Are investors turned off by people jumping on the latest bandwagon?

Innovation or fad

It’s undoubtedly true that outsiders must sometimes look at VCs ploughing investment after investment into certain ‘red hot’ sectors, such as the Internet of Things or messaging apps, and assume they’re simply jumping on bandwagons.

Some investors might be; most are not. When VCs spot genuine innovation or disruption they know that things can move very quickly, especially when properly funded. New technology platforms enable businesses to scale much faster than ever before – just look at the rapid growth of companies like Funding Circle, Adyen and Just Eat.

For that reason, if investors see that a sector, say healthcare or financial services, is ripe for disruption, they don’t mind if it’s the fifth, tenth or fifteenth entrepreneur they’re meeting from that space – they want to meet them all – just so long as the three Ts (technology, traction, and team) are great, and the business they are considering backing is building some sort of advantage over its peers.

Nevertheless, a differentiated proposition is still required. Being yet another mobile wallet, especially when the jury’s still out on whether the first to market is viable, usually doesn’t bode well.  Most VC’s don’t invest in ‘me-toos’ or copycats – they want to see original ideas at work. Copycats are typically easy to spot. They tend to be behind in terms of time to market, and they usually try to overcome that handicap by over-investing in marketing, resulting in a far higher cash burn rate through costly customer acquisition.

Numbers don’t lie

When people read about the valuations of Snapchat, Instagram and WhatsApp, they might assume investors will always want a piece of the latest craze at any price.

These observers often fail to count in one key metric which the above businesses have in common: they all exhibited phenomenal growth in users, alongside unprecedented customer adoption and engagement numbers.

Momentum attracts attention, as long as this momentum translates into something unique and valuable.

Original article here

 

By David Yates on July 10, 2014   /   Blog Post   /   Leave a comment