Inside View Investing

It seems that people who invest in startups tend to care a lot about things that have an indirect relationship with success.

• Traction
• Social proof
• Impressiveness of the team
• Not being a solo founder
• Design
• Introductions

I propose a different framework: consider the likelihood of success at each point in the roadmap to success. Let me explain.

Let’s make up an example of a startup: Widgited. Widgeted was founded by a 20 year old college student who is smart, ambitious, determined and well-read when it comes to startup blogs. However, the founder is inexperienced, and is learning on the go (doesn’t have a programming, design or business background).

Widgited aims to revolutionize the widget. Right now, people are buying widgits, and don’t really complain because the thought never occured to them that they could be made differently.

Widgited needs a $150k seed round to build a beta version that would have only its core functionality. However, this core functionality changes the game in the widget market. It solves a real problem that people have. If Widgeted could get a bunch of users, and show proof of concept, it would hopefully provide Widgited with enough traction to raise a series A, expand and add functionality, and eventually take over the $100m market for widgets.

However, there are a couple of red flags. The founder doesn’t have a design background, so although the beta version widgets will still be useful to customers, they might look a little cheap/unprofessional aesthetically. And because the founder doesn’t have much of a programming background, he won’t be able to add many features to the widgets beyonds its core functionality. And finally, because the founder doesn’t have a business background (other than reading a bunch of books and stuff on the internet), marketing the widget could potentially be an issue.

Question: would you invest in Widgeted?

Here’s how I think you should approach that question: consider the roadmap Widgeted will have to take in order to be successful, identify the points that may be roadblocks, and consider 1) how likely they are to be roadblocks, and 2) if they happen to be roadblocks, how likely it is that the founder will be able to navigate around them.

A lot of investors seem to not do this. They seem to be turned off very easily by “red flags”, without considering exactly how the “red flags” will cause roadblocks. And on the flip side, they seem to be turned on very easily by “green flags”, without considering exactly how the “green flags” will allow the roadblocks to be avoided.

Roadmap to Widgeted’s Success

• Raise the seed round.
• Build those beta versions with that core functionality.
• Market and sell these beta versions to show proof of concept.
• Raise a series A.
• Use the money from the series A to hire people and add more features that’ll allow Widgeted to take over the market.

Questions About Roadblocks

• Will you be able to raise a seed round?
• Will you be able to build that beta version the way you envision?
• Will your beta version really be solving a problem for users enough for them to want to buy it?
• Will the cheap design prevent users from buying it, even if it would solve a real problem for them?
• Will the lack of full functionality prevent users from buying it, even if it would be solving a real problem for them with the limited functionality?
• Will your lack of marketing experience/knowledge prevent you from effectively selling your beta versions?
• Will you indeed be able to raise a series A? Even if you get the traction and stuff, inefficiencies in the venture capital market could still prevent you from raising the round.
• Will you be able to use the series A money to take over the market? Could you do a good enough job hiring and managing people? Choosing the right features to add? Marketing? Monetizing?

My main point in this article is that these are the questions an investor should be asking himself. Note that all these roadblocks could be avoided, even if there is…

• No initial traction.
• No real social proof.
• A single founder, who isn’t too impressive (on the surface at least).
• An aesthetically cheap looking beta version.

Edits:

1. Another way to think about this is that investors are looking at a level of abstraction that is too high right now. They should be looking at a lower level of abstraction.
2. The performance of VC as an asset class sort of backs up my claim. There’s a few firms that get the good deals, and they perform well. But the other firms don’t outperform the market, because they can’t get these good deals. If you can’t outperform the market when you don’t get the trendy deals, your approach clearly isn’t working. Put another way, if investors need deals to look really obvious to them in order to perform well, they’re not good investors.