You make money in Venture Capital by being right when everyone thinks you are wrong. An easy way to do that is to look for bad ideas that are actually good ideas.
Putting an extra mattress in your apartment and allowing strangers to pay you to sleep over for a night or two, now that sounds like a bad idea. And that bad idea is now valued at $31 billion (AirBnB).
When looking to invest in a company, it is difficult to make money investing in “-er” businesses. A better smartphone battery. A cheaper Bluetooth speaker. A faster email tool. Twitter. Those ideas are features that larger businesses (Samsung, JBL or Gmail) can turn on if you ever become big enough to take market share from them.
Is the company you are looking at one that Silicon Valley can’t invest in because of an institutional Series A KPI hurdle? Think about if that hurdle is relevant for this business model.
It is important for bad ideas to be run by the right team. How did the founders come up with an idea that seems irrational on its face? Is the company being built on a secret that only the founders know? Like when Instagram’s founders realized that everyone wants an opportunity to share pictures of their classy boozy brunch in socially acceptable way.
In AirBnB’s case, the three founders went through all of the public information available on the hotel industry, which is what I would call a wild Friday night. Understanding the hotel history in its entirety allowed their team to upend the industry using the Internet’s scale and trust in an unprecedented way.
After hearing an innovative bad idea that would make the operations team at Blockbuster look good, a great first step is to do your research on the competitive landscape. You’d be shocked what people have already come up with, tried and failed.
What makes their business model sustainable? What have they figured out about the industry or their customer that no one else has figured out? How do they plan to establish a competitive moat? You may agree with Elon Musk that “moats are lame” or you can take Warren Buffet's word for it, which essentially says they aren’t lame. Up to you!
If you are an entrepreneur who earned a secret you are leveraging to try out a bad business idea that no one has else gone after, shoot me a note.
I am a 25 year-old venture capitalist and amateur stand-up comedian living in NYC.