Here's how one venture firm is shifting from new and shiny things to old and rusty ones
The bloom has been off the consumer Internet rose for a good year now. Since Facebook went public, venture capitalists have been less excited about consumer Web apps and more excited about companies that actually make money. You know, with customers. And profits.
It's a shift that's mostly been talked about informally at conferences and meetings. Now, one NYC firm, which is known for backing consumer Web startups like Loverly, Moveline and Circa, is formalizing that shift in its next fund. Starting with its next fund, Quotidian Ventures will invest exclusively in founders who have domain expertise in large, opaque old school industries.
That includes FieldLens, a jobsite communications tool for construction sites, as well as FaithStreet, a site that connects churches with church-goers, and SupplyHog, a site for purchasing building supplies.
A big part of this strategy involves taking non-technical founders who posses valuable industry knowledge, but not necessarily technical skills. That runs counter to the Valley conventional wisdom, which states that a technical co-founder is tantamount to success. (And its sidekick, the myth of the behoodied 19-year-old college drop-out.) To be sure, many large venture firms will not fund a company without a technical co-founder. For that reason, startups without one typically elevate their first engineer to co-founder status. Quotidian is a bit of an outlier by enthusiastically investing in companies with no technical co-founder.
"We're at a point where technology is widespread and accessible enough that you don't have to be an engineer to start a tech company," Quotidian Managing Director Pedro Torres Picon says. He believes many of the billion dollar companies of the next ten years will be started and led by non-technologists.
The ideal scenario for Quotidian would be a founder who has left their industry to solve a problem in that industry, be it a college admissions advisor, a construction manager, or a lawyer. They can leverage their connections and understand of the nuances around the problem in that market. Quotidian believes that, at the earliest stages of investment, this domain expertise is more valuable than the ability to build software.
Quotidian arrived at this conclusion by watching the performance of its own portfolio. Companies which were started by non-technical founders bringing deep industry expertise to the table have shown more growth potential than the consumer-facing companies in its portfolio.
Beyond that, there's an arbitrage play on pricing with non-technical founders. The startups with non-technical founders are undervalued, Torres Picon says, while startups with technical founders command ridiculous valuations. "We see engineers who know nothing about the markets coming in with $10 million valuations, and we think they'll probably fail," he says.
Quotidian's theory is that learning to build products is easier than learning the intricacies of how an industry works. "We're not saying any construction employee can now go build a startup," Torres Picon says. "But most of these industries have been forgotten about by technology, so it's not hard for them to see the problems."
There are little nuances where the non-technical founder will out-perform an engineer who is new to an industry, he says, because that engineer will have to make a lot of assumptions as to how his or her customers' jobs are done.
Quotidian will apply this strategy to its next fund, a vehicle with a $30 million target which is not yet closed. Its prior fund (the firm's first) was a $12 million vehicle funded by Torres Picon's family office. The fund has had seven exits, including Locu, which sold to GoDaddy for $70 million in August.
Marc Andreessen famously wrote a column for the Wall Street Journal which declared software is eating the world. In other words, he believes software and the Internet will eventually turn every single industry upside-down. The Quotidian approach builds on that theory, seeking out deeper niche industries that have not yet been disrupted by software and investing in companies that may do it. (Church donations, anyone?)
Likewise, Chris Dixon has said that successful founders all have a secret -- something they know or believe which no one else does -- which they have earned, often by observing a problem firsthand. This theory surfaced in a Github repository after Y Combinator's "Startup School" event this week; he also discussed it at a PandoMonthly talk earlier this year:
“You have to believe something that no one else believes, not because you decided to believe it but because you did something for years that led you to believe it and notice a pattern,” he said.Quotidian Ventures is taking those two theories to their explicit end, by seeking out non-technical entrepreneurs who wish to solve problems in the industries they know. The firm is hosting a meetup in New York for such founders on Tuesday, October 22, called "i2i: Why your domain expertise is just as valuable as knowing how to code."
Image via Wikimedia commons
(Disclosure: Marc Andreessen and Chris Dixon are investors in PandoDaily.)