One thing I often hear when I talk to other venture capital professionals when I mention a particular deal is “There are a ton of people in that space” or “So many companies have tried that before.”  

I never figured out why that’s a bad thing.

If a problem is worth solving, of course a lot of people are going to go after it.  That’s why there are a million ad networks and more security software companies than you can shake a stick at.  These are huge markets and numerous companies are minting money in these spaces.  In fact, I’d beware of spaces where absolutely no one is playing.  Capital moves pretty efficiently.  If anyone else thought there was money to be made in what you’re doing—I find it hard to believe no one else would be trying it.

Not to mention that, if there are a bunch of people trying to do something, chances are no one has completely solved the problem.  Last I checked, ads are still pretty irrelevant and people still hack into things.

On top of that, we all know that being first doesn’t necessarily mean you’ll be the winner.  Google certainly wasn’t the first search engine, and Facebook wasn’t the first social network.  Apple didn’t make the first MP3 player either.

Rather than being dismissive about there being too much competition or a bunch of people who have tried to solve that problem and failed, I’m going to start pushing back when I hear this.  Why did they fail?  What did this next company figure out that might enable them to succeed?  Where these companies just too early?  Did they fail to develop a key feature?  Did they misunderstand how people wanted to use the product?

Often times, it’s a small feature that makes a big difference—like how del.icio.us basically redid Third Voice, but had tags instead of folders, and defaulted to public sharing. 

Whatever the case is—if you’re an investor and you feel like you’ve seen 20 other companies in this space, you should spend some time trying to figure out what you believe makes a winner—and why everyone else hasn’t had success yet, before you completely dismiss the whole space. 

Today’s post is by request.  Someone pinged me on IM today and said that they had an idea for a blog post, but wanted to see me write it, not them.  It was an interesting enough topic, so I’m obliging.  This person may or may not work for Yahoo! and have a hyphenated last name that includes an item you’d find at a hardware store.

Working on applications where you are the intended user is undoubtedly more the exception than the rule.  Not all apps and servers are consumer facing, and ultimately they’re probably trying to cater to a much wider audience than just you.  On the other hand, niche applications still require a wide range of staffing and support, and so I don’t assume that all of the front end developers at Kayak like to travel or that whoever does sysadmin at Suicide Girls likes busty pinup girls with tats in leather.  Ok, wait… maybe that was a bad example…  but you get the picture.  You’re not always the user, but is it an advantage to be the intended demographic or will it cloud your judgment?

I think the answer isn’t A or B, but C…   that it probably doesn’t make nearly as much sense for someone on the team to be your intended demographic as it does for you to be immersed deeply in the community of your potential users.  So, if I’m building a social network for bungee jumpers, the fact that I’m afraid of heights shouldn’t really prevent me from being able to build a great app for them—so long as you are constantly getting community feedback on what you’re building.  In fact, you’ll probably be better at interpreting the feedback of others than you will be at identifying what will solve your own problems—if for no other reason than it’s easier to identify trends in the feedback of many than a trend of one. 

At the same time, when you’re not necessarily solving your own problems, you’re less tempted to “fall in love” with certain features that don’t advance the product towards key milestones.  In a certain sense, good product managers need to be a little dispassionate—with a quantifiable, logical, and actionable process for adding or removing features or changing strategy. 

That leaves open the question of where the original idea for the business or service comes from in the first place.  To some extent, you already need to be immersed in an area to identify a new way to create value—but it would take a lot of passion for that space to really want to build a company in it.  So, while I’m probably advocating a dispassionate product development process, at the same time I don’t necessarily relate to the Fabrice Grinda “9 criteria” approach to entrepreneurship—which lands him in ringtones one day, international marketplaces the next, and almost put him in cloud storage.  I feel like its more likely the case that you start out with a way to solve a problem that is close to your heart, but that, at some point, you have to put on your surgery scrubs on and operate on this service like its a machine, not someone’s grandma.

Some might argue that this approach makes it less exciting to build an application, since you’re not the intended user, but I don’t really think the best builders are motivated like that anyway.  They want to solve interesting technical problems, make services that are more robust, faster, and scalable.  To the extent that they’re solving the world’s problems or their own I think is more of the cherry on top—not the main reason to work on that project.  It’s certainly not enough to keep you at a place if you don’t have interesting challenges—and at the same time, few people I know with interesting, if not basic, product development challenges got tired because they didn’t care about using any of what they built as a user.

A funny thing has been happening to me since I joined First Round Capital.  People have gotten a lot more self-conscious about sharing their ideas with me.  Several times in the past week, friends of mine and others that I know have hesitated to tell me about a new idea because it "wasn't ready".  The other morning, I ran into an entrepreneur on the subway coming in from Brooklyn and he kept stressing to me how early his idea was and that he wasn't really planning on pitching it to “an investor” that early. 

Getting Feedback

The truth is, you can absolutely never be too early--at least to talk to me personally.  First of all, I'm big on feedback.  I don't think you can innovate in a vacuum.  Ideas need other ideas and feedback to grow.  They're almost like little kids.  Lots of overprotective parents keep their kids from playing in the dirt or playing with too many other kids, so as not to get them sick.  What happens is that they never get exposed to all the other germy little kids and therefore never get the chance to build up any kind of immune resistance.  The kids who play in the dirt almost always wind up getting sick less as they grow up.  Similarly, you can always tell when a startup idea hasn’t been circulated among enough people for feedback. 

Who Else is Out There?

At the same time, there’s a good chance I’ve already spoken to the eight other people thinking about this space.  It’s in your best interest to ask me to put you in touch with them.  They could be potential biz dev partners, competitors about to each your lunch, or even acquirers—you never know.  Whatever the case, it’s better to talk to them as early as possible.

Strike While the Bar is Low

When your idea is half-baked, I’m really not going to expect much.  It makes perfect sense that you have a lot of open questions and unsolved problems when you’re just a few days or weeks into an idea—but it seems worse if you’re “ready” for an investor pitch and you still have them.  Holes and broken demos are fine.  Things always break and you always wind up missing things you needed.  One of the things it’s my job to do is to vet the person and to figure out whether this is the kind of person who can fix things.

I’ve also been there.  I know what it’s like to iterate on a business idea as an entrepreneur.  The early versions of the Path 101 concept look nothing like the eventual product.  That’s what entrepreneurs, at least good ones, should do—pivot and adjust based on market and customer feedback, as well as a internal process of continual improvement.

Is There a Market for This?

Lastly, I think you want to know early on whether or not something seems to be venture fundable.  When you pitch a half baked idea to people who could support you, and they seem to get excited about it, you get an early signal as to how easy or difficult fundraising might be.  If every investor you talk to wants to know who your technical partner is, than maybe it’s an early signal that you need to get one.  That’s better than waiting until your prototype or demo is perfect and then finding out no one really cares that much about your space or the angle you choose to exploit the opportunity. 

Ignore Me

Of course, if you’re really passionate about an idea, and your early feedback isn’t great, that doesn’t mean you should just drop in and move on to something else.  Sometimes the process of moving forward can help you morph an idea into something disruptive.  Besides, lots of investors initial instincts have proven to be wrong, but it helps to know where the market’s at while you’re building. 

Forward Progress

People tend to think that you only have one chance to pitch an investor, but one of the best things you can do to impress an investor is to meet them very early, and then let them see how your idea morphed over time and how you made progress.  It shows forward momentum and we love it when we see someone three months later come back and say, “Hey, we vetted the idea and we’d like to update you on what we learned and our new approach.”  Plus, if you first came to me before you were even sure if you needed money, how much, etc., then there’s really no way I can turn you down, because you haven’t asked for anything yet.

Idea Theft

Some people don’t want to share their idea early because they’re worried that someone will steal it—especially an investor looking to make money off it.  That notion fails on two accounts.

First, if I had any interest in having a long career in venture capital, which I do, it would absolutely not be in my best interest to steal your idea and give it to someone else, because then I’d basically do irreparable damage to my reputation.  It’s just not worth it, because word travels too fast. 

Second, an idea isn’t really worth anything anyway.  It takes execution to get an idea off the ground, and not only are you probably the one best suited to execute on your own ideas.  Even if they do get stolen, you can out-execute the next person if you put your mind to it anyway.   I can’t think of very many people in online technology who succeeded because they were *first*…   Not Facebook, YouTube, Google, Amazon, etc.  So, there’s really no incentive for me to go stealing early ideas because getting them to someone else to beat you to it doesn’t guarantee success.

So if you’ve got a half assed idea and you want to talk it out, feel free to drop me a line.  Even better, let’s get a couple of other people smarter than us together over lunch to kick the tires and see what’s there.

Here’s my quick response to Chris Dixon’s post on taking seed money from VC firms.  As a part of the First Round Capital team, I’m totally biased here.  First Round does quite a number of very early seed investments, even less than 500k (so you’re never too early to start talking to us.)  That’s ok, Chris is biased, too, because he’s an angel investor and wouldn’t benefit from more competition in the early rounds.  The nice thing is, there really doesn’t need to be any competition because seed investors and VCs can all play nice together in the sandbox.  Any firm like First Round would love to do a deal with Chris.

In any case, he points out that it looks bad when someone who can follow on, like a VC firm, doesn’t do your next round.  It becomes a case of “What do these guys know that I don’t?”

I have several issues with this:

1 – This assumes that angel/seed folks don’t ever follow on.  They often do—which is why they rarely do a deal without the prorata right to maintain their ownership stake.  Some of these “super angel” folks can write checks of hundreds of thousands of dollars, if not more.  So, you have the same problem if you have *anyone* in your deal who could ever write more than like a $25k check.

2 – If a VC invests in a seed round, something has to go pretty wrong for them not to follow on.  VCs aren’t generally in the business of just putting 100k slugs to work here and there.  They’re assuming and *hoping* that you will have an investable deal for them when Series A time comes around.  They’ll sit down with you early on and say “This is what it will take to be a viable Series A deal for us and for anyone else in the market.”  The entrepreneur should only agree to take seed money from them if they agree to that milestone.  If the company falls so far short of that milestone that the seed VC thinks that additional investment won’t get them there, then what other invester is going to want a piece of that deal?  Wouldn’t it be clear that this is a company going in the wrong direction?

3 – Having a top tier VC in your seed round, versus some random band of family members, the local real estate developer, etc. gives you a *better* chance at building a company.  VCs bring to bear an expertise, a network, and a powerful brand that often brings a halo effect to their companies.

So, yeah, the problem doesn’t seem to be with the optics of who’s in/who’s out… it’s more the problem that the company didn’t do enough to make themselves a screaming buy to the people who knew them best.