In Our Thoughts

(Written by David Shen, Director, West Coast Operations)

I was on a panel at Fundingpost’s, Silicon Valley VC and Angel Conference this last Thursday and once again the topic of how important the startup’s idea was, relative to other factors, in an investor’s decision process to invest.

Overwhelmingly, the panelists’ response that super smart and entrepreneurial people were much more important at early stage. This was because of the fact that almost always their initial idea was going to be wrong, or needed to be adjusted, and that someone needed to be smart and adaptable enough to pivot their activities into a viable entrepreneurial direction. So like war, the initial plan seldom survives contact with the enemy, or the marketplace.

However, I think I was one of two folks who said that we bet on superior people that were ALSO working on a great idea.

There are numerous documented cases of investors who bet almost solely on rockstar entrepreneurs and will invest in a team that has genius credentials, even if the idea is underdeveloped. Why they would execute such a strategy:

1. Their past experience has shown that smart entrepreneurs has been more predictive of a successful outcome, but relatively independent of the idea they are working on or where they started.

2. They have enough capital to spread their bets among many smart teams and be less sensitive to exactly how good their initial idea is.

3. Given enough capital, a strong team/entrepreneur has enough runway to take a less developed idea and iterate until it is a strong idea. So those who qualify for item 2 above will readily support strong teams/entrepreneurs because the initial capital outlay is large for the startup, but still miniscule relative to their entire fund.

3. In today’s world, there is a huge movement to create and nurture entrepreneurs. Joining up with this effort aligns with their own thinking that more entrepreneurism is good for the world, as well as generates positive public relations with the outside world on these efforts. Thus, to support rockstar entrepreneurs at early stage is a positive thing for them and the world.

Many big names are executing this kind of strategy right now. If they are doing well, then shouldn’t I also worry less about the idea and just bet on super strong teams, even if their idea is relatively weak?

Why I look for strong entrepreneurs AND great ideas:

1. I have met strong teams but with underdeveloped ideas and walked away from investing. This is a personal choice, where I like to support them in their direction and especially if I have experience or an affinity for the direction they took. If the direction they take is very fuzzy, then I feel less of a connection with their project.

2. Personal experience plays out here, but I have seen many super smart people fail at their ideas. So for me, it’s not enough to just bet on rockstars and be more lax about the idea. I want to maximize my odds of success by finding strong entrepreneurs who are at least starting with some breakthrough idea. If they do not start with a breakthrough idea, then it is just as possible that they will pivot their way to one as it is to pivot to nowhere.

3. Now that I am at Launch Capital, I have more capital to deploy but still it is not at the level of other funds who have much deeper pockets. So there is a practical strategic consideration I need to make in the face of what Launch Capital can bring to the table. It is not possible for us to make the number of bets into smart people as others are making, and therefore I must be more discerning in my decision process.

4. Today, we are seeing an explosion of entrepreneurism. People are graduating from top universities and taking their genius-ness out to Silicon Valley to create a startup. However, this has generated what I call the MIT Problem for Startups where *every* team I meet is super-strong and smart. Even those in the valley who execute the invest in strong teams strategy can’t invest in everyone. So what differentiates you from the next team? Not everyone from MIT has what it really takes to become an entrepreneur, even if you have genius intelligence. One of those differentiating factors is your idea, especially if it is a superior one.

In times past when entrepreneurism wasn’t so popular, a superior team would definitely have an edge over an average team since there weren’t that many of them. But I think in today’s world, there are too many people with superior credentials to pick from and it’s not possible for all of them to succeed. So there needs to be some other aspect which differentiates them from others – hence the presence of a superior idea.

5. Given that we are seeing not only an explosion of innovation, but an explosion of me-too ideas, many strong teams are working on the same or similar ideas. Even strong teams are not enough to dominate a marketplace if every team (who are also strong) is going for the same customer with a similar product. The chance is very great that you will all divide up the market and end up with smaller pieces of the whole no matter how much of a genius you are.

I don’t want to invest in a strong team working on a me-too product, or an incremental product, or building a product in a super-crowded marketplace of other similar or “blurry” products. I want a strong team working in an area that is game changing, exponentially different/better, or simply has not yet been worked on yet.

6. At early stage, you don’t have much time to operate. Your clock is ticking as your bank account runs down and you better have some sort of traction for your product/service before it does. Thus, if you start with a weak idea, you may need a lot of time to iterate to find a viable idea to turn into a business. But you’re early stage – you don’t have time! If you happen to start with a superior idea, then you’re at least pointing in a direction that has a lot of positive factors for success; undeveloped ideas are much less certain and I’ve seen a lot of people end up with nothing as their bank accounts ran out, no matter how smart they were.

It’s all about increasing my chances for creating a good outcome for my investment and time. Strong entrepreneurs are a prerequisite for success, but in the crowded startup world of today, it’s not enough to lessen the impact of weaker idea they are working on. If there are so many ideas being worked on, then I can wait for the right smart/superior team to come along who is also working on a superior idea. Then my probability for getting a great outcome for my investment is much higher than without a superior idea.

Footnote: In thinking further, it is obvious that even those who invest in super strong entrepreneurs are still looking at their ideas. Even though they are writing about the fact that it’s all about super smart entrepreneurs, they are still banking on the idea in their decision process because otherwise more people would get funded. Very rarely do entrepreneurs get funding to work on really weak, undeveloped ideas; usually these people are repeat entrepreneurs with a stellar track record and with a prior relationship with the funding source.