Momentum-hunting

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Essays

Venture capitalists look for momentum. It’s sometimes fickle, like an imperceptible breeze, or a fresh wind. And sometimes it’s bigger and feels more like a gust of inevitability. I would bet many investors in other asset classes look for momentum, but we particularly do. ‘Value investing’ doesn’t work in our asset class; as Om eloquently expressed, our winners are often winner take all. Our distributions follow a power law, so once a company breaks away, it’s *very* hard to stop them from becoming massive.

Every time Uber closes a marquee hire, or Lyft announces a big partnership, they are demonstrating momentum towards this end, which attracts investors, potential employees, and sometimes customers, too. A ‘startup is designed to grow fast’, and identifying the inflection points and tactics that will sustain or generate that growth is a critical component of investing.

At the earliest stages of a technology startup, when a founder is simply trying to survive, they need to make progress on engineering, product, recruiting, branding, and sometimes sales all in one. It’s hard to imagine doing these things without a million dollars and a huge team, so of course it’s daunting to figure out how to ‘start from scratch’ to get everything going.

Here’s one thing worth considering for those founders who are just starting out now, trying to figure out how to make a case to an investor about their opportunity: momentum takes many shapes. And if you rank *very* highly in any one category of momentum, this can often be more attractive to a potential investor than ranking well, but not that well, on a number of categories.

Put another way, consider focusing your energies on pulling together *the best* team of data scientists, or software engineers, or former coworkers. If you are convincing one after another ‘marquee hire’ to take a paycut (or go without pay) for the sake of your vision, you might not even have a product yet, but you are showing great momentum. If you are pushing new code every day, while you may not have found the time to hire, or may not have a brand yet, you are showing great momentum. If you’ve been able to close contracts just on a dream and a deck, demonstrating that you’l have revenue, and that there is demand for your product, you are showing momentum.

We made an investment in an e-commerce company a few years back before they had launched, in large part because the founder did something brilliant: she started running cheap (and sometimes free) ad campaigns and other tests on Instagram, Reddit, Twitter, Facebook, etc. to build an email list, and then started tracking open rates, click-through rates, and bounce rates. She compared those numbers against mature commerce brands and industry benchmarks, demonstrating that she had a strongly differentiated offering, and that she had created demand, even though she hadn’t written a line of code nor started selling anything yet.

So if you’re feeling ‘stuck’ in convincing an investor that your company warrants an investment, consider being more creative about building momentum.

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