1/21: It’s not uncommon for a #VC to chat with an early stage #startup and within weeks get introduced to 3-4 other #startups tackling the same opportunity at the same time. When this happens it’s rarely coincidental and definitely worth paying attention to. A thread 👇: 
2/21: It’s a generalizable truth that Startups attack market opportunities. Businesses sell products, deliver experiences and solve problems, and Startups attempt to deliver vastly superior products, experiences and solutions to those that currently exist in their markets.
3/21: A Startup is a simple beast at its core. A team is assembled to build a solution to a perceived problem with the goal of distributing and selling it such that economic value accrues to the provider of the solution. (Whew!)
4/21: Three basic “beliefs” are embedded in this simple statement and can be used to describe a framework for why Venture Capital backs unproven businesses. The same three concepts can be used to describe why Founders have conviction in their ideas.
5/21: Immutable Belief #1: Operational Risk can be overcome by the team
One has to believe that given the right resources a team can be assembled to execute on the plan.
One has to believe that given the right resources a team can be assembled to execute on the plan.
6/21: Immutable Belief #2: Technical Risk can be overcome by the team
One has to believe that what’s been described can actually be built with the requested resources.
One has to believe that what’s been described can actually be built with the requested resources.
7/21: Immutable Belief #3: Market Risk won’t materialize
One has to believe that a significant number of customers can be found who are willing to pay more for the solution than it costs to produce.
One has to believe that a significant number of customers can be found who are willing to pay more for the solution than it costs to produce.
8/21: Venture Capital exists to provide the financial resources needed for an unproven business to prove out its assumptions around these three forms of risk: Operational Risk, Technical/Manufacturing Risk and Market Risk.
9/21: Venture returns are generated when high variance drivers of a business collapse to the all-important "it's working" state. String together enough things that work and a business emerges from nothing and value is created for everyone involved.
10/21: This framework can predict when a Cambrian Explosion of similar companies is likely to form at the same time:
The more obvious Market Risk = Zero the more likely it is for a startup to materialize.
And when Market Risk AND Technical Risk = Zero then the gold rush begins.
The more obvious Market Risk = Zero the more likely it is for a startup to materialize.
And when Market Risk AND Technical Risk = Zero then the gold rush begins.
11/21: The pandemic has provided us with countless examples of this concept in living color. Vaccine development, last mile delivery services, video conferencing, contactless payments and digital signatures are just a few examples.
12/21: Companies are popping up and incumbents are scrambling to modify their offerings to tackle these problems because there’s ZERO market risk. The market exists and will pay a fair price if solutions can be manufactured and distributed efficiently.
13/21: But when a VC is evaluating and/or a Founder sets out to tackle a “zero market risk opportunity” there are dynamics that are important to internalize because competition can ruin markets.
14/21: How to Ruin a Market Opportunity: Zero Differentiation
There are times when the solution the market is willing to pay for is so obvious that differentiation is nearly impossible to create.
There are times when the solution the market is willing to pay for is so obvious that differentiation is nearly impossible to create.
15/21: In these situations, the market may evolve into one with many solution providers each commanding a fraction of the market. Margins tend to collapse because price can always be used as a differentiator for commoditized products/solutions.
16/21: How to Fail When the Market is Crying for a Solution: Be Slow Out of the Gate
There are times when size and scale are critical criteria that define a superior solution.
There are times when size and scale are critical criteria that define a superior solution.
17/21: Marketplaces models depend on size and scale. The economics of businesses with significant overhead or manufacturing costs typically improve with size and scale. Businesses that provide services become more reliable with size and scale.
18/21: In these situations, the easiest way to burn a lot of cash and destroy a lot of shareholder value is to “chase the winner”. Selling to the winner or merging with a smaller player to create scale is almost always better than “just missing the podium”.
19/21: A critical point to internalize in “zero market risk opportunity” situations is that early traction doesn’t directly correlate to a startup’s probability of success. The biggest mistake one can make is to become overly confident based on “out of the gate” adoption.
20/21: So while “zero market risk opportunity” companies have been de-risked due to market appetite and have high odds of achieving amazing “out of the gate” results, it’s incredibly difficult to pick a long-term winner out of a batch of similar startups.
21/21: TL;DR: Pay attention when multiple businesses are emerging to tackle a problem at the same time. But in the immortal words muttered in every Scooby Doo episode: “And I would have gotten away with it if it weren’t for you meddling kids.” (Competition sucks!)
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