When I first started this blog, the intention was to detail my own path into VC and be a resource for other aspiring investors to learn from. Admittedly I deviate from that regularly to write thought pieces, but after a couple of recent conversations around how to think through addressable market pain points, I thought the following post was in order.
In my mind, there are principally two types of winning bets in VC:
- When you are betting on a counterintuitive re-imagination of a consumer or enterprise process/experience. In these cases, you’ve typically observed some new behavior emerging which is completely underserved by existing infrastructure:
- When a market is fundamentally broken in a way that incumbents are incapable of servicing without deeply disrupting their own business models.
In reality these two points are inextricably connected (you’re unlikely to find one without the other), but I’ve found one typically holds dominant. The former point – imagining a new structure of the universe – is one of the most exciting elements of the job. But it’s also less frequent. More often, as VCs, we’re examining existing markets looking for dislocation that can be leveraged towards a new, defensible, process.
The struggle with picking winners at the seed stage is that in today’s environment – with the low cost of building product, cheap access to distribution, PR, etc – everyone has traction. Traction is no longer representative of fundamental product/market fit. The number of consumer startups I’m seeing break out to $50k in sales in their first month of existence is staggering.
Nearly two years ago I was losing my mind. Everyone had traction. On demand this, on demand that. My gut told me something was off, everyone was growing 20% month over month – but it didn’t feel sustainable as a broad market index. I saw Brian O’Malley of Accel Partners at a First Growth event in NYC, told him I was struggling, and asked him how he was approaching the space. His nonchalant response: “just because a market doesn’t have a mobile on-demand application doesn’t mean it’s fundamentally broken.” That one line changed my entire framework as an investor.
It is easy in this business to over-diligence companies. Like my years in poker, VC is in many ways a mental sport. You can talk yourself into or out of just about anything. And that’s why – ever since that conversation – I always start my process and end my process** with that one critical insight from Brian: is this market fundamentally broken?
You’re welcome to stop here. Below I list five of my learnings over the years and insights into how I define actual brokenness of an industry. No particular order and there are lots more…but just something to get the conversation started.
Five Insights Into Brokenness:
- There are a lot of companies, especially in the consumer internet world, trying to manufacture brands. And I use “manufacture” critically. Brand is paramount – that part is correct. But trying to manufacture a brand into a space that isn’t demanding one is really just gambling.
- In marketplace businesses, solving demand side brokenness is more powerful than supply side brokenness unless the supply side is consequently empowered & incentivized to perform customer acquisition for you.
- Solving fundamentally broken processes for consumers has outsized benefit in that it has the potential to generate explosive Word of Mouth virality and referrals.
- Being fundamentally broken in an enterprise software world can mean a number of different of things. But many founders conflate price savings with brokenness (ie, this software can replace 5 people, yielding savings of $200k). Too few people in the purchasing cycle are prioritizing wage savings – most are focused on communication, functionality, accountability or growth.
- I am extremely hesitant about markets whose brokenness is rooted in regulatory mandates – ie, municipalities are now required to spend $X to decrease Y problem by Z% (insert healthcare re-admission, air pollution, energy, whatever). The problem is that these markets are therefore obvious to everyone and you are in many cases playing a budgeting allocation game rather than building a company.
**I should note that before getting this far, any investor should pre-qualify both the people behind the company as well as the size (or conceivable size) of the market. This post assumes both those variables have checked out.