Why angels invest in disruptive high-tech software

By Igor Sill, Geneva Venture Partners

Billionaire investor Mark Cuban is not bashful about discussing his thoughts on artificial intelligence, predicting that the next richest founders will be AI entrepreneurs.

Cuban says if you want to stay ahead of the curve as future entrepreneur: “I am telling you…the world’s first Trillionaires (that’s with a “T”) are going to come from somebody who masters AI and all its derivatives, and applies it in ways we never thought of.”

“We are going through the process where software will automate software, automation will automate automation.”

This movement exploded following Google’s acquisition of UK-based Deepmind. This AI startup’s mission was to “solve intelligence” and was backed by visionary investors Elon Musk and Peter Thiel.

Since its integration into Google, Deepmind has transformed Google in oh so many ways.  All Google searches are now piped through Deepmind’s artificial neural network given its efficiency over human intervention in finding relevant and accurate search results.

For the past two decades, growth rates and unicorn valuations have defined venture investment funding success for most technology companies. Every venture capital firm likes to insist that they are strategically unique and “different” even though they usually all operate from this very same playbook.

I contend that angel (seed) investors contribute far more value to a start-up than a committee-oriented venture firm partnership. An angel investor with prior high growth IPO experience with sufficient “success pattern matching” intuition combined with an extensive industry network offers a higher probability of startup success, while committee-driven VC firm decisions are just that.

Common VC firm mistakes are: misevaluating the founding team’s abilities; playing the Shark Tank valuation trap; misunderstanding the target market; Committeethinkology; assuming that a market is too small; presumes that a market already has an entrenched leader; and most importantly, lack of interest or time in mentoring, coaching, contributing and opening critical partnership doors.

After all, they’re investing someone else’s money, not their own.

When coupled with seed entrepreneurs pounding VC doors, the overwhelming selection challenge becomes all too consuming and is frequently relegated to the firm’s low level Associates.

Thus, the majority of mega million venture firms have moved to the Series A and later stages where quantifiable metrics exist.

Both Siebel Systems and Salesforce avoided traditional VC firms until much later financing rounds, instead relying on supportive angels for their seed and Series A financings.  To address this widening gap in startup funding, founders are seeking experienced angel investors as their clear first choice.

In backing start-ups, I became acutely in tune to the founders’ mindset and would rally behind those that focused on building with an attitude of unselfish responsibility and social conscientiousness.  My relationships and my network became theirs.

Harvard’s Clayton Christiansen proclaimed that disruptive innovation is a process in which a new offering initially takes root in simple applications at the bottom of a market, typically by being less expensive, better and more accessible—and then relentlessly moves upmarket, eventually displacing established market leaders.

Salesforce’s upstart dominance over Siebel Systems is a well recognised Silicon Valley disruption example.  Zoom video over Webex and Skype is yet another, etc., etc.

New age disruptive market opportunities – AI, IoT, ML, Cybersecurity

The IoT (Internet of Things) is a system of interrelated computing devices, sensors, mechanical and digital machines with the ability to transfer information over a network without requiring human interaction, so this would include security systems, thermostats, cars, electronic appliances, lights in household and commercial environments, alarm clocks, speaker systems, vending machines and most things imaginable, plus some.  And, that is just the tip of the iceberg.

The acceleration in the scope, scale and economic impact of IoT when coupled with Artificial Intelligence (AI), Machine Language (ML) and cybersecurity technology have the potential to be an incredibly positive force in the world.

  New implementations in artificial intelligence (AI) and machine learning (ML) are incorporating algorithms to prevent cybersecurity attacks while securing software vulnerabilities, allowing security experts to conduct more higher-level examinations of threats.

Essentially, every appliance and device we use today, and even those we have yet to imagine will be affected. The digitisation of machines, vehicles, systems, sensors and other elements of the physical world is an innovative idea providing powerful solutions.

We are already experiencing a real impact by changing how goods are produced and distributed, how products are serviced and refined, and how doctors and patients manage health and wellness.

If businesses execute digital transformation properly, integrating the physical and digital worlds could generate up to $11.1 trillion a year in economic value by 2025.  That’s a huge disruptable market opportunity – an angel investor’s financial heaven.

Another significant disruptive force is the degree to which the world is much more connected through global trade and movements in capital, people, and information (data and communication), what politicians call “flows.”

Real time AI application development infrastructure is a deep, complicated space that’s going through a massive transformation.  Palantir, has successfully exploited this segment with great execution skills, building a culture of working for the common good and building a future where data can be leveraged to serve people, create value and improve the quality of life.

Palantir, now viewed as one of the world’s most valuable private companies, was founded back in 2003 and they, along with many others, developed big data tools and enterprise software applications on legacy platforms which are now somewhat outdated and open to disruption.  There are tremendous numbers of old generation, outdated and vulnerable software applications operating out there, ready for new comers to displace them.

As an early stage seed investor, I seek out disruptive technology application solutions suitable for large, addressable global markets, and driven by brilliant, passionate, ideally, tried-and-proven entrepreneurs.  Once the right technology is beta-tested, then proven, it’s all about customer traction and team execution. Closing customers early in a startup’s life is essential to avoid building “yet another” similar solution.

So, I suggest, entrepreneurs build applications that businesses love.  Ask, what is it this industry really wants and needs?  What stands in the way of achieving this want and need?

One major reason for a technology company’s breakthrough success is its dynamic, constantly evolving business plan, seizing new opportunities and always striving for much bigger customer successes.

VCs focus solely on early traction analytics, assessing evidence of strong traction as sufficient to validate product acceptance.  A smart entrepreneur will have specific and measurable focus on relevant business execution time-based goals.  The most essential of any successful marketing campaign is knowing who your target customer is. You need to obtain deep market research and specifics so as to accurately identify your target customer, how to go about reaching them, where you can find them and how responsive they are to your value proposition, and how it compares to current competitive solutions.

I believe that a well-thought out solution pricing model is critical with SaaS subscription pricing being the most optimal, while licensing based pricing is a higher-risk and more susceptible to competitor disruption.  Also, offering critical solution applications, ones that can’t be scaled back, replaced or eliminated will naturally be the most valued. Of course, always be open to the realisation that your solution’s value maybe in a slightly different market segment than you originally envisioned.

Lastly, I like to support founders who, even with some leadership management flaws, can hire quality people that complement their own skills and then allow them do their jobs.