what they had for lunch." Of course, people were doing that on Twitter and people still do that on Twitter. But what those mocking Twitter were missing is that in between the tweets about pizza and pita were posts about politics and poetry. There was substance in the midst of nonsense.

I've commented on what I believe to be the primary attraction of Twitter, the illusion of close contact or relationships with other Twitter members, including celebrities. But whatever you make of Twitter, and even if you filter the wheat from the chaff so as to read about "politics and poetry" rather than "pizza and pita", it's difficult to see how that distinguishes Twitter from other technologies or starts it down the path toward profitability. Before the public's attention shifted to Twitter feeds and walls, the blogosphere was ridiculed for its superficiality - despite being full of good political commentary, poetry, and information of substance that in a Twitter feed would appear only as a link. Twitter is not a unique, stand-alone phenomenon, but is part of a progression of technologies that facilitate the public exchange of information. But is that enough to make it viable in the longer-term? It's an open question. The dot-com graveyard is full of good ideas that attracted traffic but made no money, as well as companies who did not find a way to monetize their ideas before they were copied and commoditized by others, and even of companies that briefly made money before being supplaced by something "newer and shinier" or swallowed by and incorporated into a larger company.

If I were investing millions in startups, and expected that only one in three of my investments would succeed, a company like Twitter might look like a good bet. Get in early enough and there's a possibility of making serious money when the company finds a way to turn its traffic into cash. Even if the company never figures out how to turn a profit, it may still be possible for it to go public and provide a huge return on my investment at that time. But as an individual, investing on a very different scale and with very different expectations, my first real chance to get in on a company like Twitter is after the IPO - and if you look at recent IPO's for similar companies, if you join the early rush to buy their stock on the promise or expectation that they'll eventually figure out a path to profitability you're apt to lose some money.