Several months ago I ventured into the spooky economics of information with a post that suggested that data had an increasing marginal utility. A number of folks like Albert, who know a whole lot more about economics than I do, argue that it was not exactly an increasing marginal utility, but they acknowledged that there was something weird going on. Relying again on my naiveté, I thought I’d try another post on the weird economics of information. It is almost certain to be wrong. Hopefully it will be wrong in an interesting and useful way.
I started thinking about this particular problem when I noticed that, at least anecdotally, there was a correlation between how open entrepreneurs were with us and their ultimate success. Simply put the entrepreneurs who are aggressively open in describing their plans seem to do better than the ones who are cagey. There is absolutely no data underneath this observation. It is just my sense after meeting hundreds of entrepreneurs over 15 years as a VC. If it is true, it could be for lots of reasons. The more experienced an entrepreneur, the more likely they are to understand that ideas are rarely unique, but the ability to assemble a team and execute against that idea is rare. Perhaps they are just more confident, and it is confidence that is correlated with success. But recently, I have started to think that there might be something more going on.
Many of the better entrepreneurs we know engage anyone they come across about their ideas. On the surface, this seems kind of dumb. Every time you describe your plans, you are providing a blueprint for a competitor. So, why do they do it? My hypothesis is they do it because their experience has taught them that, on average, every time they describe their ideas, they learn more than they reveal, no matter how much they reveal. And, as a result, they are able to concentrate insight in a way that creates a defensible advantage for them.
Start with the assumption that, in most conversations, the entrepreneur comes into the conversation knowing more about the idea that the person they are talking to? They bring a context, a world view, a mental framework to the conversation that has been shaped by all of the work they have already done and all of the conversations they have already had. The person on the other side of the conversation may bring insights from other disciplines or fresh perspective, but they are unlikely to fully appreciate the importance of their contribution to the core idea. Perhaps when it comes to insight the rich do get richer.
But entrepreneurs don’t just have one conversation, they have hundreds. The more open they are in each of those conversations, the more the person on the other side is likely to engage. They may unconsciously see it is a fair trade, the entrepreneur’s ideas for theirs. The more detailed the conversation the more places for a counterparty to interact. The more they understand about the entrepreneur’s plans, the more likely they are to come across other insights from other conversations that would be valuable to the entrepreneur and the more likely they are to pass them along. So an entrepreneur who is aggressively open with his or her ideas builds a very effective network that aggregates data, information, and insights that are immediately relevant to those ideas.
This brings us back to the weird economics of information. Would it be possible to model this mathematically? The image in my head is of network nodes arrayed in a series of concentric circles radiating out from the entrepreneur in the middle. The nodes on the inner circle are people who understand the opportunity and/or the necessary technology best. Nodes on each subsequent circle know the problem less well. As data and information pass from the edge to the middle, it is refined by the experience and/or knowledge of the nodes (people) on the inner circles, so that the ratio between raw data and useful insight moves more and more in favor of insight as you move from the outside in. In this model, the network becomes a very efficient idea refinery and the entrepreneur who is at the center the ultimate synthesizer of the idea. These networks would be very fluid. Different entrepreneurs pursuing different ideas could include many of the same nodes but they would be at the center of a different network defined by their ideas. The network around the original entrepreneur would also morph as the idea evolved.
All of this suggests that an entrepreneur should be open with everyone, and that they will get the most value out of being open with the people who are most knowledgeable about the particular problem they are trying to solve. The people most knowledgeable about a problem are also the ones best positioned to compete with the entrepreneur, so the entrepreneur has more to gain and more to lose by being open with these people. From one perspective, the risks and rewards of being open are perfectly balanced. Every insight comes at the cost of another potential competitor, but that calculus leaves out the whole problem of execution. If an entrepreneur is incrementally more prepared to execute on an idea that the person they are sharing it with, they should still gain even if they engage in an open (and equal) exchange with a potential competitor.
There is, of course, and embedded assumption here. The entrepreneur must be working in a market like the web that is rapidly evolving, where defensibility is based more on an organization’s ability to anticipate and adapt to change, than it is on its ability to defend a proprietary advantage. It makes a lot more sense for Peter to be open about what he is trying to do with Bug Labs, than for the folks at Coke to publish their secret formula. But in the markets we invest in, there seems to be a real advantage to being open. The best entrepreneurs in those markets cultivate huge networks of knowledgeable people and engage them actively to refine their ideas. The companies they build seem to share this characteristic, opening themselves by publishing source code and APIs: betting that they can thrive in an open ecosystem by being able to absorb, process, and capitalize on relevant information better than their competitors.