Many market needs exist independent of the fact of whether a business is fulfilling it or not. Some of these needs are widespread and represent large markets; whereas some are severely limited - geographically or in some other fashion.
One way to think of a new business, including startups, is as an attempt to discover such a need and fulfill it. Businesses must balance practical constraints and choose carefully to pick market needs to make their basic economics work. The two fundamental variables - and ultimately major constraints - facing a new business are the amount of investment capital available, and the time it takes to bring a solution to market.
In this post & future posts, I will examine how one can attempt to form a heuristic based on these two constraints and place current startup / business formation mechanisms in it. Let’s start with Venture Capital - let’s try to draw a picture of some kind (perhaps I will fill it with actual data in the future):
Although Venture Capitalists often talk about being patient, and mention a ten-year investment horizon, in practice there is delay between fund formation and investment. Furthermore, even the laggard investments must fit within this window, with the median expected time to liquidity being shorter.
Liquidity is the endpoint; and the clock often starts ticking for showing traction / growth within the first 24 to 36 months of a major venture investment.
This is not unexpected and fits within the economics of VC firms. Thus expected time to liquidity often forms a firm upper bound on investment decisions. It is naive to think that even a majority of ultimately successful potential strategies are possible within this narrow time window; and we’ll explore examples for this in the future. Interestingly, although ycombinator-backed initially, Reddit.com took many years to fulfill its original promise - much after its exit to Condé Nast.
Many open-source projects (databases for instance - neo4j, mongodb, mysql) spawn successful commercial enterprises around themselves , representing a hybrid strategy that prolongs initial gestation time, delaying the timing of first outside capital.
The other upper bound is the amount of capital investors are willing to deploy - especially when no major assets (such as oil / mining rights) are being purchased. This means that even if there is a large unmet market need, if the requisite startup capital is very high, VC firms will not be able to match to the challenge. This is also one of the reasons the State, large and established multinational conglomerates, and billionaire entrepreneurs have an important role to play in capital formation. It is unlikely that Tesla Motor Company, or Space X would’ve come so far without the unique resources and drive of Mr. Elon Musk. Likewise, another way to think of small-scale grant-funded research is a giant MVP & iteration machine.
The example of COMAC is perhaps unique in combining both longer horizons and enormous capital needs. It is unlikely that any actor other than the state of China would be able to form a startup whose mission is to disrupt the duopoly of Boeing and Airbus in large passenger aircrafts. This is a far cry from what Menlo Park does today.
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