Changing the world is not so obvious at the beginning.
As Airbnb’s valuation grows to north of $18 billion, it is hard to imagine the company as anything other than the “global hospitality brand” it aspires to become. For someone who was a former road warrior, to realize my default search for travel lodging does not start on a hotel website or travel booking engine anymore is a revelation. The narrative is not so rosy, however, when you realize at one point their most notable product was not lodging but presidential cereal.
As an investor, it is hard to see what has the potential to be that proverbial breakout hit. Every entrepreneur believes in some way they are doing something unique, revolutionary and that has the potential to be huge. The investor, however, sees one of the following:
- Just another clone
- Small iteration on an existing idea
- A product feature
- Some totally outlandish concept
The team may be talented, the passion infectious, the initial traction intriguing, but the vision ends up being the sticking point. The idea might appear muddled, the product half-baked, the description a bit long-winded. The founders might not have the value proposition clearly articulated, and the elevator pitch might go on for several elevator rides.
If there is something I have learned in the few years I have been investing, disruption is never obvious. You are stuck in a mental framework, and the frame of reference rests squarely in the existing world of the here and now. Investors may talk the big talk about investing in the future, but that is rarely ever the case. Instead they are mostly investing in iterative steps that are easier to conceptualize and sell. Investors want something wrapped up, nicely packaged and ready to deliver.
Innovation and market disruption, however, are not something that can be neatly wrapped for consumption. It is challenging and weird and does not fit well into a convenient category. There is no existing narrative to borrow and use. Instead what you see is sort of ugly and misshapen and confusing. That is the very nature of disruption, which is poised to tear down the walls, smash doors in, step on toes and punch people in the face. It is pugnacious and does not care who or what is offended.
A while back, Fred Wilson wrote about how he passed up the opportunity to invest in Airbnb: “We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do and did do.”
For late-stage investors, it is easy to bet on a startup based on the product. But at that stage, they are focused on scaling up an idea that already has solid traction in a market that is becoming established. If you are an early-stage investor though, the product is not necessarily indicative of things to come.
Thus, it makes more sense to focus less on where the product is today, as smart entrepreneurs will figure out the product and vision eventually. It is more important to see and understand the potential in entrepreneurs and whether they have what it takes to create the next big, hairy, audacious and thoroughly disruptive innovation.
This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community
Image credit: CC by Dell Inc.
