UNI – Acquired tastes in food and investing

Between Idealab, First Round Capital, the New York Angels, and just plain email, I see about 50 new business plans a week.  Many of these are “instant pass” – they don’t fit my investment objectives, nor those of my three or four half time jobs with FRC, Idealab, etc.  While these may be heartbreaking for the entrepreneurs involved, I don’t lose that much sleep over them.

There is another category, which can potentially be big hits, and these are the ones that take most of the time – due diligence, meetings, thoughts about how to work them.  They lead to the 20 or so First Round investments each year, to Idealab’s new company startups, the NY Angels 5-10 investments, and several personal investments that I make. And over the long run, they’ve proven to be worth my investment of money and time, taken as a portfolio whole.

The heartbreaking deals are those I call UNI.  As a Japanese sushi, uni (or sea urchin) is somewhat of an acquired taste.  It is a bit slimy, but can have a wonderful sweetness to it.  I acquired a taste for it during my many trips to Japan in the 80s and 90s, and order it whenever it’s fresh.  I also see a lot of businesses that taste sweet, but have a somewhat slippery texture, I call these UNI -  User, not Investor.  These are deals where the product excites some of my sensibilities, and I can quickly see that I, and maybe many other early adopters I know, would easily become users.  But I either don’t see a business model, or see how it gets to be a very large company.  In many cases, I can see getting to a $10-20 million business throwing off  a few million a year. But there is either  market or no vision of how to get it to $50-100 million.  These are wonderful business for the entrepreneur, friends and family, and some angel investors.  They generate cash flow and great lifestyles.  They just don’t work for the venture business.

Many of the ideas we see that build on the social network or new communications platforms fall into the UNI category.  As a big user of Facebook, Twitter, et. al., tools that help me do it are most welcome, and I try many of them.  As businesses, most of them don’t have the ability to generate much revenue. The same seems true for the iPhone app business.  Lots of neat apps (see the humorous iPhone ad you’ll never see on TV), but not many generating enough revenue for long enough to build venture scale companies. 

So please don’t feel offended if I pass on your deal, after showing great excitement for your product. You may well have a winner – for small scale investors, but  cannot generate the scale that works with venture math.

Comments

[Arthur Einstein Jr]

Interesting perspective Howard. So how do you judge whether the potential is monster or not? Everything looked like a big idea once. Now, nothing seems to.
[HLM] to keep with the food metaphor, it's gut feel.

[Yuri G.]

It's very interesting opinion, but do you think those VC's who invested in Twitter or other social networking projects are not smart enough and they didn't have any projections or ideas how to monetize those kind of projects in future? It's very interesting how they evaluate capitalization of those companies now...they dont' generate any cashflow but their valuation is unreallistically high. I think i saw that one of your partner at first round invested in Delicious, isn't the same kind of projects that you are considering as a UNI :)

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These are deals where the product excites some of my sensibilities, and I can quickly see that I, and maybe many other early adopters I know, would easily become users. But I either don’t see a business model, or see how it gets to be a very large company. In many cases, I can see getting to a $10-20 million business throwing off a few million a year. But there is either market or no vision of how to get it to $50-100 million. These are wonderful business for the entrepreneur, friends and family, and some angel investors. They generate cash flow and great lifestyles. They just don’t work for the venture business.

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As businesses, most of them don’t have the ability to generate much revenue. The same seems true for the iPhone app business. Lots of neat apps (see the humorous iPhone ad you’ll never see on TV), but not many generating enough revenue for long enough to build venture scale companies.

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