This article originally appeared on Silicon Alley Insider.
A few months ago I wrote a post called “Invest in Lines, Not Dots.” It was my investment philosophy that observing teams’ performance over time was far more insightful than reacting to how good of a product demo they do, how good they present Powerpoint slides or how great tech blogs say they are.
Equally, I encouraged entrepreneurs to spend time getting to know their future VCs early because getting a feel for your chemistry is far more important than how the VC is ranked in some survey. Equally, I encouraged entrepreneurs to thoroughly reference check their VCs – you’ll learn much more from this than anything else.
Lines vs. Dots is all about people. It’s about how entrepreneurs perform over time and respond to adversity, how they ship products, how they attract other talent, etc. For investors it’s how much they follow up when they say they will, do they use and engage with your product and so on.
Market Opportunity
But what about markets? We always say that great opportunities are composed of a world-class team addressing a big & disruptive market opportunity.
In this area I’ve developed another philosophy that guides my investment decisions and forms a lot of the premise that I debate in our internal partners’ meetings when I’m advocating that we invest in a company. I call it “focus on basecamp, not the summit.” I felt the exact same way when I was an entrepreneur.
Let me explain.
Years ago when I was a struggling entrepreneur I sat through scores of VC meetings presenting my vision, my company and my product. One of the common refrains that I heard was that investors were looking for “large markets with lots of white space.” This annoyed me to no end.
I argued the same thing every time usually to deaf ears. “There’s no such thing as a large market with lots of white space. If there were, other companies would already be filling it. By definition the market is already large and therefore crowded or it’s nascent and the opportunity is not totally clear.
In the former case I might be looking to totally change the way online banking works – like BankSimple – or the way that low-income lending is done in an ethical way like ZestCast (we’re an investor). But these markets don’t have “white space.” They might be large markets, sure. They incumbents might provide terrible products or services that you think you can better. But be sure that along your ascent they’re going to notice you and respond.
Or maybe you’re trying to dramatically change the way TV is consumed, like Boxee or TV advertising works on the Internet, like Hulu. Or maybe you’re developing second screen viewing applications like GetGlue or building a YouTube studio to deliver low-cost content. These markets for disrupting the way that TV is consumed and delivered aren’t large yet, but they’re going to be.
I would like to say it again. Large markets with white space don’t exist. So let’s stop pretending they do.
My argument as an entrepreneur and my thesis as an investor is that I’m looking to get to basecamp.
I define basecamp as an attainable goal in the 2 year time horizon. It’s developing a differentiated product in a market where you can demonstrate value to your customers – whether they’re paying or not. Don’t get me wrong – the industry you’re in needs to be large enough or you perceive it will become large. But your exact long-term “market?” Focus on basecamp.
And here’s why – if you look to the summit often it seems unattainable. Take Boxee, if you looked at what it would take to fight in the living room for digital supremacy in a world where Microsoft, Intel, Apple, Sony and others have tried and failed for years you’d never even bother trying. If you look at Hulu and said, “the networks will never enable a strong competitor to broadcast TV you’d need to put your head in the sand.
Yet I’d argue that each has achieved basecamp. Neither is sure to reach the top but both have helped to redraw the landscape about how the future of how the television industry will work. I want to be clear – there is not “white space” in the digital living room. There is only road kill.
How can we call ourselves entrepreneurs or venture capitalists if we’re not willing to try to build important companies just because we know that from basecamp to the summit will be perilous? When we have our internal debates I use some form of the following argument,
“Look, I can’t tell you with absolute certainly what the right revenue model will be that will make this a large company one day. I can’t tell you how incumbents will act and who else will choose to compete fiercely with us.
I can tell you that I think we have a great shot at being a strong player in a market that I think will be important. We can see evidence of change. I can tell you how we intend to monetize for the short-term. But long term? All bets are off. I can also tell you that if we capture basecamp we’re going to be incredibly well positioned.
And if we achieve objectives A, B, C we are going to be well on our way to building an incredibly valuable and defensible business.”
My goal: Basecamp. From there we’ll figure out whether to go for the summit, whether to sell or whether to look for adjacent mountains.
See the funny thing is that when you get to basecamp 1 you often find out that there are bigger opportunities or maybe just an easier route to climb on an adjacent hill.
Think about Twitter. My gut feeling is that it initially started as an experiment – an accident. If I understand correctly it was initially a platform for sending SMS messages to friends via a website. Basecamp. After that they realized the power of the platform for “microblogging.” Only later, for example, did people come up with the idea for hashtags that help organize information.
As you know, one of the primary revenue models of Twitter today is “promoted Tweets” based on hashtags. That summit would have been so foggy from day one you couldn’t have predicted it. Hashtags were organically created by the Twitter community the way that RT (retweets) were and OH (over heard) was and #FF (follow Friday), etc. We have no clue where the community will help take Twitter next.
I’ll bet money that when Fred Wilson chased down Twitter in the early days to make an investment it was because he knew that they were on to something big ultimately, but it wasn’t clear what that would eventually become or look like. I don’t want to put words in his mouth, but I’m guessing he knew that there was a large basecamp with a defensible position if they reached it. And he likely knew that from there they’d have a much easier time scaling one hell of a mountain.
But it wasn’t a large market with lots of white space. It wasn’t a market at all. And along the way there were skeptics claiming any one of the following arguments:
- growth is stalling
- the youth will never use it
- Facebook will crush them
- they’ll never make any money
I argued all along that all of these premises were likely to be proved wrong. And along the way more data came out showing that the Monday morning quarterbacks got it wrong.
And as I’ve argued many times I think an ever bigger mountain would come if they pushed an open platform harder and told the world, “come make money on Twitter’s ecosystem” (the way that Facebook did in beating MySpace) and then tax the winners later. That’s the summit I see from my vantage point, from talking to 3rd-party developers who haven’t put the resources into Twitter that I would have liked to see them commit. And I’ve heard similar from my discussions with other VCs who tell me they’re not sure they can make money backing businesses that integrate tightly with Twitter so they focus elsewhere.
I’m still optimistic.
But I’m not sitting at basecamp with the Twitter staring up the mountain and making decisions about the best route to the top. So maybe they’re seeing something that I’m not. They have to make the tough decisions about where to allocate scarce resources, what the future business model will become and how to compete with other large platforms out there. They are at basecamp.
The thing is that at basecamp you have a much better vantage point than anybody else on the ground to look at routes to climb. You have the real data – everybody else is just making calls from the bottom of the mountain and radioing them in. That includes me.
Whatever their eventual path and outcomes – I would argue that their impact on Iran, Tunisia & Egypt – and frankly on the way that we as a society communicate now – has rendered them one of the most important technologies of the past decade. The fact that they can be both an economic engine and a driver for social change is awesome. And I’ll bet they encountered some cynical VCs in the early days who said, “this doesn’t look like a large enough market with enough white space.”
So to entrepreneurs – don’t be so obsessed with “end game” as you are focused on building to an amazing basecamp position. That doesn’t mean to build products in an industry where there will clearly be structural challenges to ever become large. The summit eventually matters. And you still need to spend some time figuring out the basic economics of your business – at least for basecamp. Just don’t obsess on what life will look like in 7 years. Nobody knows that. 7 years ago there was no Facebook.
And to investors – please consider how realistic it is for an amazing team building a great piece of technology to really predict what the summit looks like. Don’t try to be “too clever by half.” Don’t fall for that false line of reasoning that there are large markets with big white space. And for gawd’s sake – please stop justifying your disinterest because Facebook, Google, Microsoft could easily do this themselves. That line of reasoning would render the entire startup tech market useless.
