Each VC has a set of fields where they have the previous exposure and investment experience necessary to confidently evaluate a startup’s prospects. Similarly, there are some areas which are off limits because they require specific knowledge and expertise that takes years to accumulate. But what about those startups that are addressing a market that falls in the middle? While you may not be an expert in the market, perhaps you have experienced the pain point that the startup is attempting to solve in your daily activities. Should you consider investing in these markets?
This is a question that I have been struggling with for a while now and I have decided that the answer is yes, but a qualified yes. While I may not be an expert in a startup’s target market, if what they’re doing makes intuitive sense to me, I do evaluate the investment opportunity. However, I do so with the assistance of friends who have extensive experience in the field. These friends, who have studied the field for years, or worked at companies in the same market, or served on the boards of similar startups, are able to see the nuances of a startup’s strategy to solve a specific problem. While these nuances would go unnoticed to the untrained eye, they are second nature to people with years of experience in the market.
In the past week alone, I have relied on three friends to provide their insights into markets where I believe there is an opportunity but am not sufficiently confident in my ability to understand whether a startup’s specific approach targets this opportunity in the right way. There is no guarantee that my experienced friends’ evaluations are correct since some of the best startups emerge from an outsider realizing that an assumption which industry veterans held to be true for tens of years should have actually been open to debate. However, even if this is the case, an expert’s perspective is valuable as it helps establish the contrast between the status quo and the improvement that the startup is attempting to achieve. After internalizing the thoughts of both the startup and the expert, it is ultimately up to the VC to form his own version of reality.