Hard Numbers' False Security

Shaan Puri shares Bill Gurley's perspective on how traditional market analysis often fails when evaluating disruptive technologies, using Uber as a case study. He explains why optimistic thinking about market potential is essential in tech investing, even when it seems to contradict conventional wisdom.

Key Points:

• Bill Gurley (legendary VC and early Uber investor) wrote a blog post called "How to Miss by a Mile" critiquing a professor's analysis that Uber wasn't worth $17 billion

  • The professor was technically right but in the wrong direction - Uber ended up being worth 10x more

• Hard numbers in analysis give a false sense of security

  • There's a difference between precision (forecasting to the second decimal) and accuracy (being correct)
  • The professor made two key mistakes in his analysis of Uber's potential:
    • Misjudging the total addressable market (TAM)
    • Misjudging market penetration

• The TAM mistake: assuming the future will look like the past

  • "The mistake of thinking that the future will look quite like the past but the arrival of a new product or service will have a nonzero impact on the overall market"
  • New offerings with new convenience levels and price points open up entirely new use cases

• Historical example: AT&T and cell phones

  • AT&T paid McKinsey to forecast the cell phone market
  • McKinsey predicted 900,000 users by a certain date
  • The actual number was 9 billion - they were off by 1000x
  • AT&T decided not to invest, later had to buy a cell company for $12 billion

• "Sizing the market for a disruptor based on the incumbent's market is like sizing the car industry based on how many horses there were in 1910"

• Tech investing vs. traditional investing:

  • Warren Buffett's approach: "Rule number one: don't lose money" - predicting the future will repeat the past
  • VC/tech investing: doing "100% the opposite" - betting on disruption
  • "In our business, the cynics get to be right and the optimists get to be rich"
  • Cynics are right 8 out of 10 times, but optimists are the ones who get rich

• Tech investing is a hits-driven game

  • You can be wrong 8-9 times out of 10 as long as you get one right in a big way
  • This isn't true in other businesses, school, or jobs where consistency matters more