Warren Buffet famously quipped: “only when the tide goes out do you discover who’s been swimming naked.”
Every startup is a skinny dipper slipping into the ocean while swimmers are looking the other way. The hope is to find a suit before the tide goes out.
It’s fashionable among investors and many entrepreneurs to claim that being early in a really big market is better than trying to be profitable, or indeed that being early in a big market is all that really matters. Like many popular ideas, this one has lost it’s nuance: big ideas are not the same thing as business ideas, but they sometimes overlap.
As a result of this simplification, there’s a lot of money looking for startups with big ideas. The thinking goes: “Big idea? Big market? Might be a really big outcome!” And for many investors, that’s where the thinking ends. Anyone can — and some people do — get lucky this way, but great investors understand that there is a way to tip the scales in your favor by looking for big ideas that are underpinned by a real business proposition.
One idea in a big market that turned out not to be a business was MoviePass. The idea was very big: what if people could go to a movie in any theater, whenever they wanted, for a simple $10 monthly subscription?
Unfortunately, people who subscribed to MoviePass mostly went to more movies than could be purchased by their subscription fee, which meant that every subscriber the company gained was a net loss for the business, and to get out of that cycle they’d need to find some kind of real leverage over the movie theater chains or some new form of revenue based on their massive user base. The story is of course much more complex, but selling someone else’s product for less than they’re willing to sell it to you is rarely a winning proposition.
Clubhouse is an example of a big idea that may or may not turn out to be a great business. Right now they’re focused on winning the social status land-grab against Twitter Spaces and whatever Facebook chooses to build as a competitor, but eventually they too will set their sights on a business model, and we’ll see if they can convert all this attention into actual cash. My guess is yes, but it’s not obvious yet how it will happen.
Sometimes the wild ideas that are hard to get your head around can turn out to have real business models. Take a look at Meow Wolf (where Alsop Louie Partners is a shareholder). At first glance, it seems quite strange. Why invest in an artists collective in an abandoned bowling alley? Look a little deeper, and the idea is very big: a shot at redefining our relationship with the physical spaces around us now that the real world has to “compete” with the one we keep in our pocket. And it turns out there’s a remarkable business to be had through Meow Wolf’s bizarre and interactive exhibits: each location drives an unusually high gross margin on operations that’s higher than even Disney’s incredible theme park margin.
A startup can go a long way on money raised from investors who are happy to believe in the bigness of an idea. Sometimes it works out great. But the truth is that until you’re able to deliver a service, a device, a platform, or whatever else you’re building for less than your customer pays for it, you’re still looking for a swim suit.