As I tallied up 2011, I realized that I had reviewed, evaluated, judged, advised, or opined on well over 1000 start-up or early stage deals, and I expect that trend to continue in 2012.  This is something I enjoy doing, for many reasons.  It’s interesting to see the worldwide patterns that come and go in creative startup minds, and it’s always a particular joy to meet aspirational young entrepreneurs in hot pursuit of their dreams.

My deal flow is by no means a representative sample of the startup universe.  It is skewed more toward digital media, with less hard science and almost no life sciences.  But, I can make some interesting observations from this pool.

Déjà vu – I looked at one set of executive summaries where I calculated 20% were just about exactly the same concept.  All those were in the general category of “using my mobile device to organize my friends and/or family activities.”   That’s not to mention the already healthy number of companies playing in that same space.  Are these ideas being created in vacuums with no thought to existing tools?  Is the problem that significant that it requires so many solutions?   This is a prime example of where operating in a strong start-up ecosystem can be a huge benefit.   No matter how much you read and research online, just being in a human community where you can describe your deal to a knowledgeable listener can keep you from re-doing the obvious, can connect you with something similar where you can add value, or can spin you off in a totally different direction.   These ecosystems in places like the Valley tend to protect their offspring by providing a dimension of personal feedback that might not be found in, say, Ludowici, Georgia.   (Some decades ago its leading industry was its infamous speed trap.  Where else but TechDrawl could you learn such fascinating tidbits of Southern history?)

The Kicker – Bob Metcalfe here says repeatedly that the world’s problems are not going to be solved by another website.   Yet just this week we see companies like Klout getting a $30M infusion from top rank VC’s.   Does that mean my Klout score will eventually determine whether I can get a job or buy a home?  Will it be on an RFID chip in my elbow that also has my medical records?   (I’d cite my Klout score here, but when I try to check it all I get is “internal server error.”  Hopefully some of that $30M is going toward technology.)  Certainly for some careers indices like this are relevant, and yes there is still plenty of money to be made in new websites and new mobile apps.   But, when you look at a mountain of deals as I have over the last year, the ones that stand out are the ones that appear to have some protectable science underneath and are not relying strictly on being coolest, fastest, or "firstest."  That science may be embodied in an algorithm, a chip, or a device, but it changes the nature of the game and provides what I would call a “kicker” to interested investors.

Traction – There’s that word again.  Entrepreneurs complain that if they already have traction and have taken the risk out of a deal, then investors aren’t actually taking much risk.   But, you can see from the investors’ perspective how with so many similar deals, the cutest ones that come to the front of the cage ready for adoption are the ones that have shown an ability to create real customers and real volume.   (Austin is a rather slow market for local TV news, so there are lots of animal shelter stories.  I thought I should throw in something analogous here.) Investor risk is indeed greatly reduced if you let the marketplace do the preliminary sorting, particularly when there are so many replica deals.   If there’s no kicker that truly differentiates, then traction is the next best test.  And, you can see why investors find it easier to play in B2B deals where a few big customers or channels can be sold up front to prove the market.  

Proxies – That’s a term that has surfaced several times this past year.  If you have a new concept, what similar concept is an adequate “proxy” for your proposed revenue model?   How do you set the price?  Who else is paying what you plan to charge, and what are the competitive pressures?  Even as far back as my Peachtree Software days, just creating a price list was a challenge.  That topic alone is almost worthy of a business school course, but it’s trial and error for most entrepreneurs.   If your concept has multiple revenue streams, or perhaps mixtures of capital costs and recurring fees, you quickly find many permutations.   You can conduct surveys and get some useful input, but genuine proxies can be your best guides.  I’ve found that it’s very hard in particular to ask consumers what they will pay for a new and novel product or service.  You might pay a lot more than I for something that catches your fancy, or vice versa, but the question is what on average is reasonable.  And you often must learn that the hard way as your launch yourself into the market.

I would say more on this topic, but it’s time now to go look at another deal...

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