New Tech Isn’t Always Innovative

When you run into a brand new technology, there is a certain “whiz bang” part of it that is always interesting.  I think we saw that with artificial intelligence and we are seeing it with other new technologies that are being developed.  Deep Blue beats the best human chess player and wins at Jeopardy and a lot of people think humans are doomed.

Money starts to flow into the sector and valuations creep up.

The truth is, even with the most cutting edge new technology you have to build a business.  The principles of building a sustainable business are relatively unchanged.  You produce where marginal costs equal marginal revenue.  You have to market the business and brand the business.  But most of all, you need an moat that competitors cannot easily get over.

Building that moat is extremely hard.

At our fund, we like to invest in companies that we think can become “platform” type companies.  Often they have network effects.  Sometimes they don’t, but the business is so sticky it grows tentacles inside organizations and they can use first, second, and third degree price discrimination to extract more and more value out of a customer for one acquisition cost.  Megalytics does this with their risk analysis product and their retail analytics product.  CFX/OFN has started to develop into a nice platform company.

At the seed stage, it’s often very hard to see what company can become a platform like company.  Often they start as tools and as they get successful grow into platforms.  One of the angel investments I made, Riskalyze, is doing just that.  Recently another angel investment, Ycharts, announced new integration features that makes their product indispensable to their target market.  FinMkt is executing on a vision they described when we invested but at the time wasn’t possible.

If you have deep domain expertise, you sometimes can see it.  Generally the customer grouping is known and the pain points in the market are known.  The differentiator is the team that is solving for them, and the unique way they are going about solving for them.  Our two latest investments Holberg Financial and PipIT do just that.

It is not enough just to identify the problem and apply new technology to it.  Blockchain for this, AI for that, Big data for this.  You have to apply it super creatively and build a potential big business at the same time.