Being the first mover sucks.

Time-travelling start-ups, business textbook theory and a simple investing tool to keep in mind.

Timing is the most important factor for both startup success and VC investing. There, I said it. Team, market, product etc etc. are all linked to, and driven by, the umbrella factor — timing*

I’ll briefly look at this in two ways: from the success of a start-up and from an investor’s point of view — both assessing the elements of timing from different angles.

Timing for the start-up

Many entrepreneurs and startups have been ahead of their time. Not in just the realms of far-fetched entrepreneur imagination or in unrealistic fictions e.g. self-tieing laces or flying cars in Back to the Future (filmed in 1985…). But ones where by start-ups were founded on a great business idea, just a solid 5–10 years before the verticals were appreciated by the customer. The verticals of today, take on-demand start-ups as an example, could have made an impact long before they have done, however as consumers, we were not ready. It’s kind of like some sort of freaky start-up time-travel.

Don’t believe me? Keep reading.

All hail Uber (pardon the pun, slightly ironic one at that…), the start-up has shaken up the taxi sector, changed the way we view transport and has introduced the notion of “on-demand” into our mainstream lives. Many have since aligned with this thinking and as consumers we can get what we want and when we want it via “on-demand” start-ups (e.g. Deliveroo, Bizzby). Couple this with same-day delivery offering by the likes of Amazon and many others; the on-demand offering is solidified into our lives.

However, same-day delivery / on-demand offering was first introduced by famous Web 1.0 blow-ups such as Kozmo.com and Webvan. Put simply, no one wanted it back then, they failed to back any money and were trapped in a pre-emptive stage of the business cycle. In more detail:

• Kozmo.com lost hundreds of millions in value in the dotcom crash
  Webvan lost over a billion in investor money
• Today, Kozmo.com’s co-founder has revived the idea with MaxDelivery.com; it has a small customer base of c.100k, but has grown slowly and steadily since 2005 on its own profits, supporting a staff of 130+. The recent influx of new startups offering anything you want on-demand proves that the idea wasn’t bad, but the timing was.
• If you look at Webvan, founded in 1995 (bankrupt by 2001), they focused specifically and deliberately on the grocery market, yet it is only now that home delivery, in particularly grocery, is at its most competitive, the likes of Amazon et al. are all extremely focused on the multi-billion dollar market. Plus if you include the complete food delivery channel from groceries, to prepared food to final meal delivery, then the market it triples in value, competition and investor sentiment. Either way the market is now not were it once evidently not. Granted there were other more granular reasons for failure but the underlying factor is the customer and existing technology wasn’t ready, no one wanted same-day / on-demand products, (in particular for their groceries or meals) and no one had an easy platform to access it even if they did (now through our smartphones).

Other examples include — virtual reality (e.g. Nintendos Digital Boy), digital currency (e.g. Booz and Flooz), vertical e-commerce (e.g. boo.com et al) and smartwatches (e.g. Microsoft). All of which are now hot investment areas.

With the beauty of hindsight it’s easy to say all of this now. But what it tells us is although a team and product are key to start-up success, if there is limited to no product-market fit then the start-up will naturally fail. However the lack of fit is not always within the founders control. As we can observe from the above, the lack of alignment with the wider tech environment and readiness from the consumer — the market difficult to crack. The beauty being that no start-up really knows this until they try. If they realise quickly they’re in the “Webvan trap”, then they can preserve capital and wait it out, or re-visit when the time is right, and perhaps re-incarnate like Kozmo.com.

Timing for the VC investor

How do VC’s use Timing to shape their investment decision? Well first and foremost, they have to be able to avoid the start-ups trapped in the above “pre-emptive stage”, which is quite easy (he says…) — there wouldn’t be much hype around them, nor would there be any great traction or success. However once the market, technology and consumers are ready, they need to go a level deeper and assess timing in a little more granularity. Simply put they need to consider the “Installation vs. Deployment phases”.* * & ***

USV (Union Square Ventures) define it so eloquently, the Installation vs. Deployment phases can be defined as follows:

In short, the installation phase is when a technology first comes into a market and investments are capacity building. The deployment phase is when this capacity is used to actually affect broad changes in the economy and society. The installation phase is (almost) always marked by a speculative bubble.

Current examples may include IoT, self-driving cars and Machine Learning. We are talking about sectors that are at the forefront of the tech world, often hyped about and receiving attention from the media and VC’s. Hence why it’s often difficult to differentiate between Installation vs. Deployment. ****

Investing in installation is risky as few companies will make it into the “mature” market. Where as investing in firms in the deployment is not only less risky as they are already on the cusp of a “mature” market, but they are also more likely to dominate in the eventual “mature” markets — clearly much better for investor returns. Note, there are still winners here, which in turn helps to fuel the installation phase itself, we have seen many speculative bubbles in different areas, fueled by early spectacular exits (e.g. in VR — Oculus sold to rift and autonomous vehicles — Cruise sold to general motors). While it is easy to see this as “irrational exuberance,” from an overall social perspective the investment in the installation phase can yield massive benefits eventually as we have seen with the mobile phones and the Internet. The dot.com boom and then bust, signalled the end of Internet’s installation phase, but internet now rules our lives; the way we shop, communicate and live. Investing in these companies around 2000 would have been great but we’ve seen the collapse of many since and those that were around then, tend not to be dominating, investing in them 5 years later would have been much better.

I suppose an obvious question now would be — why would those first to the market not dominate the mature markets? In business schools, the textbook tells you being a first mover is key and that pioneers are winners. Well, this is not quite the case. Golder and Tellis study showed us this all the way back in 1993, the concept of first mover is mythical by nature and should be viewed as the race to fail first.

Concluding remarks

Many start-ups have been ahead of their time, without any ability to change the tech landscape then they fail to gather product-market fit and consumer traction — as a result the only fame can be from reflection blogs like this one years after their failure. Investors need to firstly bypass these pre-emptive start-ups and then secondly focus on deployment vs. installation.***** If they can ignore the hype and focus on the much broader, holistic view on the market development, understand how and when the horizontal technologies will be applied to different verticals, and appreciate it’s not who is first to the market but who is last to dominate, then investments may just yield a much greater return.

And as Erin Griffith nicely put it:

“Venture investors are fond of their truisms, to the point that the startup world is riddled with clichés. But few cut deeper than the one about timing: The only thing worse than being wrong is being early”

* Bill Grossman gave an insightful TEDx talk on the importance of timing https://www.ted.com/talks/bill_gross_the_single_biggest_reason_why_startups_succeed

**I’m aware this thinking is based on the economic theory of Carlota Perez

***Note this is not the difference between early stage and late stage investing, this is more holistic and at a market level rather than at the life-cycle of a company. Take a VC firm investing in a cross-sector, technology specific Machine learning start-up, or even just an AI one for that matter, even if the company is at a growth stage (lets assume Series C onwards i.e. its worked through any major pivots, established product-market fit and starting to deliver performance), the wider AI market is actually still in the installation phase, pure-play AI start-ups are not mainstream and neither are sector focused start-ups applying AI. All in all, such an investment would still be in the installation horizon. How long until the deployment phase starts is another question, particularly for a hot sector such as AI. In some cases, many start-ups are actually inhibited from getting into their own growth stage if the market is still in installation, which makes sense, and hence the two are inherently correlated.

**** Take 3D printing for example, the technology that enables objects to be created directly from a digital file, after initial investment and hype, the technology has only started to move beyond the installation phase, and now heading for deployment. During the installation phase stocks such as 3D Systems and Stratasys soared (and indirectly Makerbot claiming 3D printers would be as common as microwaves) but then crashed back to earth. In the meantime, on a B2B basis companies such as Tesla and SpaceX would not be able to progress at the speed they are without 3D printing and more recently HP, who is progressing in the market with a much faster printer and Shapeways is bringing 3D printing direct to consumers.

***** I’m also aware this is simply one school of thought on investing and many may opt for installation over deployment, I just think doesn't make much sense hence…