The conventional wisdom of venture investing is populated with a myriad of musty and meaningless maxims that do little to develop due diligence deft. The list of such utter untruths include little tarradiddles such as the importance of a start-up to draft a comprehensive business plan when seeking financing (wrong), or the existence of a clearly defined exit strategy (also wrong).
The often cited notion that entrepreneurs have material amounts of their personal cash invested as “skin-in-the-game” is another feckless formula for evaluating venture opportunities. My only private investment write-off in the last 10 years was the result of backing a proven entrepreneur with a prior high-multiple liquidity event who put $12 million of his own money behind a good idea that proved beyond his ability to execute.
Many bankable opportunities come from entrepreneurs that lack the personal wealth to back their great ideas. Sweat equity, career opportunity costs, material equity upside, and personal sacrifice are generally sufficient substitutes for a founder’s funds.
One of the more sophomoric shibboleths among venture investment evaluation criteria is the fictitious “first-mover advantage” (FMA). The na?ve notion, which garnered its groupies during the dot.com delirium, suggests that the first entrant to a market space can fend off the followers and dominate the market for a material period of time. Fueled by VC funding and visions of carried interests, blind faith to this “first-to-market” fallacy financed many blowouts and busts.
For every Amazon where the FMA proved sustainable, there are dozens of examples where the market pioneer gave ground to a later entrant. Admittedly, there are a few instances where the first mover held considerable market share (and developed material enterprise value) for a material period, such as Henry Ford’s Model T domination of the market for years until giving ground to Chevrolet.
Mouse No. 2 Gets the Cheese
My own experiences concur with the broader history of venture. I had a hand in the development of a multibillion-dollar alternative strategies asset management firm that picked off the AUM of pioneer firms by developing cheaper, more transparent, and more liquid investment vehicles. The pioneers spent vast sums on educating the marketplace. We simply piggybacked and poached the pioneers’ early-adopter clients on the way to assuming a dominant market position.
In most cases, you are better off backing the entrepreneurs that are building the second coming of the next big thing–the slower but wiser entrepreneur for me.
Viola, Erwise, and Midas, the first browsers, gave way to Mosaic, which in turn gave way to Netscape. Chux, the first disposable diaper from J&J, gave way to P&G’s Pampers. Micro Instrumentation & Telemetry Systems pioneered personal computing with Altair, which later gave way to Apple, which hardly dominates the personal computer market today.