Fools rush in – funding of ‘pie in the sky’ startups

Over the past few months, in the course of advising a couple of startups I’ve had the unique opportunity to interact with an gain insights into some of the firms in the Berlin scene. Many of them seem to share two to three commonalities –

1. its all around ‘social’ and community without much about as a hoots care of how to monetize; the thinking seems to go like this – we should just try to acquire users (this is especially true for web community startups), show some obscene growth patterns and lo and behold we will be acquired a la Instagram and then become insanely wealthy OR
2. will take a tried and tested brick and mortar industry and make an online avatar of it; the thinking is – everyone will suddenly change their buying patterns and buy from me thus making me insanely rich OR
3. let me find the latest trend in Silicon valley, and create the European clone before the original creator can say ‘Europe’. Perhaps I will make a lot of money if the parent in USA buys me – and then… yeah you got it right, I become rich.

I don’t have any issues with (3) which seems to be the domain of the few VC firms who have the firepower to churn out these clones at breakneck speed. My current muse is with the first two, and more so to their financial backers.

When I personally look at business plans, I try to understand and analyze the underlying problem that people are trying to solve – with a close look on how people will monetize their solution. It is all and good to have a solution – but if people will not pay for it, you are out of luck buddy! And one cursory look at many of them is sufficient for you to realize that you may never see your money again forget making a fortune. Makes me wonder if these investors put in a lot of due diligence or are they simply hoping that they find the next biggest fool who they could pawn the firm to?

I personally prefer firms who have a solid, even if not exponential growth path with a clearly defined revenue – and more importantly profit generating path. Many of these firms are staid, do away with gimmicks, have dedicated founders who are interested in company building rather than the ‘get rich quick’ approach adopted by the others. They may not even operate in the ‘sexy’ web service domain, but whose products provide something of real value that their users cherish and pay for. More important, such firms do actually enrich the communities in which they operate – perhaps something that many firms should aspire to. In the end a single person can only handle so many social media interactions and apps – not sure at the end of the day if his or her life is better as a result of it!

Over the course of the year, if and when I discover such firms I would like to profile them on my blog. If you think you merit mention feel free to drop me an email/ respond and we can get in touch. To help my readers – if I have a vested interest in any of the firm I will let it be known upfront; so you will always be able to get the ‘real’ insight.