Yesterday I came across an interesting question from a well-known investor in the US community, Joseph Marc Blumenthal, in his Facebook post about whether investors should give advice to startups whose ideas they consider to be a failure.
The topic is really very interesting, but I would like to write more about whether startups should always listen to investors' advice and whether they can really help.
Let's try to understand the "flags" that Paul described.
1. The idea is dead (tested by many unsuccessful attempts)
Imagine a situation that Zhang Yiming comes to investors in 2015 and says: "I want to create a new social network for young people!" And investors say to him: "You're crazy, there is no point in getting into the social network, here's Facebook, here's Snapchat, everything is already occupied and divided, and thousands of people like you are convinced that the idea is dead!"
TikTok was launched in 2016 and now has a valuation of $100 billion.
2. Insufficiently large market, the problem is too local, outdated, uninteresting
Hi Brian. I apologize for the long answer. We discussed your project and, unfortunately, came to the conclusion that this is not the best investment prospect for us. The potential service market does not seem large enough to us.
This is how early investors responded to Brian Chesky, founder of Airbnb when he wanted to raise $ 150,000 for 10% of the company.
The market for the rental of air mattresses for spending the night (which is why the name went) seemed "not big enough, too local and uninteresting."
For 2019, the company was valued at $31 billion.
Another good example is BrewDog, which didn't even qualify for the BBC's "Dragons Den" investment show. The guys were looking for 100 thousand pounds of investment for 20% of the company. Nobody believed that beer could be reinvented. The market is "outdated and uninteresting." Today the company is valued at over $2 billion.
3. The problem is interesting, but there is no solution (product)
In 2010 Michael Karnjanaprakorn came to NextView Ventures with the idea of revolutionizing education through personal tutoring. Investors refused because:
He had nothing to show. His product ideas were supported only by these that were not even tested.
Skillshare is now one of the top online learning platforms with over $42 million in investment.
4. The idea is worthy, but this startup does not have enough strength to implement it
Private space companies NASA initially regarded only as a means of delivering cargo to the ISS, and the agency does not believe at all in their ability to create reusable spacecraft from multistage rockets.
The entire world community asserted that never in his life would the geek who created PayPal be able to launch rockets into space. I don't think it's worth telling more about this geek.
5. An interesting hypothesis that the startup has yet to confirm (show traction)
This is where investor vision comes in. There are a huge number of business models where it is extremely difficult to show the first "traction" without investment. That is why there are different stages of companies.
There are a huge number of companies that were given money at the idea stage and thanks to this money they became successful. There are also many more companies that have not become successful, although they could if they had raised money.
Sometimes it resembles a chicken-egg problem, you can never say with 100% accuracy why there was no traction: because the hypothesis was shit or because no one believed in it.
The most interesting fact is that often in the PR activities of young investment funds, there is a “survivor's mistake”. Funds are actively promoting with exits at 10x, but they rarely publish cases when they missed an opportunity, where there could be an exit in 100x.
Top funds are doing better with this. One example is the Bessemer Venture Partners fund, which, in addition to its impressive portfolio, also shares its anti-portfolio. I think it is in their anti-portfolio that a huge number of entrepreneurs will find a lot of inspiration.
The conclusion I want to draw from all this is simple. Venture investing and entrepreneurship are two completely different worlds, living by completely different rules and having completely different motivations. Sometimes these 2 worlds intersect with a common multiplier, sometimes not.
The world's most successful startup accelerators, such as Y Combinator, adhere to the tacit rule of rejection for one simple reason - they understand that the likelihood that they are wrong is extremely high. And with their advice or feedback, they will do a "disservice" to the entrepreneur, who is likely to become successful without them.
I've had 5 startups in my life. Each of them would end in disaster for any venture capitalist. But least of all, I would like to hear from one of the investors the phrase "the idea is dead, tested" or "the idea is worthy, but you do not have enough strength to implement it." With this kind of feedback, I would never fail, never gain experience, never learn, and certainly would not be where I am now.
Now I have a 6th startup, we are building a SaaS platform in the field of big data and machine learning for marketing. We help companies around the world increase the effectiveness of their advertising investments. We believe in what we do, our clients are grateful to us for the result, we have assembled an incredible team and work the way we like .
And who knows, maybe this time we will not be able to become a "unicorn", and someone will buy us for worthless (by VC standards) 10-20 million dollars. But we will gain new experience, new contacts, new ideas that will make us much more experienced entrepreneurs.
And somewhere in the depths of my entrepreneurial soul, I am very glad that when I was 20, they didn’t write to me “the idea is dead”, I got my opportunity to “get some fun” several times, I didn’t end my entrepreneurial path without ideas, knowledge, experience, and dreams...
And no book on Customer Development and Product / Market Fit teaches you better than your own experience! In the same way, no VC investor without similar entrepreneurial experience will give you good advice. It can only be given by those who have passed the same way as you.