Do VCs invest in me-too start-ups!!!

To answer this question, first, we need to understand the investment landscape for a VC.

To answer this question, first we need to understand the investment landscape for a VC. (To know more read blog: Know your investor)

A new business model in its nascent stages rarely attracts VC investments. It is usually supported by Angel Investors, who are proactive in taking smaller/riskier bets (Unvalidated business models/proposition) for higher returns.

And as the business model achieves product-market fit, it starts receiving traction from the VCs.

VCs typically invest in the growth stage start-ups. While VCs appreciate the disruptive business growth (achieved after product-market fit) the stage of investment is indicative towards aversion to investing in the early stages with low/no product market fit, a crucial trait of innovative business offerings.

Once the product-market fit is achieved, investors, customers, and media come flocking to highlight the business and thus the model attracts competition (me-too).

For competitors to build further on a validated business model and its learnings is comparatively easy and less risky vis-à-vis achieving the same which is time consuming and expensive.

In India close to 82% start-ups that close doors are due to non-availability of funds. An attribute which can be intricately linked to aversion to invest in disruptive technology & business model and long gestation period.

From an investor’s perspective, originality of the model matters a lot less in the

grand scheme of things than the business can achieve. What investors are looking for is not necessarily something freakishly original but a spin on an existing idea (validated business model) that can lead in a different direction

• New target audience
• New enabling technology
• Differentiated offerings
• Differentiated price point

A spin that a larger player either cannot or will not replicate, and the potential increase in the size of the pie, once the spin is factored in.

Which brings us to… As long as its 'original' to the consumer or the country, its original!!!

Like,

• Flipkart (E-commerce Marketplace) to India followed by 100+ marketplaces in India targeting niche in E-commerce kids products, furniture, food.
• Ola (cab aggregator) to India followed by businesses focused on aggregating cabs for outstation travel, hourly rental, bikes

They all are original in their respective geographies & domains yet me-too in their DNA. These “me-too” companies have attracted no less consumer & investor interest.

Thus, the originality is not the function of the broad business spectrum but of the targeted niches.

Many a times it is an occurrence that the original bearer of the idea may not be able to deliver the value proposition required to scale the business while a me-too entrepreneur may learn from the experience of others & be able to hack the growth and deliver to achieve the scale.

A good example of this would be an everyday convenience that most affects our lives, ‘Light Bulb’.

Most common belief is Thomas Edison invented the light bulb. But he ‘did not invent’. Edison created the first commercially practical incandescent light. He was neither the first nor the only person trying to invent an incandescent light bulb. In fact, there were over 20 inventors of incandescent lamps prior to Edison’s version.

However, Edison’s version was able to outstrip the earlier versions because of a combination of factors:

• An effective incandescent material (Product)
• High resistance that made power distribution from a centralized source economically viable (Price & Place)

Thus, me-too start-ups as business proposition :

• Can be  more scalable,
• Have shorter gestation period,
• Can be  less risky and attract VC interest due to its attributes.

 

But entrepreneurs should remember not all me-too start-ups gain from the attributes, the benefits come to play only if there is a differentiation at the micro level leading to increased competitive advantage, commercial viability and sustainability.