VC Cliche of the Week

In the venture business, it almost always pays to be on the leading edge of new technologies.

If you invest in the first company to develop some new market, technology, or business model, you have a better chance of success than if you invest in the tenth.

But even worse than an investing in the tenth copycat company is investing in a company that is way too early, well before the leading edge.  We call that the bleeding edge in the venture business.

I was reminded of this yesterday afternoon when my daughter Emily and I were given a tour of a friend's new home and we saw a bunch of cool Sony wireless TV/Internet Appliances all over the house. 

Our friends use them for portable television, web browsing, and email.  They love these devices.

We incubated a company in the Flatiron days in early 1999 called IAN, the Internet Appliance Network. 

Our vision was to produce devices just like this and distribute them via a sponsored advertising network business model.

We created a reference design for a device that is remarkably similar to the Sony device we saw at our friend's house yesterday.  Except that we were 6 years too early.

We invested a bunch of money in designing the devices, building out a team, creating partnerships with marketers, and then folded the business in late 2000 when it became clear that we could not get the cost down to a level that made sense for the business model.

We bled a lot on that IAN investment and it taught me a great deal about the pain of investing at the bleeding edge.

There are two main lessons that I learned from the IAN investment.

The first is you must keep your burn rate really low if you operating at the bleeding edge.  It's possible to hang in there long enough for the market to develop, but only if you keep your costs so low that $2-3mm of investment capital can last a couple years.  Investors will be patient only if they can afford to be patient.

The second is the fact that you cannot spend enough to develop a market on your own.  Markets develop for many reasons, but there is no way that a small venture backed company can stimulate a market to develop by itself.  We tried to do that with IAN and it didn't work.

I keep one of the demonstration units that IAN built on my bookshelf in my office, right next to the Apple Newton, the Scout device, and a few other technologies that were out there on the bleeding edge.  It's my bleeding edge wall of infamy and I look at it every day to make sure we don't end up on the bleeding edge anymore.

Comments

[Jeremy]

thats a really interesting post... I'd be interested to know if you have stuck to services/ web 2.0 services etc since and avoided hardware and if this shift is permanent... a prodcut set to me has always seemed like a much larger risk, with less obvious payoff benefits because of the manufacturing complexity required and the skill base of the competitors... your USV portfolio companies currently seem heavily weighted on services... I guess web 2.0 assumes the device is agnostic and more services move to server side

[steve]

$2-$3mm last a couple of years? hmmm. are you serious, fred? how much odes one talented human being cost per annum? can we agree on maybe an average of $100K/year, including benefits? then there's rent and T&E and other overhads, maybe another $100K/year? then there's R&D...

let's say you assemble 5 engineers, a bus dev exec, a controller, a product management/mktg exec, a ceo, a secretary. 10 folks. average of $100K/year gives you $1MM/year. plus overheads, gets you to $1.1MM year. can these poor sould spend anything at all on R&D, or marketing? maybe we're up to $1.5MM/year.

kind of blows your limit, no?

also, its academically true that keeping burn rate is always best -- true true true -- but weak balance sheets and skittish seeming investors scare away smart entrepreneurs. if the VCs appear to be vacillating and uncommitted, why would great talent sign up?

"A round" VC investing, I'd argue, is always about the bleeding edge. Being too far ahead of the market is a constant risk... unless the investor's strategy is to be a copy cat or to provide later stage money. And the huge returns are always about being in the game when "bleeding edge" becomes market acceptable...?

[Daniel Nerezov]

Great post. Again, the timing is right on! There was just a thread done at http://www.startupjunkies.org/forums/viewtopic.php?t=400

Fred, I don't understand why "invest[ing] in the first company to develop some new market, technology, or business model, you have a better chance of success than if you invest in the tenth". I don't think I've ever come across a good example of that happening. Care to share? Yeah... a post on the first mover advantage...I say it doesn't exist. Does it?

Anyways...the conundrum here, of course, is most facinating.

You don't want to be on the bleeding edge, so you wait, but then you don't want to miss the boat- so you're back on the bleeding edge.

Fellow entrepreneurs, pack your six shooters, get the sambrero and we'll stand this thing off 'till mid-day strikes.

Timing is a bitch.

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