Back the Pioneer, Not the Copycat
As humans, we are hard-wired to be followers. Heroes, legends, and great leaders are part of our psychological conditioning and most people have an almost biological urge to follow them. Look at how many books Richard Branson sells or how we idolize every word coming from Elon Musk. Look at how much money a lunch with Warren Buffett sells for.
When some person or group achieves overwhelming success, we hold them as nearly infallible and assume it can be replicated through emulation.
Another interesting aspect of human psychology is our tendency to follow the pack. Closely related to idol worshipping, Asch conformity experiments show how even when we know an answer is wrong or illogical, we gravitate toward conformity (on average). Subsequent studies show that this is amplified when direct observation is not possible.
Let’s move out of the psychological theory and look at a few examples…
- Take the tv industry for example. When one show becomes immensely popular, a strong of copy-cats will inevitably follow. Remember when “Who Wants to Be a Millionaire” gripped the nation? Game shows suddenly appeared on every network. Then “Survivor” introduced us to the reality tv show concept. Reality shows spread like wildfire. Then we saw the same trends for other tv pioneers like “American Idol” (performance competitions), “The Sopranos” (a bad-guy main character), and “Game of Thrones” (the fantasy epic). The question is, who wins in this? The pioneer or the copy-cat? It’s always the pioneer.
- Let’s also consider sports. When a dominant team is assembled, others try to emulate their success. While learning from successful people is highly advisable, copying a single approach as the definitive answer is not. A decade ago, the San Antonio Spurs had the “twin towers” of David Robinson and Tim Duncan. These were two Hall of Fame centers, whereas the typical basketball team had only one big man. But it worked, as the team won two championships and suddenly, all the other teams wanted to emulate them. Centers became more hotly demanded, even if their past performance or future potential didn’t justify it. The same thing is happening with the Golden State Warriors. They are winning with outstanding shooting. Now everyone wants to assemble a team of dominant 3-point shooting. But in these examples, it wasn’t a single dominant strategy. It’s that these were great teams, with superior talent, coaching, and organizational culture.
- Moving over to business, the world is in awe of the companies that build financial empires seemingly overnight. Companies like Google, Facebook, and Uber have ignited an unprecedented wave of aspiring founders dreaming to create the next unicorn. As you get into the startup world, however, you find a lot of copycatting. After Google became successful, everyone determined search as the next great thing. Then founders turned to social media as the answer to their industry’s problems. And now founders are all pitching to be the Uber of their industry’s market. These companies were revolutionary because they turned a simple concept into a dominant vision. They were pioneers. And while lessons could be learned about their strategies, trying to replicate their success is unlikely.
None of these examples are surprising. It’s so much easier to come up with a strategy of copying another successful person, group, or concept. Pitching that is easier for network executives, sports owners, and startup investors to understand. You can give factual examples of success. And since humans are naturally risk averse, it’s not surprising that it works.
The visionary, however, is rare. Not many people can visualize a market that doesn’t exist or product that has yet to be invented. Fewer can turn that visual into a tangible business plan and comprehensive strategy. And even fewer can actually execute it.
What Would You Do?
Both ways work. Many successful companies are founded on finding a better business model, launching a superior product, or competing for a niche segment of an existing market. If you’re a founder, it’s probably easier to build a successful company on doing one thing better than your market’s competition.
But is that the best thing for investors? Angel investors and venture capitalists are after the big payday. That’s how their fund works… it knows that most of their portfolio companies will fail but 10–20% will yield a 10–100x return and justify their risky investments.
And almost all the big paydays that investors want to emulate were pioneers. They found a demand and created an entire market around that need.
Which brings us to my point. Who are the people you want to team with?
- The visionaries or the copy-cats?
- The people that have a plan toward something unique or someone that wants to re-apply knowledge now in the public domain?
- The people that want to dominate an entirely new market or the ones that want to compete in a market that already has well-established, well-financed competitors?
It’s actually pretty easy to see what the next big markets will be…
- Blockchain is a more efficient way of doing many things — transactions, record-keeping, and more.
- AI expands computing capability by many magnitudes.
- And virtual reality takes communication, visuals, and entertainment to a level of immersion that screens can’t provide.
The next batch of unicorns are so much more likely to be in these fields than in software, mobile apps, or web services. But investing in technology that hasn’t yet materialized, markets that haven’t yet formed, and products that are almost entirely conceptual go against our natural human conditioning.
What about investment style?
While the type of companies getting investment are worth thinking about, the investment criteria is also worth considering. Startup investing seems to value certain attributes. Investors want a prototype. They want a team of founders rather than a solo founder. They want you to raise multiple rounds of financing before exiting. They want a focus on scalability before hitting profitability. These have become established “facts”.
But is this just “copying” the typical startup investor playbook or is it really the optimal way?
Investors obviously have to determine it on a case by case basis. But consider the following rebuttals to the consensus:
- No Solo Founders
Investors like to see a management team in place. For early stage, this means many co-founders. However, is that always wise?
Might it be better to place your trust in a founder that understands a cap table? Co-founders accept 50% or 33% equity before the company gets started. What about the founder that rejects this and realizes they can hire equal and possibly better talent without the dilution? This demonstrates smart business decisioning already.
Multiple founders are definitely not a negative. But a rule to eliminate a great solo founder? That would have eliminated a lot of great investments (Amazon being the most obvious). And as this article points out, most successful companies are actually from solo founders.
2. A Prototype
As humans, we’re more likely to believe things we can see, hear, and touch. An idea is easy and hardly representative of a successful future business. Anyone can come up with a great business idea. This is why many investors want to see a prototype or some form of intellectual property.
Fair enough. Getting to the step of actually creating something is a valuable test of competency. However, is this absolutely required?
Prototypes can exist in many forms. Every business should be able to go beyond an idea and create their proof points. Maybe it’s a website. Maybe it’s a detailed requirements document for software. Maybe it’s a script like movies use to assess ideas. Or maybe it’s an idea so well-developed that it’s even better than a prototype.
Prototypes are really just half-baked versions of a product. For a Series A, a product should exist in its full form. But for seed funding, investors ought to consider the power of using the funding to build a full product rather than something small.
3. Multiple Rounds
It has become well established in the startup culture to go from round to round. For an angel investor, that’s a curious proposition. Why back a company that will almost guarantee dilution? It’s one thing if the Series A or subsequent rounds are truly being used to build a stronger return on equity. But what happened to the fundamentally run company that grows through profitability?
Obviously since angels are making illiquid investment, they want possible exits as soon as possible. However, there are so many other models to consider. How about a company that achieves profitability immediately and grows at a manageable pace? How about a company that offers a partial dividend?
There’s no right or wrong way. If angels are happy with dilution then fair enough. But it’s interesting to see many steer away from the more fundamentally managed companies because it doesn’t fit the typical startup roadmap.
4. A Defined Exit
This one is similar to the multiple rounds but slightly different. Are all angels really looking for an exit? Might there be individual investors that prefer a 20% annual return via dividends? Or maybe a company that has a 7–10 year IPO horizon?
There are a lot of great businesses that can be funded without going for an exit. They will return big money. But startup funding is reluctant to back them. At the very least, there’s a big opportunity for investors to take this niche. You’ll have your pick of the best, as no others investors are funding such companies.
5. Tech Only
Pretty much all angel funded companies are either directly tech companies or use technology to achieve a competitive advantage. That’s ok. Many of the big investment success stories come from tech. It’s the hot business model.
But angel investors ought to think beyond the crowded tech space. If all entrepreneurs are going toward tech software, AI, and other such businesses then there’s a lot of room for innovation in other spaces. That might include real estate, hospitality, service businesses, and more. Bringing the principles of angel investing to these businesses have interesting potential. It’s all about returns so why not consider it?
As I’ve repeatedly said, there is no right or wrong way to invest or found a startup. Every business requires its own unique circumstances to achieve success.
However, what makes Silicon Valley and the startup world so wonderful is the rejection of consensus thinking. It’s about innovation and creativity.
That’s why Google made search the biggest money-maker ever. They thought differently. That’s why Facebook took social media to the next level. That’s why Amazon and Alibaba took retail to new possibilities.
Being the pioneer is where you make dreams come true.
And I’d love to talk to you about what I’d like to pioneer:
There are two businesses I’m looking for finance partners on…
1) Virtual Reality Learning. We are working on becoming the world’s largest learning, training, and education company. VR is in its infant stages and only a few years away from going mainstream. This makes it the perfect time to invest in this revolutionary technology that will have impact comparable to the internet. And it is perfect to enhance the way we learn.
If you’d like to find out more about what we’re doing, get into contact!
2) Modern Accommodation. I talk about this subject a lot on this Medium publication. The accommodation industry is ripe for innovation and modernization. I’m looking for partners to bring that vision to life. Again, contact me for more details!
About the author: Dan owns several businesses across the futuristic landscape.
Startup Conception offers services to startups and small businesses including financial modeling & budgeting, investor decks, strategy, interim CFO/COO, international business, and IT outsourcing
Reverse Tide seeks to change how we learn and apply those learnings to exciting career opportunities.
RT Virtual Reality provides learning and business solutions in the VR space (the tech that will most change the world).
And Modern Accommodation Group seeks to apply future-proof concepts to the accommodation and real estate world.
Check out our content and services and get into contact if anything interests you!