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May 31, 2005
MYTH: "VCs care about what your application looks like."
REALITY: “Your application is irrelevant to smart investors.”
This is another one of those major disconnects between entrepreneurs and investors — technically oriented entrepreneurs tend to spend way too much time building an impressive demo or alpha production system, and often waste the entire seed or friends and family round, building one. They invest alot of time, and invariably are dissappointed, when VCs show little or no interest in even looking at it.
First, let’s mention some high-profile venture-backed companies as data points. eBay was apparently an ugly application with a clumsy interface when the first institution money went in. Google has never been a full-featured application, infact, it’s hard to get a simpler interface — yet it gets the job done and quite well at that. But it wasn’t until the advent of ADWORDS that investors even cared about Google.
And then there was my experience as CEO of my first venture-backed company, the Series A investor never showed any interest in ever looking at either the demos or even the live production system. I’m not sure he EVER looked at it over the life of the company — and yet he was a very active and highly insightful and productive member of the Board of Directors.
So what gives? Why don’t VCs show any interest in the application you have spent so much time on and are so proud of? Sure, they may be polite and look at it — but their eyes often glaze over — not because they don’t understand it, but because they just don’t give a damn.
Q: Why? A: Because it’s irrelevant to them!
Scenario A:
If you don’t make a credible case for —
(1) the existence of a significant market opportunity (BIG! BIG! BIG!) and
(2) a cost-effective high-growth execution strategy (SCALABILITY! SCALABILITY! SCALABILITY! ) which achieves significant marketshare (BIG! BIG! BIG!) —
then the demo just doesn’t matter.
Scenario B:
If you DO make a credible case for —
(1) the existence of a significant market opportunity (BIG! BIG! BIG!) and
(2) a cost-effective high-growth execution strategy (SCALABILITY! SCALABILITY! SCALABILITY! )which achieves significant marketshare (BIG! BIG! BIG!) —
then the demo just doesn’t matter.
In either scenario, the demo just doesn’t matter.
VCs are only interested in Scenario B. Without #1 and #2, your deal is just a “Non-Starter”.
It wasn’t the bad-looking application that made so many VCs initally pass on eBay. They just weren’t convinced about #1, the existence of a significant market opportunity, so both #2, The Execution Strategy, and the actual system were of no interest to them. The first investors of eBay had to be convinced, first of #1 and then of #2. Once they believed in those two things, the deplorable state of the actual application was irrelevant — that could be fixed — but you can’t fix #1 and #2.
In my case, since my series A investor recognized #1, The Market Opportunity, and then believed in our #2, The Execution Strategy (which includes The Team), he never showed any interest in the actual product. When I finally asked him years later why he never even looked at the product, he told me (paraphased) —
I knew you would end up with a product that the market demanded so why would it ever matter what I thought of the product? All that mattered was what the market thought of your product. And since I wasn’t a target customer, any opinions I might have might actually be misleading — and then I would be providing negative value with my impressions of the product, since my impressions would have carried far too much weight with you and the rest of management.
Perhaps he was just lazy and this was just a clever justification —but his fund was a top performer and he was quite active in helping us grow the business — ie, he worked hard and provide us lot’s of examples of positive value.
In summary:
Note well, especially if you are technically oriented and, therefore, have a propensity to want to show off what you are good at —
If you want to attact venture capital, you need to focus on
(1) The Market Opportunity and
(2) The Execution Strategy
Your actual product is NOT mission critical (at this point).
Posted by cmayaud at 09:52 AM | Permalink| Comments (3)
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| Posted to Business Strategy | Entrepreneurship | MYTH of the Week | Open Source | Patents | IP | SOFTWARE IT | Venture Capital Process | eHEALTH
Comments
Excellent post, Christian. I make reference to it my my blog today.
Carlos
Posted by: Carlos N Velez at May 31, 2005 12:12 PM
The thought keeps popping up in my head: Christian is a great writer.
I noticed a pattern over the last few weeks; you have spent quite a bit of time-but time is irrelevent if you can do what you do quickly-on writing great articles on your blog.
Personally I think you should be on the best seller lists with a book called " The Tao of Chris: Debunking the myths and the introducton of mind altering stategies for well being in the Corporate World."
Well done Christian. Your thought, views, pointers, links and aphorisms and what you think's, have really provided added value for having known you.
I would gently like to push you toward writing because you are a teacher at heart and books that teach help people and you have the gift.
Posted by: Michael Pokocky at May 31, 2005 06:52 PM
Good writing Christian! Also, it leads to a question: Who was your wise VC mentor?
Posted by: Jim at June 20, 2005 01:55 PM
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