What do photo sharing, social networking, and mobile payments have in common?
They represent hot trends that VCs have piled onto in recent years without regard for how small these markets really are.
Put plainly, there’s only room for a few (successful) photo sharing apps in the world.
Yet we’ve watched it happen again and again. When Groupon took off, up sprang LivingSocial, then Bloomspot. Before you could blink, every VC firm in Silicon Valley had the “daily deals” space checked off on its portfolio. We all know how that turned out.
This herd mentality is siphoning capital from more promising start-ups and sandbagging the creativity for which Silicon Valley — and the startup scene more broadly — has long been known.
Venture capitalists have become so risk-averse, it seems they’ve forgotten that risk-taking is the whole point of their jobs.
I have actually heard investors claim that if someone is able to sell them on a company, then they should be able to sell it to anyone. The problem with this line of logic is that it focuses more on the pitch — that is, the sales and marketing hype — than it does on the actual substance of a startup, or more importantly, its product.
In fact, rather than rushing in headlong, VCs should approach hot areas with extra caution. And instead of seeking out copycat startups to add to their own portfolios, VCs should actively research the landscape and seek to build a unique, thoughtful, and nuanced perspective on the industry current and future. The best way to accomplish this is to spend time with academics, scientists, and research centers — the places where the real, down-and-dirty innovation is happening.
Investors should also have, or hire people who have, a strong background in technology and science. This way they will be able to intelligently recognize and track major breakthroughs as they move from abstract concepts to real-world applications.
I like to think of this approach as “proactive investing.” Proactive investing gives VCs a competitive advantage because, by employing a combination of research, connections, and proprietary knowledge, VCs have can pursue interesting areas and companies that others haven’t noticed yet.
In order to become more proactive, VCs should step back and examine the wider technology landscape. Doing so will make it clear that what I will broadly term the Internet investment sphere (encompassing everything from consumer apps to enterprise software as a service) has become overripe in the last few years. In fact, in Q3 of this year, Internet investment was up 17 percent compared to the same period last year — the highest growth levels since the dot-com bubble burst.
Of course, this doesn’t happen in a vacuum. One explanation for the herd mentality we’re witnessing lies in our natural distrust of things we don’t understand. Internet and computing is relatively easy to understand, even for outsiders and those without deep tech knowledge. Certainly it’s much easier to bring up mobile payments at a cocktail party than to delve into nanotechnology. It’s no wonder that the former garners more buzz, even if the latter wields more potential to transform our world.
But Internet tech is just one sector of a much larger technological field. On its own, the Internet can’t solve all of the problems, or satisfy all of the needs, of humanity. As one of my friends once put it, “Social media can warn you that an asteroid is barreling towards the earth, but it can’t do anything to stop it.”
Part of the larger technology field I’m referring to includes some emerging niches that are often challenging to conceptualize and explain, including nanomaterials, quantum computing, ultra-precise sensing, and so forth. While it’s tough to convey the value and potential of these areas in soundbites, they promise tremendous upside in terms of both financial return and world-changing innovation.
We must do a better job of educating ourselves and others about the cutting-edge technology that is springing up in the unexplored shadows. This is exactly what we are trying to accomplish at my company, QWave Capital, by stepping back from the hype cycle and doing our own research into some of the technologies that are likely to erupt in the coming years, with massive potential to disrupt old markets and create new ones.
As one example of a neglected industry with high potential, Mail.Ru founder Dmitry Grishin last year unveiled a new fund focused exclusively on the personal robotics industry. It’s a promising area that has seen surprisingly little investment despite the widespread belief in academic and research circles that robotics will soon change our world in fundamental ways.
So if you are looking to invest in the “next big thing,” do yourself a favor. Step out of the bubble. Make connections not just within the tech community, but also within the wider scientific and academic communities. You’ll gain deeper insight into where technology and society are headed and the kind of innovation that is needed to move us forward, not incrementally, but in leaps and bounds.
All important innovations take place beyond the borders of established disciplines and industries. Truly disruptive technology often heralds the creation of an entirely new industry, or bridges two previously disparate ones. If venture capitalists and other investors want to foster true innovation and move society forward while also making a profit, they will need to turn down the volume on the hype machine and start taking the right kind of risks.