People who know me have heard me say in the last several months that I’ve “soured on internet deals.” Unfortunately, this has been misinterpreted as “Dave has stopped doing internet deals completely.” But this is untrue.
Internet is in my blood. I’ve been working on internet businesses since 1995 - that’s nearly 16 years of thinking, designing, launching, breathing, living internet. I can’t escape it and don’t want to.
I *will* do internet-only startup deals. But the problem is that the current environment makes it difficult for me to justify investing in internet-only startups. This is because:
- Competition for internet-only startups is created too easily. Too often I meet an entrepreneur who already has competitors; how do I know that he will be the one who wins?
- Competition stifles growth potential which can be deadly to an early stage startup who is watching their bank account grow less by the day while revenue and customer growth is slowed by the other similar startups attempting to sign up the same customers.
- Competition creates confusion in the customer base as much of the company's differentiation is very incremental or small. To a customer who is inundated with so many similar services, how do they tell who to buy services from? This limits the growth of startups which again can be deadly at early stage.
- Extending on 3, not enough startups are working hard enough to differentiate exponentially versus incrementally. In today's crowded marketplace, it is not enough to be just a little better; you have to be exponentially better.
- New angel investors entering the market are inexperienced but also they have no choice but to invest in what is out there today. This fuels the existence and survival of competition in the marketplace when these startups should have been pushed harder to develop exponential differentiation instead of simply incremental.
- Valuations are inching upward, while the quality of the startups is dropping relative to the conditions of the marketplace. When valuations rise above what I think the risk potential of a startup's idea, it's time I know that I should not play in the internet-only space. Now we are seeing notes without caps, which is the beginning of the end for why angels should be putting up early risk capital and getting little in return later when the note converts into a large up round with a venture capitalist.
- Hiring is a nightmare across the board. Lack of resources limits a startup's ability to scale. I have seen many startups who want to do more but simply cannot hire fast enough to do more.
- SEO and viral don’t work any more. I’ve seen too high a dependence on trying to drive traffic in these ways, but too many people are SEO-ing in the same way, and consumers have way too much stuff to be viral about.
However, that does not mean I won't invest in internet-only startups. It just means that they have to pass harder conditions. These are conditions like:
- Little or no competition.
- Understand what it takes to compete in today's world and have some sort of advantage. Arguably, in 2011 now, people are competing now with competitive advantages in design/user experience and customer acquisition. This may also mean that you must raise a ton of money to: a) outlast your competitors, who will die because they couldn’t; b) out-market everyone else by spending money to buy customers since free methods aren’t as effective (ie. SEO) or too difficult (ie. viral). The world moves fast; potentially in a few short months, these factors could change.
- The idea must be *totally* unique. That means if I search around Google or iTunes app store, I won't even find near competitors of yours. If it is improvement over a previous product, the improvement must be exponential, not incremental.
- Disruption of an old world industry is always attractive.
- Some kind of technical advantage is also always attractive.
- I must have an affinity, interest, and/or expertise in the area. If I'm going to spend time on your startup for a long time, it might as well be something that I think is cool.
- They must have a world dominating vision and show unwavering determination to take over the world. We must both agree that their vision is a world domination vision. I want the entrepreneur to aim for a lofty goal that is game changing, and not just some tiny goal.
- Another lofty goal: I want to them to figure out how to make $100MM revenue per year...or more.
- Ideally, I see valuation at exit for the company in excess of $100MM. Otherwise, it will be hard to make money for my overall portfolio and not just on this one deal, given that many others in my portfolio will fail.
- The entrepreneur must exhibit great entrepreneurial qualities, be tenacious, adaptable and not quit, because yes it is freakin’ hard to win in today’s internet-only startup world and I don't want them to give up but instead it energizes them and ramps their creativity further.
I may, therefore, say no to investing in internet-only startups a lot more, maybe even 99.99% of the time now as I adjust my bar so high for an internet-only startup to pass. But I am simply reacting and strategizing to the realities and demands of today’s marketplace, AND the fact that I invest to make money, versus other non-money making reasons.
Who knows where the world will be in another year or two? Perhaps my bar will shift again. But if you have an internet-only startup which satisfies my new super-hard critieria, I would love to meet you.