I recently read Fred Wilson’s blog post on his waning interest in investing in Pre-Product Phase companies. I’ve always found Fred’s writing to be very self-aware, so this type of post does not surprise me. My interpretation of his post is that he doesn’t believe his personal diligence process is well tuned towards pre-product companies. He states: “Until I can get my hands on it and use it, I have an incredibly difficult time imagining what the thing is.”
He then follows that statement with an expression of where his passion lies: “I really enjoy investing in a business where the product is out in the wild, getting used, and everything else has to be figured out.”
I think this is an interesting framework to think about a VC’s appetite for deal flow.
DILIGENCE CAPABILITIES + PERSONAL (FIRM) PASSIONS = APPETITE
I used this framework and here are the top three reasons Thinktiv likes pre-product phase opportunities:
- We prefer to ask the question: “What is possible with the expertise and assets inside this company?” Many VC’s have a diligence process designed to answer the question: “What progress has this team made and is that progress indicative of future potential.” In order to measure progress, a company has to have something in market and pre-product companies do not. This line of questioning makes sense for VC firms built on financial platforms. It’s an unnecessary question for venture firms built on talent platforms. Since we surround entrepreneurs with talent they don’t already have, we can affect product and marketing outcomes. Therefore, we can base our diligence process on a more valuable question: "What is possible?" The clean slate of a pre-product company is easier to work with. Given we believe we can deeply effect outcomes, we better be willing to invest in on our ability to do so.
- Our diligence teams include designers, marketers and product strategists. We can “see” and paint a picture of a product, marketing strategy and company we’d be excited to build using insights from a multi-disciplinary diligence team. In fact, the headline picture of this post is Alex, one of our product strategists. This is unusual and is only available to firms that have built this into their platform. If the founding team we’re talking to is excited about the same picture we are, then we’ve got alignment. If we have alignment, then we can discuss capital strategy and whether Thinktiv + founding team is a unique weapon capable of creating a category leader. If it is, then we are willing to invest in our ability to create a category leader, together.
- Our talent platform is comprised of people who love to create. Most people at Thinktiv love to create. Whether it’s product strategy, design, brands, code, we’re culturally wired to want to create and launch new things. We are less likely to be excited about operating things that exist in market. Those are valuable tasks and opportunities, but they’re not for us. 100% of the companies we work with have a product to create or a new market to address with an existing product, or both. There are no exceptions to this rule. It’s where our passion lies.
If you're raising money for your startup, what do you want to be part of your investor's diligence process?