In many cases we see a startup that is exploiting a trend or riding a thermal and they’ve built a feature or product that is exclusively used within one platform. And there is a sole player that owns the platform and it’s entire distribution channel. A couple, off the top of my head include Amazon, Apple iOS and Google’s search engine marketing. Yes, there are competitors to these companies, but with each they have created a market and have total control over their channel of distribution and, ultimately, the offerings that will be allowed through the channel.
I have seen situations where people build businesses on Amazon, with no brick-and-mortar, that are ended overnight b/c Amazon may change their commission structure or affiliate program. Or maybe someone has built an App for iOS that delivers a steady $50k / month, when iOS upgrades their operating system or app requirements. And this established app no longer works. So, until it can be re-developed and approved, the revenue disappears.
Meerkat, which has been in the news and we’ve been discussing over at Venture Weekly, has built much of their user-base by using Twitter’s platform. When Twitter disabled their functionality a few weeks ago, it was a big story and Meerkat was in a tough spot. Now, they have built their own social platform, thus Twitter is a user-acquisition strategy, not an ongoing channel necessity. But, this illustrates the effects of channel choke and reliance on one distribution method, controlled by one party. Of course, there are other external drivers aside from company decisions. Jerry Neumann, on episode 20, discussed a legislative driver, in online advertising, that could destroy the industry overnight. In my former job in M&A, we monitored government and legislative drivers very closely, of course from a risk standpoint but even more-so for opportunities. New law doesn’t just eliminate value it can create tremendous opportunity.
So, the message here is to lookout for channel choke or a captive channel when evaluating risks for an investment. Is the startup relying on the policies of one company in order to succeed. Is there a likelihood that this one company may enact policy that will eliminate the startups business model? These focused-platform technologies can be extremely lucrative, very fast… but if an investor’s time to exit is 8-10 years and the incumbent likely views it as a threat, the startup and your investment may disappear together.
While talking about syndicates this week, I was very tempted to include a tip that broke-down the advantages and disadvantages of investment approaches. We’ve talked about the lone-wolf, the angel group, the venture fund and now the syndicate. The natural extension to this conversation is to analyze each and understand the strengths and weaknesses. The syndicate approach that Gil is employing, clearly exploits advantages of angel groups and venture funds, while avoiding some of their drawbacks. But, while this is an innovative approach to early-stage investing, Syndicates are not without their own limitations. And while, a number of you have emailed and asked why I haven’t started one, in all honestly I’m still learning the mechanics and nuances of syndicate investment. It’s not that I’m not open to it but rather I have to make sure that a) It’s a sound decision that fits with the overall philosophy and b) it provides advantages that other approaches don’t. On the surface it’s pretty compelling but it requires more thought and analysis. So, to get my head around it, I started putting together a comparison of each of the approaches, and I will do a special segment this week that considers factors like decision autonomy, bureaucracy, fees, terms, access to dealflow, etc… and I’ll attempt to rate the factors for venture funds vs. angel groups vs. syndicates and, of course, lone-wolf investing. So, if you are grappling with this decision like I am, stay tuned for the special segment coming up.
And remember to check out our newest project, Venture Weekly, the Top 10 articles of the week, written by the venture experts. We have put a lot of time into analyzing social, views and user feedback to identify the top trending articles of the week. And then we read the top 40 and pick the ten must-read articles of the week. If you’re out there reading everything and don’t mind some sub-par content, this is not for you. If your schedule doesn’t allow for this and you’d benefit from the curation and aggregation then head over to ventureweekly.net and check it out. I’m a huge fan of feedback, both positive and constructive, so shoot me a note at firstname.lastname@example.org, if you’ve got ideas about ways we can improve the interface.
That’s it for today. We’ll see you next time and until then, over-prepare, choose carefully and invest confidently, thanks for listening.