Derivative Entrepreneurs or Calculus Entrepreneurship

One of the things that investors crave is good deal flow.  It’s a competitive edge.  Investors also like to meet with lots and lots of people so they get ideas themselves.  They also use diverse groups of people to suspend their confirmation bias.

It is rare when you see a truly groundbreaking idea that is entirely new.

Usually, those groundbreaking ideas are fraught with a lot of risk.  They sometimes seem really stupid.  They might even be childish, similar to a kids game.  But, put with the right team that can execute, they go big time.  Think about Snapchat.  Totally stupid.  Totally childish.  Highly risky at a seed level.  Bigtime.

Some ideas are simply derivatives of an existing idea.  A better Snapchat.  A different feature that Snapchat doesn’t have.  It’s hard to know if these kinds of ideas are going to be big or not.  It all depends on how the entrepreneur presents the business, and the frame of mind of the investor.

For example, suppose you met with Jack Dorsey when they launched Twitter.  You could have looked at that company any number of ways.  It was unbundling the Facebook status update with a 140 character constraint.  Or, it was a new way to communicate.  Or, it was something entirely different.  Was it a derivative of a business or was it groundbreaking?   See, it’s hard to tell.

Often, entrepreneurs will look at one business model and try to apply it to another vertical.  They’ll shorthand describe it as “Uber for this”.  Those might work, but there is always a threat that the existing kahuna can enter the space.  Just depends on a lot of factors.  Melding different ideas from different businesses can become a successful business.  Look at Sitter City.

Sometimes though, it’s easy to tell.  Investors see a lot of deals that aren’t that unique. The entrepreneur makes up a business plan that is simple a melding or derivative of an existing business.  Internally as an investor, you don’t feel like the person can really execute this business.

I call those businesses Derivative Entrepreneurship.  It comes from calculus where you take the derivative of an equation.  There is nothing exciting about the business.  It’s not that unique.  The truth of the matter is the entrepreneur just doesn’t want to take a job with another company or corporation, and they are good enough salespeople to pitch and persuade investors to write a check.  That keeps them going for a couple of years until they fail and come up with the next derivative idea.  VC Fred Wilson has described these kinds of businesses as “ankle biters”.

A number of years ago, my friend Bob Geras told me about this phenomena.  Bob was the first VC in Chicago and is a very shrewd guy.  After the financial crisis, he said to beware of entrepreneurs cooking up businesses simply to get a check.  They have no real plans of blowing out the business and will simply try to exist until the economy turns.

With the crunch in seed funding, and the slam down of later stage valuations, it will be interesting to see how many existing Derivative Entrepreneurship kinds of businesses go under.  As Warren Buffet says, “The tide is still going out.”