One of the questions a VC gets most often is “what are you interested in?” Many investors have developed “themes” that become a shorthand used to discuss the types of deals they like. Sometimes, themes are predictive and useful. Union Square Ventures turned the phrase “Large networks of connected users” into a portfolio featuring six billion dollar in exits (and counting). The Foundry Group has built a stellar track record investing against a few simple, well-considered ideas.
More often than not though, “themes” are simply content marketing for venture capitalists, narrative fodder for journalists, and a substitute for thinking for entrepreneurs.
People find a common (if broad) connection between successful businesses and extrapolate. This isn’t necessarily bad; Steve Jobs talked about how it’s only possible to connect the dots looking backward, but themes can lead startups astray.
Themes Have a Bad Track Record
People speak, and often think in sound bites. However, the most original ideas often lack a clear analog or a crisp pitch at first. Soundcloud is the YouTube for audio, but what was YouTube compared to? There has been a flotilla of “Uber for X” startups launched in the last few years, but explaining Uber to most normal people was still a challenge even two years ago.
Themes and trends are traps for entrepreneurs and investors. Dozens of “check-in” startups were founded and funded at the peak of Foursquare’s popularity. Have any of those delivered returns? Thematic investment isn’t a recent phenomenon. Investors wasted billions of dollars, and entrepreneurs spent years of their lives chasing RFID, nanotech, cleantech, and other hyped trends that never materialized as markets. Nor is it exclusive to startups — there was a time Apple “had” to build a “netbook” or risk losing relevance.
Like Mark Twain said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
What Theme Predicted Airbnb and Uber?
“SoLoMo” and the “Real Time Web” were themes popular with investors in 2009–2010 and drove significant investment activity. Both terms would have been perfect descriptors of Airbnb and Uber, but neither company earned the label. They were just oddball startups that struggled to get funded. Eventually, after enjoying runaway success, they were hailed as exemplars of a new trend, the “sharing economy,” which in turn resulted in another wave of me-too startups.
Don’t Follow the Spotlight
By the time there is a special purpose VC fund devoted to a trend, it is probably too late to build a meaningful company in that space. That said, companies that start late aren’t doomed. Facebook had turned social networking into a “solved problem” until Snapchat created a mobile-first network. LinkedIn and Twitter found ways to fill niches and create $40B in aggregate market cap.
Once a category is established, startups need to get creative to thrive. Kickstarter put crowdfunding on the map and many tried to clone it, but the most successful competitors changed the frame. GoFundMe focused on medical emergencies and Patreon built a new kind of funding model to differentiate in an increasingly crowded market.
Quantifying the Weird & Wonderful
At Founder Collective we’re stage focused and sector agnostic. We like to invest in companies that are “weird and wonderful.” Often, we’re as surprised as anyone about which of our companies take off.
Here are five examples of “trends” (as measured by Google Trends) and the startups that defined them. Note the significant lag between the founding date and when the trend took off.
The Sharing Economy
Deep Learning & Machine Learning
How to Pitch “Weird” Startups
I realize giving the advice to focus on yet to be discovered; multi-billion dollar tech trends is a bit like telling you to find buried treasure, but there are things you can do to improve your odds. We’re proudly anti-thematic, yet there are shared traits among the weird and wonderful companies we back.
Build an Idiosyncratic Team
Your friends are more important than the Gartner Hype Cycle in determining your entrepreneurial success. The most important decision in startups, in life really, is who you decide to associate with. We like to invest in founders who see something few others do, either by dint of their background or perspective on the world. We’ve backed a world champion barista, a pro basketball player, and many other talented founders because, not in spite, of their unorthodox backgrounds. Surround yourself with the brightest (and sometimes the weirdest) collaborators you can.
Champion a Community
MakerBot built on open source project that had been active for years. Bre Pettis’s genius was galvanizing a passionate community of “alpha geeks” that would evangelize for a bold, if slightly buggy, product and turn it into a real business. We’ve also seen this with Max Lynch and the Ionic Framework and Dave Gandy who has built a rabid fanbase around fonts of all things.
Look for Intersections
Weird and wonderful startups tend to come from a well of deep IP. This doesn’t mean patents, but rather domain knowledge that is hard to assemble from Stack Exchange and Github. In the case of Oculus, building a VR headset required a tremendous amount of hardware, software, and even biology that needed to be hammered out. Complex products give you an advantage.
Think in Years, not Months
Companies building in atypical industries need to think carefully about funding. Investor tastes are fickle, and it’s often difficult to get a dollar from VCs. Angels and crowdfunding are often better earlier options. It goes without saying that revenue from paying customers is by far the best source of capital for a weird and wonderful startup.
For startups that get funded, manage the burn rate to optimize for the long haul. Practice efficient entrepreneurship. It took four to five years before the market caught up to the visions of many of the companies above. A startup limited to six quarters of capital will fall short.
Upticks in growth should be viewed conservatively, instead of as opportunities to put large amounts of capital to work.
The flip side is when the press and VCs start picking up on your industry, be prepared to capitalize on it. Peripheral awareness is one of the most underrated skills of the great entrepreneurs.