There is a supply and demand equation for every startup’s product or service. In early stage companies, I sometimes see too much from the supply side and not enough from the demand part of the equation. In other words, inventing great products that no one wants to buy is a waste of time, money and effort. While there are not nearly the amount of startups on the East Coast as in Silicon Valley, being in New York I do have tremendous access to Fortune 500 companies. One of the ways we like to invest is by talking with the buyers in the market, the CIOs and CSOs, and understanding what their pain points are, what solutions they are evaluating, and how open they are to working with early stage companies. We have gotten many a referral using this methodology and it has helped us develop our own investment thesis on certain markets where we can look ahead far enough into the future but not so far ahead that we invest in just another technology looking for a problem to solve. We also like to speak with strategic partners and understand gaps in their product portfolio (to the extent they will share that with us) to further triangulate our thoughts on the market. Bill Burnham has a great post on thesis-driven investing and why it matters in today’s competitive venture world.
Tying together a demand-driven approach to investing means that you have to have access to the IT decision makers with the budgets. This is typically not easy as every tech vendor in the world is pounding on their door to give them a pitch. That being said, if there are more IT buyers like James McGovern that understands the value that VCs can bring to IT buyers then we will all be in great shape funding companies that solve real problems. James, an enterprise architect at a major Fortune 100 company, recently wrote a post on ITtoolbox explaining how his brethren can continue to innovate and stay ahead of the curve. He goes on to say:
The methodology used today within corporate America is fundamentally busted. Sitting around waiting for a vendor to show up on your doorstep with the right solution at the right time is simply gambling (I really wanted to say irresponsible). Enterprise architects need to not sit on their butts waiting for the "right" solution to magically appear. Instead they need to make sure the venture capital community understands what problems we face so that they fund the right portfolio companies.
Competitive advantage within corporate America via the use of technology isn’t gained by implementing service-oriented architectures or any of the other hype in published in industry magazines. SOA is a reality of today’s marketplace and everyone will be doing it (hopefully doing it the right way by purchasing my upcoming book).
Competitive advantage can be gained though by being first to implement new waves of technologies before your competitors even learn about it or it appears in a matrix by your friendly neighborhood industry analyst. It is in the best interest of enterprise architects to start setting aside time to learn about technologies that are not yet released within the marketplace and are seeds within the minds of CTOs of Internet startups.
With this thought in mind, I have decided to take deliberate action in making this situation better for both parties. I am reserving Friday’s at 5pm on my calendar to talk with venture capital firms who want to bounce ideas off me related to funding or to listen to the pitches of early stage Internet startups that simply need a sounding board for someone who sits in the walls of corporate America on a daily basis…
The same principles go with VCs as well – sitting around waiting for deal flow in this competitive VC market will not get you very far. Be proactive, develop an investment thesis, and reach out to the end users like James – I wish more IT buyers thought like him. Of course, as VCs we must remember not to solely rely on the buyer’s advice and use as many data points as we can to further validate or kill our investment thesis. The danger of solely relying on IT buyers is that the solution may only be necessary for a handful of buyers and that the problem is so near term that by the time your product is ready another vendor has already stepped in to fill the void.
Starting with the problem and then developing the solution – it sounds so easy, so why do so many people have hard time doing that? I made the same mistake when I tried starting a company, and thought a lot about why I didn’t see the obvious problem with developing the technology first. I had some thoughts about how my training and experience led me down this wrong path. http://bobllama.blogspot.com/2005/05/markets-vs-technologies.html
Are we in fact evolving into a stratified market somewhat analogous to sports and music, where a few superstarts do incredibly well but even decent, competent second-tier players do little better (in the long-term) than AAA baseball or playing in bars and small clubs?
From the statistics I’ve seen, the IT “pond” is not growing very rapidly and the appetities of the big fish like IBM, Oracle, Microsoft, Accenture, et al are devouring more than their share. How can anybody consider that an appealing target market?
Sure, IT has unsolved problems and its needs are evolving as the business world evolves, but are the odds of success for a competent new IT-oriented venture really that much better than the chance that a competent ball player or guitar player will be a much buigger success than a middle-class manager?
What *are* people smoking?
— Jack Krupansky
>One of the ways we like to invest is by talking with
>the buyers in the market, the CIOs and CSOs, and
>understanding what their pain points are, what
>solutions they are evaluating, and how open they are
>to working with early stage companies.
>
As long as you are clear about the fact that you will never invest in anything even close to a disruptive technology. You are trapped by the safe box you voluntarily crawled into with dollar signs painted on all 6 sides which shields you from any chance of being involved in any landscape changing products or services.
Not that there is anything wrong with that. It’s certainly your right to dance with the “application developers” instead of the “basic researchers”, but don’t confuse what you do with anything leading edge. It may feel like big stuff from inside the box, where the only light in is from the people willing to dance in the box. Incremental improvements, sure. And everyone loves easy buyers, no doubt. But that’s it.
Even your methodology is same-old, same-old standard fare. Nothing leading edge about investing in just about the same way everyone else does. (How many knocks on the door did you say the same 200 CIOs get?)
Real science is about uncovering truths that everyone thinks are false, about making things false tomorrow that were true, comfortable and even profitable yesterday, about solving problems people don’t even realize are problems.
There was no market for nylons before they were invented.
Examples in an industry closer to home.
Email in 1971, couldn’t have gotten funded.
Even after the enormous success of the microcomputer boom (an incremental improvement which was funded – Apple) 20 years after email in 1991, the web couldn’t have gotten funded.
Would you have let the paper pusher CIOs who ran the “computer department” decide for you if the web was a good idea at a time he might not have even been using email himself?
Nonsense.
Are you going to miss the next pitch in 2011?
Or are you missing it right now?
Makes ya wonder. 😉
So, Ed, How would you state your investment thesis, if you care to share? Same goes for other readers. I’ve been working on one for angel investing in medical technology, but I’d be curious to view a few models. Maybe we can figure out what makes a good thesis. Thanks for starting this blog, which I predict will expand.
Cary Adams
Good points!
But, I believe there has been a shift in favor of the end user, the individual as opposed to the corporate buyer.
Many interesting products/services today start in the consumer market, and then many years later reach the corporate market.
Inventing is all about being one step ahead of your potential customers, you can listen to them when they explain their problems, but you are the one that will have to come up with a solution.
I think your strategy sounds like playing it a little bit too safe.
Yes, you are correct. Listening to problems does not mean that they are coming up with a solution. That is where we need to be innovative, to find potential solutions to problems with large market potential. I should have clarified my points to really mean enterprise technology. When talking to a CIO, I do typically end up talking to a corporate end user as well. What you are talking about, however, is the push/pull phenomonenon where one can release a product/web-based service to the masses and then it gets pulled into the corporation. That is definitely a viable strategy for certain types of companies but it doesn’t help me selling a security networking box or new data warehousing technology. It is different for consumer plays. When we invested in Expertcity (sold to Citrix last year) we didn’t really have CIOs to talk to-our best way to learn the market was to look at proxies in the space and determine their success and then launch our service and constantly refine and test.
Thanks for mentioning me in your blog. Sadly, not a single customer took me up on my offer. Would love to learn about VCs investing in unique IT security products…
I have used plr articles successfully and it has given a boost on my traffic counts