VCs and angel investors are inundated with business plans. Most plans just go onto the heap. Let's assume that the entrepreneur has done a little homework to find the VCs and angel investors who are interested in their space. From that pool, how can an investor recognize the startups and entrepreneurs with truly great potential? This is the billion-dollar question. To answer it, I'm going to start with a gross oversimplification: there are three kinds of entrepreneurs in the world.
First, there are novice entrepreneurs. They're just learning how the game works. Their networks are small and of limited value. They may have good ideas, but they're unsure how to present them and to whom. Their understanding of basic business concepts and trends is just growing. They may have intelligence and commitment, but it usually has not yet matured into a passion.
Second, there is the serial entrepreneur. This is someone who knows how the game works. They come equipped with good analytical tools and an extensive network of contacts. They've been through the drill before, often several times. They usually have a track record that either speaks for itself or can be sufficiently embellished to create a level of comfort with investors. The overwhelming preponderance of investor bets are placed on serial entrepreneurs, because it's usually most convenient; they're perceived to be safe bets. Also, serial entrepreneurs are easy to distinguish from novice entrepreneurs on the basis of surface impressions.
However, the perceived value of the serial entrepreneur is fool's gold. Why? In periods of rising expectations and markets, betting on serial entrepreneurs can bring favorable results for investors, on balance. But in periods of declining markets and expectations, this approach is fraught with unanticipated risks. Investors end up with a portfolio of me-too ventures in increasingly narrow and niche markets that seldom achieve the scale necessary to even break even. Today there are concerns that many of these me-too ventures are reliant on business models that depend on a finite share of a fairly small pie of online and mobile advertising.
The pack trend of betting on serial entrepreneurs is, in the broad schema, unfortunate both for VCs and the tech industry in general. Why? Because the entrepreneurial ecosystem become a closed loop that feeds on its own myths and increasingly narrow thinking. In other words, the focus on finding a good serial entrepreneur blinds investors to the much greater potential in the third category: the inspired entrepreneurs.
The inspired entrepreneur is someone who doesn't build and flip companies for a living. Sometimes the inspired entrepreneur is someone who has taken a few knocks in the real world and has learned from those experiences, analyzed them and come up with a truly game-changing vision for a startup. Sometimes the inspired entrepreneur is just a technical genius. Wherever the inspiration for the startup comes from, it's usually a once-in-a-lifetime experience.
Inspired entrepreneurs have a feel for fundamental long-term trends in society rather than the transient and haphazard movements of markets. They have an uncanny ability to peer into the future with a sense of clarity, integrating widely divergent perspectives and functionalities. They have a healthy level of skepticism for both conventional wisdom and appearances. Their sense of guidance flows internally, from gut instincts that are clearly formed, rather than advisors who are focused on momentary and superficial factors. They have some threshold level of organizational and interpersonal skills, but they have little patience for small minds and limited vision. They are often brusk to the point of rudeness, intolerant of mediocrity, and direct in manner.
Although they understand the languages of many different disciplines, their ideas can often only be understood by a small circle of highly intelligent people. The investor's passion for brevity and simplicity frustrates the inspired entrepreneur, whose ideas are usually rooted in complexity that defies facile explanations. This frequently leaves inspired entrepreneurs grasping for resources that they need to push ahead with their vision.
The inspired entrepreneur has no intention of doing anything else with their life other than work to make their vision a reality. The intensity of their inspiration creates a level of commitment and passion that keeps them going even after multiple rejections and shifts in the marketplace of ideas. But even the most inspired entrepreneur can only take their commitment so far without backing. Is the cookie-cutter approach to investing so biased in favor of the serial entrepreneur that "insanely great" ideas and entrepreneurs are going unfunded?
If Larry Page and Sergey Brin were shopping a business plan today, would they get anyone to listen seriously? In hindsight, most investors would say, "Of course, I'd listen," but would they really? Would investors really have listened to two 25-year-old grad students with no startup experience, no revenue model, no tested management team in place, for an app that was perceived to be a secondary add-on, in a field that was already crowded with well-funded incumbents?
If an inspired entrepreneur comes to an investor with a startup plan that's truly game-changing, but the entrepreneur just isn't in the mold of the serial entrepreneurs that investors usually bet on, will the investor give that person the time of day? If the inspired entrepreneur just hasn't learned to play the game the way VCs are used to having the game played (the attention-grabbing elevator pitch, the one-page executive summary, the polished powerpoint, the well-chosen buzzwords, the highly credentialed management team), will VCs let that inspired entrepreneur in the door and engage in a serious conversation? If the answer to that question is "no," then where are investors who will back the Amazons, Yahoo!s, eBays and Googles of tomorrow?
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