VC 101 – get in at the beginning of a new market Part 2

A couple of weeks ago I explained how I love investing in companies that are at the start of a new market.  In that post I said the first thing you need to ask yourself is where the money for this new market is coming from.

The second thing you need to ask is why is it now that the money moving from the old market to the new? – breaking that down I would ask

  • what are the drivers?, and
  • where is the evidence?
  • are there any roadblocks?

At heart these are questions about timing.  Whilst the best way to make it big as a startup company is to dominate a new market, the easiest way to lose a ton of cash is to get there too early.  Timing is everything, and the corporate graveyards are littered with the corpses of companies that were ahead of their time.  Even that most infamous of dotcom screw ups, Boo.com, was only trying to deliver the sort of retail experience that companies like Zafu are going for again today.

A quick example.

Broadband TV

The hypothesis is that TV will shift from being distributed over the air (terrestrial or satellite) and start entering our houses through a broadband connection – either cable or some variant of DSL.

I am excited about this opportunity because it should be able to deliver access to the long tail of content and cheaper access to mainstream content.  These are the drivers and IMHO they are both very powerful.
The evidence so far is a bit thin on the ground – and mostly comes from illegal file sharing.  The amount of activity on BitTorrent and other networks and the challenges (legal and technical) that people go through to get TV programmes on their computers tell me that one day there will be a market for a legal and easy to use service.   That said, there isn’t enough there to really be sure that the market is opening up today.  The hype around Joost and services like BT Vision also help in this regard.
Finally – the blockers – there are three main ones – digital rights, broadband access and home networking.  Until the networks start playing ball, broadband access improves and it gets easier to link PCs to televisions broadband TV will never hit the mainstream.  Today these are real issues, but there is clear movement on all three fronts.

All of which leaves me excited about the opportunity – but still a little bit nervous with regard to market timing.  This is about the time to be making investments in a sector.  If you wait until the evidence is clear and there are no blockers you will miss the boat.