Reid Holffman’s three rules for investment

Reid has a guest post on Techcrunch today where he lists his three rules for investing in internet companies.  Armed with this framework he says “After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will.” – which is a little more efficient than we manage!

His rules:

  1. Every net entrepreneur should explain how they will rise above the noise to attract a massive audience, how they will get to 1m and then 10m users.
  2. They should have a unique value proposition, backed by a product which is sufficiently innovative to distinguish itself from the pack, but not so forward thinking as to alienate the user.
  3. A capital efficient business plan.

I (along with everyone else) rate Reid highly as a thinker and have linked to him twice before, but this is the first time I have seen a full framework from him.  Further, they are all great points that can sometimes get forgotten.

It is tough to split them, but I particularly like 2. – because for me product is the most important thing.  As I said on a panel at the excellent Geek’n’rolla conference yesterday all the great web startups have had fantastic product and if I was forced to invest in a startup which had only one of the three attributes above I would definitely choose the one that had a unique value prop/great product.  There is at least a grain of truth in the old maxim that if you have focus on building fantastic product the rest of the business will look after itself.

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  • As he says, I think with all the noise our there you need 1 as well as 2. This is the real nugget I took away from reading his post. Unless you are Google, I dont think a great product by itself will necessarily make it.

  • As he says, I think with all the noise our there you need 1 as well as 2. This is the real nugget I took away from reading his post. Unless you are Google, I dont think a great product by itself will necessarily make it.

  • I’ve been making the same point – in fact, yesterday I made it again at Geek’n’Rolla, for a while: product is everything. The revenue models based on “being a club promoter” (Facebook) that amalgamates audiences for a brand to advertise to them are over for me and for many. I have good research from inside the advertising industry that shows how ineffective this model is turning out for many brands and how poor the advertising figures of youtube are.
    A company needs to sell a clear product, even if it is another vacuum cleaner, because consumers pay for items that deliver a direct and clear value to them or tend to demand services as freeware if they not.
    I will be disseminating these figures in the next week or so as I only just got them yesterday at the EU conference that I’m attending but the scary thing is that they prove how the advertising margins are decreasing and making it not even worth trying.