If what you are investing in “rocks the world,” be prepared for the company to face unexpected challenges convincing customers. Double any timeframe presented as well as the cost of success. When it pertains to customers, this means a longer timeframe to achieve a significant level of sales (see Crossing the Chasm by Geoffrey Moore) and higher cost of acquisition per early customer.
In our series of nine questions to ask before investing in a new venture, ask yourself this: Is this product or service a “sustaining technology” (an improvement to the current way of doing things), or is it truly a “disruptive technology?”
“New new things” – borrowing a term coined by Michael Lewis in his book “The New New Thing” – are tough to introduce and take much longer than is normally expected to gain a customer foothold, no matter how beneficial they might appear. Human beings generally like their existing “happy place”; it gives them a sense of security – their most dominant instinct. Also, existing infrastructure (supply chain, out-sourced fulfilment, etc.) supporting the status-quo can be highly resistant to change.
Affecting the choices people make isn’t easy. Human beings are naturally resistant to change. We all have our “happy place” – for example the smell of your mom’s laundry detergent, your favorite brand of paper towels, or that favorite family dinner cooked every Sunday night – familiarity can create a sense of safety and security.
Furthermore, existing infrastructure (supply chain, out-sourced fulfilment, etc.) supporting the status-quo can also be highly resistant to change. A company is taking risk when adapting (or creating) new equipment for which a consistent use and demand has not yet been proven—think about the first light bulb for example.
Product or services which are not disruptive, if well branded, may still lead to a successful venture. Think of all the sneaker companies or soft-drink companies which don’t offer a game-changing product. What many do is engage experienced branding partners to set them apart from the competition, creating an identity that ignites brand ambassadors.
When considering this venture investment, ask yourself some additional questions:
- How great are the benefits delivered to the customer by the product or service? If it is difficult to change a customer’s purchasing pattern, then the customer must be persuaded by substantially improved results to buy this new product or service.
- Is it worth the risk to purchase it, and do you believe that significant target customers will switch…and become repeat buyers?
- Consider what kind of investment the customer has in the current solution to a product. For most people, once they’ve made an investment in their Maytag washing machine, they’re not going to replace it with another, unless the new solution to cleaning clothes makes a giant leap forward.
- The company must also give you reason to believe that any issues surrounding the supply chain are manageable, all the way from effective planning, through sourcing, building inventory, producing and delivering product, etc.
- Finally, has the company developed patents and other intellectual property that are a barrier to entry to competitors?
Venture investing is risky. We recommend that only the most risk-prone investors consider this sector of investing and limit your invested amounts that you truly feel you can afford to lose.
For more information about investing in venture enterprises, please see Carofin’s “9 Leaps of Faith” from which this, largely, is an excerpt.