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FOMO in Silicon Valley: How to know when the next Facebook comes along

Spoiler alert: It is not possible to review and comment on Episode 7 of the HBO show "Silicon Valley," which aired on Sunday, without revealing some critical plot twists. You are forewarned.

Amanda Crew as Monica featured in the HBO original series, Silicon Valley.
John P. Johnson | HBO
Amanda Crew as Monica featured in the HBO original series, Silicon Valley.

Episode 7: To Build a Better Beta, which aired June 5, has two fascinating plot lines that are worth delving into deeper. The first one revolves around when to do a private beta of your product and how to manage all the emotions around that. The Pied Piper team has been working feverishly on the platform and is at the point when its ready to go beta but Richard Hendricks (Thomas Middleditch) is reluctant to take that step and expose his baby to the scrutiny of strangers.

The second plot line is about how every venture capitalist misses the next big company at some point in their career because they struggle to fully understand its potential. Monica (Amanda Crew,) the young venture capitalist on the board of Pied Piper, doesn't think the beta product is great but is wary of voicing her opinion since she did not think Slack was great either. She missed the chance to invest in Slack for 20 percent of the company and now doubts her ability to discern the wheat from the chaff. Let us analyze these two narratives further.

The topic of when to do a beta release is fascinating. Microsoft was famous in the 80's for announcing its plans for a product two years before its planned release and freezing the market. This tactic was so powerful that people coined the phrase "vaporware" to describe it. Esther Dyson is believed to have been the first person to use the word in print in her monthly newsletter RELease 1.0. Microsoft was able to successfully fend off many startups and in some cases kill them just by announcing that it was building a similar product.

Steve Jobs famously rebelled against this practice by going the other way. Apple had all its product plans in complete lock down with CIA like secrecy and only announced a product when it was truly ready to be sold. Apple prided itself on being the anti-vaporware company with the product release being a highly choreographed launch event with the fully baked product immediately available to the general public. In the 2000's Google formulated a hybrid strategy for their software launches.

Instead of releasing their product fully finished, they introduced the concept of a public beta. Because Google creates software products on the web and can update the code almost daily, they used the concept of a "public beta" to introduce products to a small group of people and used the feedback from that group to iterate fast on the product.

The most famous example of this approach was GMail which was beta released in April 2004. Google limited the beta to a small number of users since they were not sure about the service. This unintentionally became a great marketing tactic as everyone clamored to get an invitation to Gmail and the concept of a limited public beta was born. Today most startups release their products in a limited beta and hope to generate buzz before the general release.

Like Captain Ahab, every venture capitalist rues the big whale that got away. Bessemer Venture Partners famously has a section of their website titled anti-portfolio which chronicles the ones that slipped from their clutches. I too have had my Moby Dick that still haunts me. In early 2004 when I was on the board of Plaxo, Sean Parker told me that he was going to Boston to meet with this Harvard student who had created a site called "The Facebook." I thought, "College student, dropout, site aimed at helping students date each other . . . this thing will never make money." $350 Billion in market capitalization later I must admit that this social networking thing might have something to it.

Most of the really big consumer companies start off with zany ideas that are dismissed as irrelevant by conventional wisdom. Snapchat was for sexting, Instagram was for pictures of food, Twitter was for sharing inane thoughts you had right now. However, these platforms eventually grow to something bigger and more profound. The challenge for venture capitalists is that they use pattern recognition as a tool to comb through the thousands of plans they see a year. For the most part this works and is very efficient. However once in a while there will come a company that breaks all the rules and pattern recognition will fail you. Knowing when to fund that one is what separates the women from the girls in our business.

Commentary by Venky Ganesan, a managing director at Menlo Ventures and the chair-elect of the National Venture Capital Association (NVCA). Follow him on Twitter @venkyganesan.

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