Sunday, October 17, 2010

Consider the source when you ask for advice

Y Combinator held its Startup School yesterday on the campus of Stanford University, and the entire event was streamed live on (The sessions have been archived for viewing here.) Some of the most interesting information came in the question and answer sessions, where many of the speakers were asked variations on two questions:
  • Are you funding the type of products/services that I'm working on?
  • What do I have to do in order to get funding from you?
It's natural to ask "people with money" about your ideas to see if they might be interested in investing, but it's also very easy to draw the wrong conclusions about their answers. For example, if they say that they're not funding projects in the area that you're working on, but they're very excited about another market or technology, it's natural to consider dropping your idea or modifying it to match the investor's interests. Before you do that, however, consider whether or not the investor is really in a position to judge your idea.

Most angel investors and at least some VCs started as entrepreneurs themselves; most of the angels got their initial bankroll for making investments from their startups. Many of them don't have a lot of experience beyond their own businesses and the few investments that they've made. If you ask them about a business idea that's outside their "comfort zone", they'll often give you their opinion, even if it's nothing more than a semi-educated guess.

Investors usually specialize in particular markets or technologies. It's always a good idea to know what an investor specializes in before you ask them to evaluate your business. You'll get better feedback, and you'll be better equipped to evaluate their answer.

Some investors will dismiss an idea, not because it's bad, but because they already have some investments in that area and are uninterested in making more. If they reject you, it doesn't mean that there's anything wrong with your idea, team or business plan--in fact, you might actually be potentially stronger than an investment that they've already made. (The risk in this case is that they'll tell their existing investment what you're doing.)

Finally, some investors will engage in "counterintelligence", and will deliberately mislead you because they already have a stealth investment in the area that you're working on. They may dismiss your idea or business, only to announce a few months later that they've funded a startup working on the same thing that you're doing, or something very similar.

For all these reasons, it's important to consider the source when you ask for advice, request funding or get feedback. Dig a little more deeply to understand the basis for what you've been told before you act on it.

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