My fondness for early stage investments often prompts me to develop a new method with which to filter, evaluate and pursue deals. One of my current methods is to group interesting early stage companies into the following buckets: “amazing,” “smart” and “crazy.” Many companies don’t quite meet the criteria I set to receive these labels, and occasionally, special companies will fall into more than one category. This is an imperfect framework, but nonetheless useful for me as I evaluate the worthiness of a given early stage project.
“Amazing” companies are the mainstay of the Israeli venture scene. The business case of these companies is predicated on having a superior technology solution for a technology problem that in turn has meaningful business implications in a very large market. These are companies whose products are incredibly difficult to develop, and whose product claims are met with incredulity or otherwise elicit a “wow” response. Competitors will scratch their heads and dismiss the claims as preposterous, but “amazing” companies will be vindicated at the end of the day. Finally, these companies are unique in that they are actually able to create shareholder value by merely delivering a working product (which honestly can’t be said of most start-ups). But alas, too many Israeli entrepreneurs and investors think their company is a diamond(amazing), when in fact it is just a shiny stone(interesting). The bar should be very high for these companies at the early stage, especially those that require significant amounts of cash for R&D. "Amazing" companies may ultimately be acquired merely for their IP, product and development team, but these outcomes are few and far between. From my portfolio, past and present, I put Altair, Dune, Soluto and Storwize in this category. Other "amazing" BVP portfolio companies would include Tilera, Miasole, and Vertica.
“Smart” companies seem to be Bessemer favorite. These companies solve challenging business/market problems with well thought out solutions that are largely business in nature, such as a new product concept, pricing model or marketing approach. They are borne of the founders’ epiphany that something valuable can be built around a market inefficiency or anomaly. They may be technology-driven, but rarely rely on technology innovation. As a result, the founders of these companies usually possess a strong understanding of the target market, including the economics, psychology and politics that drive it. The risk around these companies is largely execution, but when done properly these companies can quickly disrupt an existing market or create a new one with a surprisingly simple, yet smart approach. From my portfolio, I feel that both Soluto, and my recent undisclosed investment, fall in this category. Other “smart” BVP companies include LifeLock, Gerson-Lehrman Group, Diapers, Yodle and Open Candy, among others.
“Crazy” companies come with bold or wacky assumptions about consumer/customer behavior that are simply impossible to prove without trying. These are companies whose products are greeted with indifference (who needs it?), scorn (it’s annoying!) and ridicule(they will never build a business). And with a great degree of uncertainty baked into the plan, a lot of improvisation is required in the early years. In contrast with “amazing” companies, “crazy” companies typically have products that are straightforward to develop, but rely on untested methods of distribution, customer engagement, and/or monetization. And in contrast with “smart” companies, “crazy” companies lack a business model and operate in ill-defined market segments. I deliberately use the pejorative term “crazy,” because entrepreneurs and investors alike should recognize the immense risk of their plan so that pride does not keep anyone from pulling the plug when things clearly aren’t working out. Aside from ICQ, Israel has only had only a handful of successful crazy companies, which makes funding them more difficult. BVP has its share of “crazy” companies, which time has made very “smart.” These include Skype, Yelp, and LinkedIn, and more recently Hunch, Sonic Mule and Wix.
Over time, the distinction between each of these three labels may blur, as some “crazy” companies succeed and become “smart”(Twitter, Facebook), and some “amazing” companies succeed and become "smart" (Google). It’s fair to say that being a “smart” company should be the end goal of every start-up, but this is precisely the point. It’s hard to come up with a smart model at the onset and even harder to succeed at execution. But if you think you can, we are certainly interested. I also recognize that many “amazing” and “crazy” companies will be acquired long before they are able to prove they are also “smart”. Finally, it should be noted that falling into one of these three categories does not by itself guarantee success… however doing so can help early stage investors, like myself, feel their early stage risk is money well spent.