As a seed-stage investor, First Round Capital typically funds powerpoints. Not only are the majority of our investments pre-revenue, but most of the time we are investing in pre-launch companies. While these companies might have an alpha/beta version of their site, it's usually early enough that we can’t base our investment decision off of any market traction. Instead, we typically make our investment decisions based on three key areas: the size of the market, the strength of the team, and the product vision. This is often made even more difficult by the fact that we know that many of the businesses we fund end up with (one or more) pivots -- since their business plan is always wrong.
I've lately started to realize that our most successful companies are led by entrepreneurs who have a unique talent -- they are heat seeking missiles. It doesn't matter where the missile is aimed pre-launch. Successful entrepreneurs are constantly collecting data -- and constantly looking for bigger and better targets, adjusting course if necessary. And when they find their target, they're able to lock-onto it -- regardless of how crowded the space becomes. When Nat and Zach first came to us with the idea for Invite Media, it was focused on algorithms for ad targeting. But once they got into the market the team saw a bigger opportunity -- the DSP space -- and they locked-onto that target with a successful outcome. We funded VideoEgg back in 2005 with the goal of creating tools to manage online video -- but Matt and team quickly adjusted course and have now become a leading media network for brand advertisers. When we first met Lance and Jia in 2006, they had a cool photo-hosting application called RockMySpace -- but they quickly found the opportunity was much larger than photo-hosting, and RockYou has since became a leading provider of social networking and gaming applications.
Markets really matter. Because the bigger the market, the more targets there are for the missile to hit. I've seen many companies fail to reach their potential because -- despite the skill of the founders -- they ultimately realize that there just aren't enough (or any) big targets for them to lock-onto. It's really hard to start a company -- and there are so many risks that all startups share, regardless of market size. Whether you're targeting a $10M addressable market or a $1B addressable market, you're still going to face Hiring Risk, Marketing Risk, Competitive Risk, Technology Risk, and Financing Risk. And while bigger markets might pose more challenges than smaller markets, the risks involved in targetting a $1B market are not 100x greater than those involved in $10M market. Choosing the right market is critical, because the market you choose determines the targets that are available for the heat-seeking missile to hit.
Sometimes entrepreneurs (like Aaron) will have such a strong sense of the market that their initial product plan is dead-on. But most of the time we see the product iterate and morph over time. As a result, product is often the hardest thing to evaluate pre-launch. And some of our biggest mistakes have occurred when we passed on companies based on their pre-launch product. So today we tend to focus on a company's product vision, rather than on the specific implementation of a pre-launch product. We've also found that a pre-launch product plan is a great way for us to get additional input on the team. Have they studied the competition? Do they really understand how to leverage social networks, game mechanics, etc? Do they have a data-driven philosophy or a gut-driven philosophy. Why did they make the choices they made?
At the end of the day, I've really come to believe that you can't predict success based on where a missile is pointed pre-launch. Instead you have to assess the quality of the targeting system (the team) and the density/size of targets (the market). And hope that the missile you launch finds a true target -- rather than a decoy...
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