Who Gives This Type of Advice?

In a conversation with a client, we discussed a piece of advice he had received from a venture capitalist in regard to his business. He had been seeking an investment of a few million dollars, most of which would be spent on development and hardware infrastructure for the business. The business already had clients lined up to use the pair of products as soon as it became available, thereby crossing the first hurdle of getting the first paying customer.

With this validation under their belt, he hoped that the VC he was meeting with would see the promise. However, he left the meeting empty-handed, though the VC parted significant amounts of advice on how he might proceed. The reason he gave for declining the investment, though, was something along the lines of:

It’s not big enough for me to get involved. I think your business will do well, and will be profitable in the near future. However, you have a long road in front of you to reach the market, and the competition is quite strong. It’s not for me.

There are actually two types of investors who would make such a comment, and trying to differentiate between the two is complex at best, impossible at worst.

The first investor knows the industry, the competition, the existing products, and understands the business idea you’re proposing. He’s looked at how it compares to the current offerings, and has made an educated guess as to how the target market will respond. He’s factored in changes in the nature of the market itself – in this case, it’s age-specific, so understanding the generation that will be targeted to adopt the product is a key requirement to being able to project the business’ performance.

Once all this has been taken into consideration, this investor feels that the adoption rate will not be high, the product will not redefine the market as a whole, and there will be stiff competition. It’s unlikely that the business will do much beyond turn into “yet another” player in the specified market.

The second investor is likewise well-educated in the industry, but is also looking at it from the perspective of his own generation. That is, he sees how his generation would react to such a product, and projects that thought onto the current market. With limited adoption by that generation, a generalization of how it might be adopted by other markets is created, resulting in the same conclusion.

The difference between the two types of investors is that the first has made a properly balanced argument for why the business will not be the next shining star. The second, however, has merely projected an attitude against a new business, whose market he does not really understand. When the advice comes from the second investor, it should be taken dubiously, since he clearly does not get it.

The problem, however, is how to tell the difference between the two. For that, you need to know the people involved, past investments they’ve made, and then make a judgement call based on that.