What Investors Want to Know About Your Industry In Macro-Terms
August 2007 (The New Business Road Test)
A common myth is that investors invest in good ideas and good management teams. While there is an element of truth in both parts of this statement, the essence of venture capital investing, according to Silicon Valley investor Bob Zider is this:
The reality is that [venture capitalists] invest in good industries – that is, industries that are more competitively forgiving than the market as a whole.
What Zider’s statement means, in five forces terms, is little threat of entry (i.e. high barriers to keep future competitors out), weak supplier and buyer power, little threat of substitutes (thereby limiting competition from other industries), and little competitive rivalry. Since these are crucial issues to investors, entrepreneurs seeking capital would do well to have invested some time and effort to understand them fully for the industry they propose to enter.
Most professional investors have already made clear and conscious decisions about the industries they will and will not invest in. Many go so far as to make this information public in various venture capital industry directories or other guides.45 If the industry you want to enter with your new venture is one that a particular investor has already identified as within their scope, then the chances are good that they will already know a great deal about the industry, perhaps far more than you do. Thus, doing your industry analysis homework, using the lessons of this chapter, can help you establish your own credibility as one who understands the game you seek to play.