Early Investing

Why Truly Groundbreaking Startups Are the Hardest to Invest In

Why Truly Groundbreaking Startups Are the Hardest to Invest In
By Andy Gordon
Date September 18, 2019

What do the following have in common?

  • Food replicators
  • Asteroid mining
  • Robotic janitors
  • Full-diagnostic wearables (like taking a physical every day)
  • “Fountain of youth” pills
  • Passenger drones

Some may say they’re all audacious ideas. Some may say use is far off. Others may say widespread use will never materialize.

The more cynical and less hopeful might say they’re all a joke, something an investor should not take seriously.

I like that last answer: something not to be taken seriously. But I don’t use it the way you might think – to avoid all this frivolous stuff. Quite the opposite.

We’re all guilty of falling into the trap of assuming some things are plain silly. But if a startup challenges conventional thinking – challenges the notion of what is possible – it just might deserve a second look. And if it goes on to outperform expectations… prove the naysayers wrong… and defy the so-called realists, then this technology or product or business model is where you can find the biggest profits.

It reminds me of a famous saying that’s often (falsely) attributed to Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win.”

This describes not only the evolution of causes and movements but also the perception of groundbreaking ideas from concept (crazy) to deeply disruptive and moneymaking reality (widespread adoption).

From Niche to Next Big Thing

A good example is plant-based food. Nobody took it seriously for a long time. It was considered niche. And, much worse, making a tasty burger from plants was considered an impossible endeavor. As recently as 2015, the press treated Beyond Meat’s newly released Beast Burger as an off-putting curiosity. Despite decent reviews, no one questioned the prevailing attitude of “Why would anyone eat this stuff?”

But that’s changed. Nowadays, plant-based food is a white-hot sector headlined by the appropriately named Impossible Foods and Beyond Meat. Legacy companies, including Nestlé, Tyson Foods and Perdue Farms, are all developing their own versions of plant-based foods. And Whole Foods just announced it will start selling burgers from the U.K.-based startup Meatless Farm in all of its stores.

There are many other examples. Who initially took a taxi service made up of privately owned cars driven by your neighbors seriously? Or solar panels? Or mobile phones when they first made an appearance as unwieldy devices the size of shoeboxes?

But the truth is, the crazier the product seems at the outset, the more money it can make early investors when it succeeds down the road.

And by the time it makes perfect sense – nobody snickers anymore when you mention “fake meat” – it’s too late to invest. You’re part of the herd, pouring into copycat companies at inflated prices (or into the original disruptors at super-expensive, late-stage or IPO prices).

Easier Said Than Done

For the 90% of you who are thinking, “Sure, I can think outside the box and do this,” I’ve got news for you. You’re probably fooling yourself.

Investing in ideas or technologies that seem utterly impossible, incredibly frivolous or so far off into the future is one of the hardest things to do as an early investor.

Look at the above list again. We don’t have any of those categories represented in our First Stage Investor portfolio. But I am following robotics, drones and anti-aging technology very closely and would love to point our subscribers to a company or two in a seed or Series A round.

What’s more, our First Stage Investor portfolio does have some “crazy idea” companies.

We’ve made a few investments in startups that are using highly unusual technology and unconventional business models that aim for 900% to 9,900% improvements (as opposed to 10% to 100%). That’s as good a definition as any of breakthrough technology.

One is HyperSciences, a company that uses nail gun-like technology to launch rockets into space. Another company – Phoenix PharmaLabs – is developing a 100% nonaddictive opioid. That strikes most people as an oxymoron, but it has real potential and might develop into one of the most important pharmaceutical breakthroughs of this century. Another company is a food franchise that serves only locally farmed and fresh foods… at fast-food prices. This up-and-coming company – called Everytable – just might reinvent the fast-food industry.

So let’s go back one more time to the list above. I listed these technologies in order, from most crazy to least crazy. They were all off-the-charts crazy at some point.

Passenger drones were a crazy idea a decade ago. But not anymore. They should be entering commercial use within a year’s time. “Fountain of youth” pills have gone from an out-there technology five years ago to a serious technology now. Breakthroughs are fully expected over the next two to five years.

Yesterday’s “fountain of youth” pills and passenger drones are today’s food replicas and asteroid mining. To be clear, I don’t know any company developing a food replica, but believe it or not, we’re getting close. An Israeli company called Redefine Meat lets you put some chopped-up plants into a machine and out comes a lamb chop. The machine is a 3D printer.

Yes, Redefine Meat sounds like something straight out of Star Trek. Yet, as crazy as it sounds, Star Trek‘s replicators are coming. So are thousands of devices we’ve never dreamed of. And it will be these “crazy” startups and their “impossible” technologies that will help take us to a future we can barely imagine.

But the time to invest in them is right now.

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