Biggest Mistake Venture Capitalists Make
It's something that many VCs do that all VCs should avoid.
Venture capitalists are, by nature, confident people. Some VCs might even be perceived as being cocky. And maybe some of them are just that. But with that confidence (or cockiness) comes a degree of oversight that might prevent the investor from picking up on some of the more minuscule details of a business.
When I interviewed Christian Nagel, a managing partner at Earlybird Venture Capital, he had an impressive list of things to look for in a startup. They included (but were not limited to) the following:
- “Should be very product centric/unique and the team should reflect this.”
- “Model should be sticky/provide for lock-in through network effects and/or a highly engaged user base.”
- “Market size should be in the billions.”
- “Capital efficiency: can it be scaled efficiently.”
Those are excellent points. But they're a part of the bigger picture. The problem with those lesser-known elements – the aforementioned “minuscule details” – is that they often include some of the most important ingredients of a young company. And there is one detail in particular that no venture capitalist should miss.
“I think the startup companies that are being funded by VCs without putting protection on innovation in place are setting up themselves for failure,” Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research, told Benzinga, referring to the lack of patents protecting company innovations. Chowdhry takes great issue with the way Facebook has behaved (“Facebook [has copied] 10 years of innovation,” he said) and fully supports Yahoo!'s (NASDAQ: YHOO) decision to sue the social network for patent infringement.
“When you have global competition, the only weapon that will decide your success or failure is velocity of innovation and protecting innovation,” Chowdhry explained. “And not only that but, just to give you a sense, today – if there were no protections – if I wanted to create YouTube, I could create YouTube at [a fraction of] the price. I know what works, what doesn't. I don't have any R&D to do. I know what they want, where I need to place it, my roadmap is fully defined. I just have to enter the market. Do you think that is fair? No.”
Chowdhry said that the act of placing advertisements on a website is not a science – “it's an art.”
“And Yahoo! learned from 10 years [of work] – how do people browse it, where to place ads, where not to place ads, and they are protected by patents,” he said. “Every technology company whose fundamentals are innovation should make sure they protect it…because that will only dictate the survivability of the company.”
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