Innovators Vs. Imitators: How to Choose Your Biggest Winners

The last time a founder I’ve directly interacted with surprised me with an idea?

About a year ago.

He was the founder of Trustify – an on-demand company in an area I thought wasn’t a good fit for an on-demand business model…

The private detective industry.

I knew how gigging out services could enhance convenience and cost savings. My co-founder Adam and I had already vetted and recommended (for our premium members) on-demand companies – one for home tech service and one for speech therapists.

But detectives?

Was there enough demand to justify gathering them online?

And would these fiercely independent and quirky (some would say “shady”!) semi-professionals cooperate?

But the more I thought about it, the more I became convinced that this was exactly the kind of market that could really benefit from a company that brought it out of the shadows.

So, after the requisite research, the startup was added to our portfolio.

Turned out to be a pretty good choice. In less than six months, Trustify had doubled its valuation.

Its success has spawned imitators. Perhaps a couple will develop into serious competitors… perhaps not.

Competition is the price of success. There’s no better confirmation that an idea has legs than the swooshing sound of other companies rushing into a previously barren sector.

Copycat Startups vs. the Innovators

And then there are those founders with rather conventional and/or copycat ideas. They offer a very different proposition to investors.

The market opportunity is well understood – perhaps even obvious. The better ones usually have a clearly better technology or product to take advantage of growing demand.

These founders are far more common. They have often learned from the “mistakes” of their predecessors… And they refine rather than reinvent growth strategies.

And if that makes them imitators… so what?

Facebook was an imitator, as were hundreds of other enormously successful startups.

With an attractive set of skills and assets to capture customers, they can hit the market running and never look back.

Some notable imitators include India’s Flipkart (Amazon)… Spain’s Cabify (Uber)… Germany’s Alando (eBay – which eventually acquired it)… Southeast Asia’s ZALORA (Zappos)…

Then there’s LivingSocial (Groupon)… 8tracks (Spotify)… Virtuix (Oculus VR)… and so on.

(By the way, 8tracks and Virtuix are two great holdings featured in our portfolio for premium members only.)

Then there are those investors who prefer backing ideas targeting consumer behavior that doesn’t exist yet or is so little understood that the ideas seem crazy or “before their time.”

These companies have the highest upside of all. They happen more often than you probably think. Think what Starbucks did for coffee… what Apple did for laptops and tablets… what Twitter did for messaging… what Snapchat did for photo-sharing… and so on.

The Case of Airbnb

Airbnb began as a derivative of the older couchsurfing.com app. It offered an air mattress instead of a couch.

Airbnb simply made the process safer and more transparent – better leveraging the growing “sharing economy” trend.

When it pivoted into sharing whole houses and apartments, its business took off.

It’s difficult to quantify an upper ceiling when the addressable market is still evolving. Airbnb’s early investors didn’t know what they had. Nor did Uber’s. They vastly underestimated the market in the early years.

Of course, sales can also plateau far below expectations, which, by the way, is what’s happening to fitness wearables right now.

Sometimes, when an idea sounds crazy because it’s ahead of its time, sales don’t take off because customers don’t “get” the product, or because the technology still isn’t quite ready.

So the upside is high. But the degree of uncertainty is also higher than it is with the imitators.

This Vision Thing

I’ve invested in both kinds of startups.

But when you look out the window and see things you think nobody else can see and a founder comes along with the same vision? Well, that kind of shared conviction between investor and founder is pretty exciting.

Now, does one’s vision have to be “way out there” to be impactful? Steve Jobs had a vision of how desktops, laptops and smartphones should look. He also had the execution know-how to make it happen.

The most successful entrepreneurs combine an ability to see the future (this vision thing) with execution.

Likewise, the most successful investors combine a strong sense of vision with the more factual aspects of evaluating startups.

In my experience, you really need both to become a great startup investor.

Invest early and well,