The Two Universes

I posted this today to the Seattle tech startup mailing list. A few folks liked it, so I’m reposting it here. It’s in response to a NY Times article talking about VC’s not caring about a business plan.

In my experience the most interesting things to a prospective valley based technology investor in descending order are:

  1. Traction and (rapid) growth to date
  2. Team and their history
  3. Product

My view is that there are two universes you can exist in with distinctly different laws of investment and business physics. There’s the Universe of the Valley and there’s the Universe of the Real.

In the Universe of the Valley the laws are something like this:

  • Investors are interested in traction, team and product
  • They aren’t very interested in your business plan, revenue projections or even where that revenue will come from
  • They are more interested in your rapid growth
  • They’re also interested in your track record, team and the strategic relevance of your business
  • They’re interested in whether your business could pose a significant strategic threat or opportunity to a potential buyer
  • If your business does go the revenue route rather than being acquired, the view is that, like Google, a revenue model can be bolted on to a business that has scaled massively by really smart folks who will be hired at that point to solve that particular problem. (Like Google did and like Twitter will.)
  • In this universe, most investors have an attitude of go big or go home. They have a large appetite for risk and of course reward and they are generally relaxed and fun to work with and are fairly hands-off your business.

In the Universe of the Real the laws are something like this:

  • Investors are interested in exactly how you plan to make money
  • They want to know how long it’s going to take to achieve certain product, growth and revenue milestones
  • They also care about traction, team and product, but as it pertains to revenue and it’s timescale
  • They care about many of the things the other universe cares about, like network effects that make your business more defensible, but in order to defend that current or future revenue stream.
  • If you change strategy or product mid-stride, they want to know why and how much (more) money it’s going to bring in and if it’s going to happen sooner
  • In this universe investors play a more active role in your business and like to be regularly reminded of progress towards the revenue they’re so interested in.

The Universe of the Real is filled with companies that build oil rigs, real-estate developers, Kinko’s, Ben & Jerry’s and similar companies. Many of the stars in this universe remain nebulous but some manage to coalesce into stable businesses that burn bright and give off lots of energy for a long time.

The Universe of the Valley is filled with stars like Twitter and Facebook that have enormous gravitational pull and that may some day turn into giant supernovae or implode into black holes.  There has been speculation recently that the Universe of the Valley may itself implode, but whether or not that sad day will come remains unclear.

It’s up to you to decide which universe you want to live in. If you can, try to get an investor from the Universe of the Valley to cross over and help you build your business in the Universe of the Real.