This week Fred Wilson shared a great article on the value of being an early and patient investor, while cautioning that being early rarely guarantees success. Fred’s post focused largely on his respect for market pioneers and his commitment to sticking out the uncertain early years in a market he has conviction in. However, I find Fred’s post interesting in the context of trying to be a contrarian thinker, something that we routinely hear is critical to be a successful founder or VC. Being contrarian with regards to market timing often means believing in something when everyone else thinks you’re crazy. Put another way, this is the ability to see the future that no one else sees before it becomes obvious.
As Fred points out though, it’s not as simple as investing in, or founding, the first company to bring a certain technology to market, because often times in tech, the first-mover doesn’t end up winning their market. Surely there are countless examples of companies that arrived later to the party and still beat out the market pioneer, think Google in search, Facebook in social, ect. And while we could go deep on why first-movers are often at a disadvantage in the fast moving tech world, many other have already done so better than I will, here, here and here. Steve Blank has also described this issue well from the standpoint of how too much focus on being first can lead founders astray: “startups whose mantra is ‘we have to be first to market’ usually lose. What startups lose sight of is there are very few cases where a second, third, or even tenth entrant cannot become a profitable or even dominant player”.
Wilson describes how when he and his partners at USV find conviction in a market, they commit to investing early, knowing they make take some lumps in the process. They understand that this is necessary in order to build the relationships and market knowledge required to find the eventual winner.
The idea of investing early, without falling victim to the first-mover disadvantage presents a dilemma for investors about how best to capitalize on a contrarian viewpoint. The answer probably lies in some combination of Fred Wilson’s advice to be early and patient, and Steve Blank’s reminder that nothing precludes the 10th entrant from beating out the previous nine. While being contrarian obviously only works if you are also right, investor’s should recognize that by being active early players in a market they will increase their chances of identifying the eventual winner when it finally comes along.
Regardless of whether you subscribe to Fred and USV’s thesis-driven approach or prefer a more opportunistic investing style, you have to appreciate their commitment, summed up well by Fred’s final line: “It is hard to sustain the enthusiasm sometimes, but if you have conviction about something, you have to stay the course.”
-Mike Droesch, Editor