I didn’t intend to write a whole series of posts on folly in innovation, but there seems to be a lot of it about. Today’s folly is about excessive due diligence. Don’t get me wrong. I think a certain amount of diligence is, well, due. You need to know what you are investing in, if you are an investor. The problem is that too many investors think they are investing in software or whatever the project happens to be and not in the makers.
When the innovators are seasoned and very experienced, excessive due diligence demands by potential investors can be nothing more than posturing. If it becomes just a show of power, telling the makers that the real clout lies with the money, not with the technologists, so that they don’t ever forget it, then the excessive due diligence is worse than useless. It’s harmful. Why? Because it wastes time and causes delay, it annoys the makers, who the investors want to work hard to enrich them and the due diligence team, in their relative inexperience, compared to the mature makers, may draw false conclusions. In many cases, the people that are doing the due diligence, asking the innovators to jump through hoops and provide endless rewrites of plans and projections, can’t tell a good innovation investment from a bad one. That’s the tragic reality.
There is a tacit assumption, in venture funding, that the investors are the wise party and the technologists are stupid, ignorant kids. With more mature technologists, however, the truth is that things are often the other way around. If they’re trying to second guess or trip up people that might have been planning their innovation over a period of several decades, while doing credible things elsewhere the entire time, then they are definitely not buying into expertise and experience. They’re buying an opportunity to pump and dump or engage in some other financial engineering ruse, or else they’re trying to look high and mighty (i.e. they’re intellectually dishonest). Such power plays don’t seem to be about fostering a relationship with an established, accomplished artist in the field, do they? If they were looking for technical experience and expertise, they would treat the innovators and makers with much more due respect.
It’s ludicrous to ask youngsters who don’t have that ability to make things, or the experience and expertise of the more mature innovator, let alone equivalent vision and passion, to sit in judgement of the innovation, weighing the project proposed by the experienced maker. They’re simply not adequately qualified to look both the project and the makers over and reach a sound judgement about the venture. They haven’t been at the coal face for enough years, for one thing.
Too many venture funders are seeking the “sure thing” feeling, but there is a baseline of risk with all innovation that cannot be removed by more spreadsheets, slide decks and predictions. You have to do the work to really understand the risks. Even if the risk is understood and accepted by the investor (at least to a first approximation), a good technologist can change the complexion of the innovation, mid-stream, to adjust to current market conditions. That’s why they’ve lasted so long in the industry. Those are the guys you want to back. They’re experienced navigators.
When you assess the risk of investing in a technology project, what you have to measure is how adept the makers are at shaping the product to the opportunity. How agile are they, at that? How do they mitigate the baseline risks of doing something brand new, for the very first time in human history? Compared to the swindles that many investors are used to backing, innovation (and especially technical innovation) is always more risky than what they have become accustomed to, in say the halcyon days of the property market, to give just one example. In an innovation venture, you’re not duping the trusting or waiting patiently for the inevitable valuation inflation, you’re actually trying to do something nobody has ever done before. You’re creating brand new intellectual property. There are no assurances of safety and guarantees of success that can be given, in such a venture, by anybody, unless they’re cynical and dishonest. You don’t want to back people like that with your money. You want somebody with more integrity than that. All you can do is make sure the makers you back know how to sail these treacherous waters and to navigate the usual rocks that lurk below the water line.
Investors that clobber a mature technologist’s proposed venture to death, with demands for detailed predictions and excessive due diligence documentation, actually do more harm than good. If you are a mature innovator, that already knows what they’re doing, who has been doing it for decades, avoid them. They’ll waste your time and distort the project. These are not the investors you’re looking for. Move along.
It turns out that more innovations are actually destroyed due to bad investor behaviour (control freakery, cheapness, cheating, withdrawing too early) than because of any short sightedness, dishonesty, indolence or incompetence on the behalf of the makers. The real due diligence, at the beginning of the venture, ought to be into the character and track record of the investors, with respect to their funding of previous innovations. Do they stay for the long term? Do they panic? Do they have realistic expectations, grounded in a real working knowledge of the technology, or are they emotional, irrational and flighty; too scared to spend money to make money? Are their pockets deep enough to reach the critical investment tipping point, where the venture will make money under its own momentum, or will they starve a perfectly viable project to death, out of ignorance, fear and greed?
The real reasons why most technical ventures fail are similar to why many marriages fail – control freakery, cheapness, cheating and withdrawing too early. If you are an innovator, bear that in mind next time you select an investor. And do your due diligence on them.
Due diligence should always be accompanied by due respect. It works both ways, too.
Innovation Fascinations 