Inovation vs fad
It’s undoubtedly true that outsiders must sometimes look at us VCs ploughing investment after investment into certain ‘red hot’ sectors, such as the Internet of Things or messaging apps, and assume we’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. At Index we don’t invest in ‘me-toos’ or copycats – we 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.
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Similarly, the reason Index invested in ASOS back in 2009, was that customers were coming back in droves every day, reading the website, just as they would consume a fashion magazine; a ‘way of life’ and burgeoning community translated into a very loyal customer base, with high repeat purchase rates too.
Define it how you will, momentum attracts attention, as long as this momentum translates into something unique and valuable.
In the absence of an obvious momentum ‘clue’, at Index we have developed a framework to differentiate between opportunities instead. Generally there are four criteria for success: (1) scale, (2) technology, (3) network effects, and (4) brand. In our opinion, technology, network and brand tend to be more powerful than scale.
We would always look for one of these ingredients, as a differentiator from the rest of the pack. If you have achieved true technological differentiation (such as proprietary IP), or a network effect (a ‘flywheel’ of a marketplace) or have a unique brand proposition (with a loyal customer following and trust, beyond a transactional relationship), you are in a good position to build scale and a moat to defend you from your competitors.
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In that case, being on a bandwagon is probably a good thing when playing in a big market.
But if you are buying your way into a market through sustained losses simply to copy and achieve scale, then that’s a proposition investors will quickly see through.
Ultimately, of course, the determination to win by a great team is often what sets a startup apart, regardless of whether it is pursuing the latest trend or forging a lonely, perhaps surprising, path of its own.