The #1 Question to Ask Before You Invest

By Matthew Milner, on Wednesday, June 10, 2015

17 years ago, a start-up called Kozmo offered consumers something they’d never experienced before:

One-hour delivery of just about anything you could imagine.

Need a couple of aspirin or a new hairdryer? You got it.

How about a soy latte from Starbucks? On its way.

But in the span of just three years, Kozmo’s “on-demand” business burned through $280 million of investment capital and went belly up.

Surprisingly, a similar service called Instacart launched in 2012…

It’s now raised $275 million from some of the smartest investors on the planet—from Kleiner Perkins to Sequoia Capital.

It makes you wonder:

Is it different this time?

Why Now?

When life gets bumpy, some people ask, “Why me?”  To avoid a bumpy ride when investing in early-stage companies, it’s best to ask, “Why now?”

The above quote is from a whitepaper we wrote in the past about how to be a successful early-stage investor. (To read it, click here >>)

But given the importance of this topic, we thought we’d give it a fresh look today.

To make this essay relevant (and hopefully, entertaining), we thought we’d look at the question of “Why Now?” through the lens of on-demand companies like Instacart.

You see, professional investors are making major bets right now on new on-demand services—from Uber (for a ride), to HotelTonight (for a room), to Handy (for a professional who’ll clean your garage or pack your bags).

In many ways, these companies look eerily similar to the failed dot-coms of the 90s…

Why would the pros invest in them all over again?

“It’s Different This Time”

Kozmo didn’t work in 1998; but Instacart is blossoming today., which let you hire someone to do your errands, didn’t work in the 90s… yet a similar company called TaskRabbit is now thriving.

If these companies didn’t work then, why would they work now?

Well, as the technology blog Business Insider wrote, “It’s different this time.”

In brief, here’s why:

1. Always On—In 1997, just 26% of the U.S. population had internet access, and those who did had slowww service. That made for an unhappy online shopping experience: frankly, it was faster to walk down the street and get that latte yourself.

But today, half the U.S. population has blazing fast Internet—and we’re always online.

2. Shift in Consumer Behavior—In the 90s, very few of us trusted the internet enough to buy something online. In 1999, for example, just $20.1 billion was transacted online.

But thanks to today’s mobile phones, many of us are in love with the Internet. The average person checks his phone every six minutes, and has embraced it for e-commerce. By 2013, commerce from mobile phones alone accounted for $40.7 billion in transactions. Instant gratification has become the norm.

3. Rise of the Contractor—The economic boom of the 90s brought high employment, and made it expensive to hire employees. But post-recession, it’s a different story…

Today, according to Mary Meeker’s Internet Trends Report, “34 percent of the work force in the United States, 53 million people, now consider themselves independent contractors, short-term hires or other kinds of freelancers.”

Given this environment, it’s easier to hire staff as contractors: they don’t receive expensive benefits, and they can be let go or re-hired as needed.

4. Lean Operations—Back then, companies would build huge warehouses and fully staff their operations before they’d even proven there was interest in their product. Nowadays, start-ups aim to stay “lean,” only investing in capital-intensive projects if it’s absolutely necessary.

5. Validation—In the late 1990s, start-ups would expand into the next big city (or country) before perfecting their business model. A delivery service called Urbanfetch was so ambitious that it tried to launch international operations only seven months after starting its business in New York.

Today’s on-demand services are showing more patience. Instacart, for example, was in business at least 19 months before it had grown to five markets.

So, to sum things up, here’s the “Why now?” argument for on-demand start-ups:

The internet and the economy are at a more appropriate place, start-ups are being more thoughtful about growth, and there’s been a change in consumer psychology.

Timeliness Doesn’t Always Lead to Success

But to be clear, just because the timing is better doesn’t mean these companies will succeed.

As top-notch venture capitalist Fred Wilson recently wrote about the latest crop of on-demand services:

I hope it all turns out differently this time. There are many reasons to hope and expect that it will. But for now, I see a lot of similarities out there in the delivery space to what Kozmo was doing…

And keep in mind, “Why Now?” isn’t the only filter to use when evaluating a start-up.

If you’re a longtime Crowdability reader, you’ll know about the importance of other essential criteria—like the quality of the start-up’s management team, and the level of its valuation.

But as you’ve learned today by using the example of on-demand companies, without a compelling reason why right now is the right time to invest in a company, you’re putting your capital at unnecessary risk.

So before you make your next investment, be sure to answer this critical question:

“Why Now?”

Best Regards,
Matthew Milner
Matthew Milner


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Tags: Uber Fred Wilson Instacart Kleiner Perkins

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