When you listen to pitches, you might hear an entrepreneur squeak that line into the pitch. “Payments are fundamentally broken”. It’s a broad statement. However, it doesn’t say much about how or why?
Is it broken? Why it’s broken is the more important issue.
Are people spending hours during their day solving it? Or, is it just sort of a cumbersome process.? It really comes down to how big the pain point is. Is the target customer devoting a lot of resources to solving it? If they are devoting resources to solving it, then the pain point solution goes from being nice to have to “I have to have”.
Does the new company require a change in behavior on the part of the customer? Or is the process easy to integrate into their existing workflow? If there is a learning curve, that doesn’t mean the company won’t be successful, but it makes implementation a lot more difficult. Extending implementation increases burn rates.
I was reading how in China, too much capital is chasing too few deals. It’s important to know why a situation has presented itself. In the case of China, here is a quote from the article that sheds light on the reason,
Money has rushed into the tech sector because of dwindling investment returns elsewhere and policy decisions by Beijing, which opened the credit taps last year to spur slowing growth—and has steered money toward “innovation” in hopes of creating new economic drivers.
Allow me to digress a bit. The United States has its own issues with capital. Over the past several years, new capital has come to the later stage market driving up valuations. New capital came into the seed market as well, driving up valuations. Uninformed, undisciplined capital came into the market screwing up valuations. Strategic investors entered the market. Their economic interests were different than typical venture capitalists and valuations changed.
If we look at the macroeconomics in the United States the incentives there changed valuations. The stock market was higher, pumped up by 0% interest rates. Real estate recovered, and investors switched their risk capital to other alternative investments looking for yield.
At the end of the day what that means is a lot of companies got funded that normally wouldn’t have gotten funded.
One of the nice things about our thesis is we generally run into entrepreneurs that are solving a pain point whether we invest or not.
Sometimes people start companies for themeselves, not the marketplace. They are not interested in “working for someone”. They are interested in raising some VC money so they can get a check for a few years.
The world awash in cash also means venture capitalists see a lot of me-too companies. “We are doing video, but we are just slightly different than Snapchat/Facebook/Instagram/Periscope/Twitter”. I was speaking with another early stage investor that invests in a totally different sector than we do. They said they are seeing the exact same things. Super high valuations with little to no revenue. A lot of the companies being started today are just retreads. They aren’t new.
It also means a lot of companies get funded that aren’t solving real pain points to problems that are core to customers. As an investor, you hate to say “that dog won’t hunt” but there are a lot of dogs out in the field that aren’t going to find any birds for you. For venture capital companies that are generalists, it makes the entire sifting process a lot harder. At seed stage, it’s really difficult to know what’s going to work and what is not going to work. That’s why it pays to have a thesis and/or a focus.