There is an old saying that goes the pessimist is always right and sounds smart, while the optimist sounds delusional and makes money. This is true in certain types of investing, and particularly betting on startups. Angel investing requires suspending disbelief. When the Iphone was first introduced in 2007 by Steve Jobs, then Microsoft CEO Steve Ballmer called it the dumbest idea ever. Now, it is the brand leader in the smartphone space as a household name. Time and time again, we see the consensus opinion be wrong repeatedly, while the small minority get it right. What are they doing right that everyone else is doing wrong? Let’s look at some possible reasons as to what the consensus crowd thinking is, and how to adjust our own thinking to be able to get this right.
Focus on the big picture, not the details
Some people don’t do a lot of work and didn’t do a lot of education or certifications and make a lot of money. Still, there are others who work very hard on a consistent basis, have multiple degrees and certifications, and yet they are at best comfortable, living pay to pay cheque, or poor. Why is this the case? Some people picked the right industries to work in. Namely ones where the general direct is a tailwind, an industry where the tide is rising, which ends up lifting all captains of all boats. Whereas being in sunset industries, facing multiple headwinds, leads to the tide falling, and thus, all struggle. Looking at the study of human nature, by default, people are lazy and want convenience, are impatient, and will take the path of least resistance, the easy route. Let’s take a look at a seemingly new industry born out of nowhere, the food delivery industry. Food delivery is not exactly a new phenomenon, with in house services being offered to some extent in generations prior. However, it was not widespread, the service times were inconvenient, and therefore not reliable. One could say that the demand was never there to begin with. But as hindsight is 20/20, it appears that the infrastructure and supply was not available to supply the demand. Companies delivering including ubereats, doordash, skipthedishes, fantuan and more, allows restaurants to make additional sales that they might not have otherwise have gotten from users who either don’t have a car, or did not want to take the time to pickup the order. Although the margin would be low, if the gross margin was ultimately positive on an order out, it would still be worth it as this would not take up any restaurant space either. This also capitalizes on the users who do not want to cook a particular meal, perhaps out of a lack of time, inconvenience, busyness, being tired or to have a good meal. Imagine being able to go on your phone at home and pick out anything you want to eat and having that meal delivered to you in half an hour or a little more time than that. No effort is required at all. What a great convenience that people would be willing to pay for. If one were to look at the details and ask who would be willing to pay for a meal delivered with the delivery fee and tips involved rather than just drive 10–15 minutes to pick up? This line of thinking looking at the details does not consider just how much people are willing to pay for convenience, particularly for something as cooking. Not getting out of your pajamas and getting a meal sounds good. During the long, previous bull market run with low interest rates, these loss making companies could afford to fund the losses with more fundraising rounds from VCs, another perhaps important detail that was temporarily solved. In fact, in the last 15 years, of all the larger IPOs, only one has become consistently profitable. I guess profits weren’t needed in a bull market with low interest rates and an oversupply of money.
It is better to be approximately right than precisely wrong
Looking at all the small minor details that don’t really matter and getting nitpicky, when it is the big things that matter. For instance, Uber’s controversies workplace culture handling and alleged toxicity, mistreatment of female staff. While not ignoring the wrongs committed or fallout to the unfortunate victims, no startup can get everything right. If the overall direction will succeed, the small blips of details not being handled totally correct pales in comparison to the successful vision. Uber has gotten past those issues and continues to be a major player in the ride sharing industry across the globe. Imagine having sold based on one workplace incident. Or having bought and sold Tesla based on one electric car lighting up on fire. Smartphones and laptops have also been known to have defects and destruct, yet they are still around. Small mishaps, as long as they are handled correctly and do not interfere with the ultimate goal in overall execution is an understandable path for a startup to succeeding. So be flexible on the details, but particular on the vision. To use a house analogy, imagine a builder is very good at building houses and has a previous track record of doing so. You go to his previous homes built to see the quality. And you find that the home is built solidly, though sometimes the tiles in the kitchen are not completely straight. Or that the bench at the front of the home in the entrance to sit on while taking your shoes off is taking up more space than you would like. It seems very nitpicky to be rejecting said home builder on these minor details. And then imagine doing the opposite, finding a home builder who gets those small details right, but then messes up the whole foundation. Better the former than the latter when it comes to startups as well.
Focus on what could go right, not what could go wrong
Being optimistic might not make you succeed, but pessimism definitely won’t. The chance of success in any facet of life is actually quite low. For the fact that 6% of people in the US are millionaires, 75% of venture backed startups fail, etc. In psychology there is something known as RAS, reticular activating system. What this does in people is over time, whatever you focus on will be the things you focus on more and more, whilst ignoring everything else. Focusing only on the negatives only makes the negatives stand out more, making one more likely to miss the positives. Imagine someone seeing the 75% statistic alluded to above and deciding to not bother investing at all, even small sums of money into startups. Well, they would end up missing all the losses, but also the upside too. There would be no possibility of hitting a unicorn, and could end up missing out on hundreds of thousands or even millions. If the question of looking at what could go wrong is always looked at, then every company suddenly looks like a terrible company and not worth investing in, and by extension, having a miserable financial future. Imagine taking that money and only investing 100% it in government bonds. Unless large amounts of money are present, this is likely to be a long-term losing decision. Not all ventures require huge amounts of risk to be successful, but putting it in bonds with low dollar amounts is unlikely to get the financial future that one would need to be comfortable in, let alone dream of. Now imagine focusing on what could go right, finding the companies that may seem ridiculous by the vast majority, but in a successful scenario, would fundamentally change people’s lives to be better, faster, more convenient, more enjoyable, easier, etc. What a better way to think, and better way to make more money.
Take Airbnb, one of the largest IPOs ever. Not many believed in the concept when it was in its infancy, with many questioning whether or not it could actually disrupt the hotel industry. An industry that had been established for practically eons. And who would take the risk of letting short term rentals take either their home, or rental property, with income unstable, and the potential for short-term visitors to destroy the residence? Or to be renting out a spare room, and effectively living with short term renters. And yet, thanks to a rating system, as well as the opportunity to take advantage of unused capacity and turn it into money via spare rooms, or getting more money than long-term rentals in desired locations, Airbnb had all the necessary supply it needed. It turns out, as the founders themselves wanted initially, that there was a quiet unmet market need that was in demand. And now, travelers have hotels and Airbnb as options to choose from when going on vacation. Too bad for all the people that were living in fear of having serial killers or of drugs destroying a place.
As an adult, pessimism is easy, optimism is contrarian and tough to come by. And yet it is only those few who believed in such causes that actually moved the world in impact.
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes