Entrepreneurs and investors in seemingly “less sexy” sectors like enterprise software, healthcare and cleantech complain that this is a tough market for start-ups. There’s an almost bipolar attitude in the ecosystem today- consumer-oriented web companies are hot in the private (and public) markets, while those in other fields struggle to raise capital despite credible teams and ideas. It’s a market dynamic that forces investors and entrepreneurs (like me) to constantly ask themselves, “am I on the right side of this?” Here are some potential observations and explanations…
You can’t incubate a biotech company in a Starbucks
Today’s web companies require amazingly little capital and equipment to prove out basic assumptions (or “knowables” as I describe in a previous post). I’m continually amazed at how a concept can be reduced to practice, brought to market and generate revenue in as little as 30 days. At Brontes (med tech) or Novophage (bio/cleantech), this process might take three years or more. Unlike a pure web-business, hardware and bio businesses require labs, expensive equipment and usually a larger team. Given the short attention span of entrepreneurs and investors alike, there is certainly a bias towards things that can be assessed quickly and cheaply.
Diligence is different
My experience raising capital for Brontes, Novophage and working with other “core tech” companies is that the diligence process is markedly different than for many seed/early stage web focused businesses. In a university spin-out for example, there are patents to examine, industry and technical references that can be called, and often a competitive landscape to evaluate. For a company liked LinkedIn in the early days, an investor spending hours surveying consumers is fruitless. In the end, it’s a bet based on the team and Conviction (as my colleague Eric Paley wrote in an earlier post).
Quantifying risk in start-ups is impossible so perception dominates
It’s hard to calculate on a risk-adjusted basis, which is a better bet – a medical device or mobile app start-up. They each have a different risk profile and capital needs. You don’t hear about GE making acquisitions for talent (“acquihires”) like Facebook, but on the other hand, there’s usually less competition in more traditional industries. Since numerical quantification of risk in early-stage ventures is impossible, we default to perception. With the IPOs of LinkedIn and strong private markets for Facebook and Twitter, one’s perception is that web is the place to be (again).
In the end, I think its best to follow one’s instinct instead of the herd. Align yourself with the best team possible, and for the most part, stick to your knitting. The most successful entrepreneurs and investors I’ve seen leverage what they’ve learned in each new endeavor. They try their best to only make new mistakes!