Ideas Matter
The debate amongst venture capitalists over whether to prioritize markets or people in investment decision making is as old as the industry itself. Fred Wilson, famously authored an oft quoted 2004 blog – Execution Matters, Ideas Don’t – which referenced USV’s failed incubation of FaveMail leading to the following conclusion:
“The lesson i take away from the whole thing is great ideas don’t make great investments – great entrepreneurs do.”
Three years later, Marc Andreessen, co-founder of Andreessen-Horowitz, opined differently in “On product/market fit for startups,” noting:
In a great market — a market with lots of real potential customers — the market pulls product out of the startup.
The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.
The product doesn't need to be great; it just has to basically work. And, the market doesn't care how good the team is, as long as the team can produce that viable product.
Most recently, University of Chicago Professor Steven Kaplan in his 2009 study “Should Investors Bet On the Jockey or the Horse” in the Journal of Finance concluded:
The results for both of our samples indicate that firms that go public rarely change or make a huge leap from their initial business idea or line of business. This suggests that it is extremely important that a VC picks a good business. At the same time, firms commonly replace their initial managers with new ones and see their founders depart, yet still are able to go public, suggesting that VCs are regularly able to find management replacements or improvements for good businesses.
In spite of Andreessen’s comments, I would say that the working consensus in the early/seed stage venture world for the duration of my tenure has been to bet on special people and let the rest fall into place. That approach was verbalized in my interview with David Hornik on this blog where he outlined his investment approach as “people, people, markets, people.”
But the world is changing. The vast majority of companies I’m referred to are largely derivative ideas of larger tech/startup competitors. Problematically, this is actually fundamentally different than going after large monolithic incumbent corporates in a given space. For whatever reason I think it's because entrepreneurs are trying to improve processes/better execute on problems rather than re-imagining the reasons those habits/processes even exist.
My sense is that the market is cycling back to the importance of bold, unique, creative ideas – above and beyond the obvious focus on “big markets” or “founder/market fit.” Of course people still matter, just as a large addressable markets have always mattered, but in my estimation there is a subtle yet undeniable shift of interest away from improved processes/products towards ideas that challenge the fundamental assumptions underlying the existence of those processes or products themselves.
In that vein, I was recently asked to prep some talking points for a firm offsite on the state and challenges of investing in consumer tech. I’ve attached those slides here. The theme was very clearly that we are in the “reimagination” stage of venture and my observation is that companies solving pain points but not re-imagining or re-conceptualizing consumer behavior are out of favor with top tier investors.
[slideshare id=60622895&doc=consumerfunding3-160407181645]
[Note: It’s always nerve wracking putting detailed thoughts into the market – I’m sure a lot of people disagree with me – but I do appreciate any feedback and counter-examples of places where I’m wrong.]