Do Investors Invest in Ideas, People or Markets?

Investors often say that they invest in people first, then the market and lastly, the idea. I’d say that’s generally true, but it’s also very difficult not to triage and make judgement calls in reverse. When an investor asks for a pitch, they don’t say, “Tell me why you’ve got what it takes to be a startup founder.” Instead it’s always, “What’s your idea?” And countless entrepreneurs never get past that stage – the first elevator pitch, the first ten seconds of a meeting. Boom. Judgement made. Idea sucks. Entrepreneur out. It’s like filtering resumes based on typos; you get so many resumes you need to create easy filtering mechanisms that you can employ quickly. Investors see a lot of pitches.

It’s fair to say that super successful entrepreneurs have bad ideas. Probably just as many as unsuccessful entrepreneurs. The difference is that successful entrepreneurs somehow managed to take a bad idea and make it successful, or finally went through enough bad ideas to get to one good one. Point being, it’s hard to judge someone on ideas alone, but unless they come with a known history as an entrepreneur (successful or not), investors don’t have a lot of data points.

So I think investors put quite a bit of weight on ideas, even if they claim that they’re only (or primarily) interested in founders. I’m not saying this is a bad thing, just exploring the realities of investment.

Ideas are to some degree a reflection of the entrepreneur. You can poke holes in ideas and see how entrepreneurs respond. You can challenge them, throw out crazy ideas (or not-so-crazy ideas) and see what they say. You can probe how an entrepreneur is working to validate an idea and emphasize the importance of not believing they’re own hyperbole. Entrepreneurs that are rigid, steadfast and blind to the possibility that their idea might suck most likely don’t have Founder DNA. Entrepreneurs that take this kind of abuse (I mean … feedback) and run with it, coming back two days later with new ideas, proof points (or failure points) and an eagerness to learn, pivot and think more broadly, are demonstrating their ability to be true startup founders. All of that starts with the first idea.

This is essentially the process we go through at Year One Labs. It often starts with a quick meeting, followed by a much more intense meeting where we try and deconstruct and reconstruct ideas. Throw the proverbial shit on the wall and see what sticks. It’s not to be mean (we genuinely hope everyone – us and the entrepreneurs – in every meeting extracts some value), it’s about evaluating entrepreneurs and their potential. We’re trying to get to the true mantra of, “We invest in people.”

I know some people have found our meetings discouraging or difficult. Others have walked away revitalized and encouraged. But if we’re going to truly invest in people and not ideas, then we have to assume that every idea we see we’ll ultimately be thrown completely out the window. That’s not easy for most entrepreneurs to understand (I struggle with it myself sometimes!) Entrepreneurs are often wedded to their ideas, it’s just the way we are. It’s not natural (even though it makes logical sense) to focus on experimentation and validation (or more likely invalidation) of ideas, with the intent of killing them quickly.

Investments aren’t Structured for Killing Ideas

Most early venture or angel investments are not designed with the intent that the startup will receive funding, spend some focused time validating their market and then pivot. And potentially pivot so hugely that the startup is moving from one business to a completely new one. It’s great to see stories like this one – Pivotal Pivot – about the Instagram guys that tossed out 8 months of work to pivot completely. It does happen, but when someone invests in your startup they’re not expecting it (although they won’t be totally surprised when you pitch them on pivoting.) At Year One Labs it’s built into the plan. It’s expected that companies will pivot – possibly in drastic ways – but it’s important to do so very, very quickly. Having said that, I regularly catch myself envisioning how we’re going to work with entrepreneurs to build their products, launch, acquire customers, gain market traction, raise follow-on financing, etc. in a linear fashion. I love building products. So do most entrepreneurs. It’s natural as an entrepreneur to assume you know more than you do and build against your own “knowledge of how things should be done.” That’s why we’re committed to a process at Year One Labs to focus on early testing and validation of ideas before moving into rapid product development and beyond. And again, this comes back to investing in people and not ideas. You have to find people that are equally committed to this approach, willing to move from idea to idea as quickly as possible.

The Importance of Markets

A note about markets – they’re critically important. Go after a market that’s too small and you don’t have an investable business. Go after a market that you don’t know well enough and you could get eaten alive. For founders, you need to target investors that have some knowledge and experience in your market of choice. That’s ideal. If they have portfolio companies in your space that’s a bonus. We know what we know, and although investors have to have broad knowledge on many things and work very hard to get quickly educated on markets they don’t know well, generally they’re going to stick with what they know.

People -> Markets -> Ideas.

That’s the way most (if not all) investors should (and do) look at things. But the idea itself, your understanding of the market, competitors, monetization strategies, and existing idea validation that you’ve done , are all very beneficial when it comes to getting through early investor screens. You can’t get an investor’s attention without an idea that stands out in some way, or an angle on an idea that’s going to get them interested.

November 10, 2010 Posted in Angel Investing, Startup Fundraising by

  • http://adiamor.com Sarah Harris

    I agree that’s the way investors should see things, looking at people, then markets, then ideas. But it has seemed in my experience that they always judge quickly on the idea and its viability. I’d like to see them look into the people more, but obviously that is very difficult to do when they have so many people asking for their investment.

  • http://twitter.com/IvanRiosMena Iván Ríos Mena

    This is one of the gripes I have with how business plans are used. They’re useful many times, but too many people use them too early in the process, putting the emphasis on the idea before even meeting the entrepreneur.

  • http://submitgu.ru/ SubmitguRu

    No doubt – Invest in people first and you will always have money and people :-)

  • http://www.aktifgrup.com.tr Ofis Temizli?i

    thanks for the post, i like it and i add my bookmark, thank you very much

  • http://www.midyatgazete.com midyat

    thanks… very nice….

  • http://ne-nasil.blogspot.com/ Nasil

    Thank you for this topic

  • http://www.mallorca-wetter.org Mallorquinerin

    I think they invest only in their own pocket.

  • http://www.killerbeeprinting.com/products/brochures Cheap Brochure Dude

    I think we live in a world that invest in ideas firs; whatever makes the big money.

  • Pamtenblackhawk

    Hi Ben….!
    Thanks for your Great Post ,that Categorizes the Investment Difference in People,Ideas and Market…..!
    As the Investment lies in Idea then People then Market as per the current circumstances….!
    Anyways thanks for sharing this meaningful stuff.

  • http://toughbiz.blogspot.com Business Development

    Hi. Agnes Lee here of International Business Development Blog. Can we use your business related articles in our blogsite? We will credit you accordingly.

    And also, if you are interested to link exchange we are willing to trade links. You can contact me thru this email: agnes(dot)odusee(at)gmail(dot)com. Good luck and more power. Thanks. (:

  • http://twitter.com/ttcompliance SuttonCompliance

    Thought leadership plays a major role in this topic. Investors must trust the company in which is creating the product/service first and foremost before investing.http://bit.ly/cedY43

  • http://pokerworld.pp.ua/ PokerWorld

    Invest in Markets!

  • http://www.flirtfair.fr Peter

    When you put yourself in the position of an investor, you realize that people are represented by their ideas and that the way they present it, the way tehy explain it gives you a fairly good overlook on the perspective and on their project.

  • Joe

    Do investors provide business finance to ideas or the people behind the idea? An interesting questions and certainly one that has received much debate at a recent networking meeting between business angels and entrepreneurs in Johannesburg. Most investors would tell you that it’s the idea that they are interested in but if you look at the ideas who receive investment and the people behind them its often easy to identify why one idea received funding and another, not.
    http://commodityconsultant.com

  • http://www.kbcsi.com Kbcsi

    Very helpful and relevant tips for Investors…. Thanks for sharing such a Great Info. :)

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Ben Yoskovitz
I'm VP Product at Codified (makers of VarageSale).

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it).

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