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Investing in “Firsts” Is Overrated

Investing in “Firsts” Is Overrated
By Adam Sharp
Date December 10, 2019

“Google was the twelfth search engine. Facebook was the tenth social network. iPad was the twentieth tablet. It’s not who gets there first. It’s who gets there when the market’s ready.”

The quote above is from the book Angel by Jason Calacanis. It’s a great read and highly recommended for anyone considering making offline angel investments.

The point he makes here is an important one. People who are new to startup investing often put too much emphasis on investing in “firsts.” They often invest in startups that are “first to market.”

And being the first to market can sometimes offer an advantage. But the fact is that the vast majority of first companies in any market fail. Creating a new industry is tough sledding. And even if those startups gain a foothold, this often attracts competition. If you do invest in first-to-market startups, make sure they have strong playbooks for fending off competition.

If the execution isn’t excellent, or the timing isn’t right, being first won’t make a difference. So as you examine startup deals, remember to focus on fundamentals. The foremost signal we are looking for should be traction (progress). How much progress has the company made based on the amount of money it has raised?

Another thing we always need to examine is the team. We need to make sure they work well together (even if it’s only two or three people). If these founders have worked somewhere together in the past, that’s usually a great sign. On the other hand, if they’ve known each other for less than a year, be careful. Founder dynamics are incredibly important in startup investing. If one of the founders decides to quit, it can be very hard for a startup to recover.

I’ll give an example from my own portfolio. I invested in a metal 3D printing company back in 2014. It was one of my first online angel deals ever. This company was one of the very first legit startups attacking the metallic 3D printing market. The tech looked great, and the lead investor was a patent attorney who was also a well-known angel investor.

However, the team dynamics didn’t work out. The founding team hadn’t worked with each other at all, and I believe the company failed as a result.

Bottom line: Don’t get pulled into a deal simply because the startup is first to market. There will always be competition eventually, and if the market opportunity is large, there will be a lot of it. Make sure the companies you’re investing in have plans to fend off competitors and build “moats” around their businesses.

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