Five years ago the prospect of an eyeglass company, a coworking space and enterprise chat app each being worth over a billion dollars would have struck most people as absurd. As software eats the world we will see more companies in these “weird wonderful spaces and unusual places.” This creates new challenges for founders and investors.
At Founder Collective we like backing weird stuff. That is the goal of venture capital after all — to break convention. Sure, we’ve backed “traditional” startups like Buzzfeed, Seatgeek, and Periscope. But we’ve also invested in satellite booster rockets, a robot pharmacy, and an Internet of Things-enabled wine service. These businesses sounded weird when they were first pitched and only now is their disruptive potential being recognized.
Our belief is that the next great opportunity can come from anyone, in virtually any industry. That said, breaking through with an atypical business is harder than pitching a new consumer app or SaaS service. If your startup is slightly off the beaten path, here are some tips for framing your story:
Escape the Bucket
If you’re pitching a business in an unusual space you need to clearly point out the non-obvious truth you see in the market. You need to explain why this industry that seems weird to the average individual is actually a massive opportunity. Explain what everyone else is missing.
This is hard to do. Chris Mims of the Wall Street Journal is one of the smartest tech journalists working today. Yet a big investment from an industry-leading firm in an atypical category, hair extensions in this case, was a cause for confusion.
Chris Sacca manages one of the best performing VC funds in the history of the business, was an investor in this particular company, and even he didn’t completely get the potential impact of the idea at first.This is just a small illustration of how people in tech have a tendency to bucket things. Our industry sees thousands of new ventures every year. It’s human nature to group things together to simplify the analysis. It’s easy to benchmark a B2B SaaS company. Mobile photo apps lend themselves to analysis via a myriad of metrics. It’s a bit harder to evaluate companies that sell costume jewelry.
The way to escape the bucket is to show how flawed the assumptions of the bucket are. For example, I remember when I started my dental technology company, many investors said “dental is a terrible category. Everyone’s lost money there.”
Yet when pressed for examples, the investors pointed to failed roll-ups of dental practices. That had nothing to do with the digital scanning and 3-D printing solution I was trying to bring to market. We had to highlight the flaw in the investor’s logic to get them to see the opportunity.
Demonstrate Domain Expertise
I’ve had the pleasure of backing seasoned entrepreneurs who were getting the band back together to dominate an industry. I’ve also backed founders who are second generation stewards of a business started by their parents. These founders had a preternatural understanding of the markets they were in and could use this domain expertise to explain why a seemingly unsexy part of the economy could be the source of a billion dollar company.
You don’t have to be a lifer to show this kind of knowledge. I’ve met people getting into new fields who managed to learn every SKU their competitors put out by heart. They could argue the merits of esoteric material choices in terms of aesthetics and durability. For a smart entrepreneur, a couple months of cold-calling and a few tradeshows can help you scale the learning curve quickly.
It may seem contrary to conventional wisdom to think that the entrepreneur should leave the VC with homework. This is where the savvy pitch woman can hook the VC.
I often invest in businesses where I leave that first meeting thinking that the founders are special, but where I feel like I want to learn more about the market opportunity. I love it when an entrepreneur presents a non-obvious truth, provides references, and challenges us to check it out after the meeting.
When my own homework validates their proposed thesis, I start to lean in. The more I find myself Googling markets and trying competitive products, the more likely I am to invest.
Make your VC Comfortable being Uncomfortable
One of the few drawbacks of being a VC is seeing dozens of copycats for every novel company that’s achieved some success. We hear “We’re the Uber for X,” “The ClassPass for Y,” “The Airbnb for God knows what.” Here’s how a couple founders in our portfolio stood out with special ideas:
When Transfix pitched the idea of automating freight brokerage. I didn’t even know that those two words could be paired in the English language!
Founders Drew McElroy and Jonathan Salama told me about “deadhead” rides where 16-wheelers would return from a trip empty and unprofitable because they were unable to find freight easily. How thousands of brokers and drivers used phones, fax machines — even cork bulletin boards — to coordinate shipments of stuff around the country. These insights opened my eyes.
When they started to tell me more about the $800B industry and their backgrounds, the more confident I became that dramatic change was possible with technology. A technology they were uniquely suited to create.
I had no knowledge of the long-haul trucking business, but the team made it easy for me to see how their weird business actually fit into a well-understood pattern.
I thought every permutation of business model pairing fitness studios and tech had been tried. But Apple alum Holly Shelton had an insight that fitness buffs are more loyal to their instructors than the studios they paid dues to.
She told me about instructors who had almost religious followings — in fact many of them referred to their classes as their “tribes.” She challenged me to try one of the classes in Boston. After I did that homework, the insight was more than concept, it represented an opportunity to empower instructors to host classes and monetize their tribes, as opposed to the gym studios that typified the fitness business model.
Finally, Flaunt your “Weaknesses”
If your startup challenges conventional wisdom in some way — like if you’re building a tech business in Winnipeg — don’t try to hide it. Flaunt it. Talk about why building a startup in the “call center capital of Canada” is a huge (non-obvious) advantage.
Think about Warby Parker. The company is light on tech, but they didn’t tack an app onto their service for the sake of checking a box. Instead they focused on design, direct marketing, and customer service. It worked out pretty well in the end.
Similarly, when Founder Collective invested in Uber six years ago, many of our peers thought it was bizarre. Why would you invest in car dispatch, they asked? Needless to say, we don’t get asked much anymore.