Tuesday, May 17, 2011

Angel Investing Is Like The NBA Draft

Each year, NBA scouts devote their time to finding flaws in players. Landry Fields lacks athleticism. DeJuan Blair is too short. And each year, those scouts misfire badly, as players like Fields and Blair end up thriving in the NBA.

The scouts fail because they're too focused on what players can't do, rather than understanding what they can. If you're a brilliant rebounder or a great shooter, but are below average in other aspects of the game, that's a lot better than being average at everything.

The same applies to investing in startups. It's easy to find reasons not to invest in a company. The founders are too inexperienced. The space is too crowded. The technology isn't unique enough.

But simply avoiding flaws isn't enough. Startups don't succeed because they demonstrate broad adequacy. They succeed by being insanely great at something, even at the cost of sucking at others.

If you want your startup to succeed, figure out your business' elite skill and focus on honing it. This isn't to say that your startup's flaws don't matter. They do. But being flawless yet mediocre is a recipe for indifference.

Conversely, if you're contemplating a potential investment, focus less on what it can't do and more on what it can. A great product that meets a critical need can convince people to overlook myriad flaws.

Monday, May 16, 2011

Find A Competition You Can Win

In college football, the practice of scheduling cream puffs is both much reviled and much practiced. Football powers pay smaller schools to act as sacrificial lambs.

Seeking out weaker competitors is a contemptible trait in football, but it's good strategy when it comes to business. There's no BCS formula to give you extra credit for tackling tougher opponents.

Some of this principle is apparent in the practice of market segmentation--finding a niche you can dominate. But where segmentation is about customers, this is about selecting a competitive set where you can shine.

When I was a student at HBS, one of the companies that visited campus was Progressive Insurance. When asked the secret of their success, the managers there admitted, "Frankly, not that many smart people want to go into the car insurance business. Nothing we do is that advanced, but it's more advanced than anyone else in the industry."

In my own life, I've had a lot of success with my writing simply because most other business writing is that bad. When I was a Creative Writing major at Stanford, I struggled to get any of my stories or poems published. Today, I can get my articles published in some of the top outlets in the world.

It's not that my writing is that much better; I used to spend upwards of 40 hours writing and editing each of my stories. Today, I usually don't bother with revisions, and can write a piece in less that two hours. The difference? The competition. The average PR flack or business executive is much weaker competition than a dedicated fiction writer.

Want to shine? Find a competition you can win.