Leland Teschler, Executive Editor
On Twitter @DW_LeeTeschler
Teschler on Topic
If you want a measure of what’s happening in start-up companies these days, consider a display by a company called Airspace Experience Technologies, LLC (AirSpaceX), a subsidiary of Detroit Aircraft Corp., at the recent North American International Auto Show. AirspaceX is developing an electric vertical-takeoff-and-landing aircraft, sort of a VTOL Uber service, for shuttling passengers and cargo on demand.
AirspaceX didn’t mention what a ride on one of its VTOLs might cost, but we are tempted to speculate that potential passengers who have to ask the price probably can’t afford it. Thus it seems that AirspaceX has come up with a technology that benefits mainly consumers with a high net worth, the “one percenters” – those earning over about $343,000 annually.
Of course, AirspaceX isn’t alone in pursuing developments that make life more convenient for the rich. Many start-ups take the same route, and therein lies a problem, at least according to Ross Baird, founder of Village Capital. Baird’s firm invests in entrepreneurs trying to solve societal problems that affect more than just the financial elite. Baird contends that the way venture firms fund start-ups tends to create blind spots about opportunities outside the mainstream of $100,000 supercars and services for well-heeled consumers.
Another difficulty is that start-ups and venture firms tend to cluster in small prosperous areas, and this clustering promotes group-think. To illuminate the problem, consider a list of “startup game changers” put together by the data mining analysis firm CBInsights. Though the firm’s analysts looked around the globe for promising ideas, nine of 30 companies on the list, slightly less than a third, hail either from near Silicon Valley or the tech corridor around Boston. Both areas have a generous share of affluent residents.
One result of this concentration: “The American Dream seems to have been confused with the Silicon Valley Dream, which means that more people don’t see these opportunities outside the mainstream,” says Baird. “Instead of solving the biggest problems of the day, we’re putting billions of dollars into how to make mobile advertising and clickbait news more effective, and nudging people to buy more stuff.”
Baird’s frustrations with current practices for funding start-ups compelled him to write a book about it: The Innovation Blind Spot: Why We Back the Wrong Ideas–And What to Do about It. It’s easy to get upset at the intellectual laziness he spotlights among venture firms. “I also hear about investors who won’t even look at a company that would require them to take a connecting flight. Indeed, the average distance between a VC firm and the companies it invests in is eighty miles,” he writes.
And when VC firms do invest in ideas, they tend to invest in the wrong ones. Baird says investors tend to look for new ideas that are similar to those that have been commercially successful before, not the best way to uncover truly innovative concepts. A better way to find promising avenues is to look at things the way an entrepreneur would: Evaluate the probability that a certain outcome can happen if the right resources are brought to bear. This gets around the trap of figuring out how a new idea might fit into existing patterns, Baird says.
Looking at new ideas the way an entrepreneur would is one way to avoid filtering out schemes not exclusively aimed at one-percenters. And it can be profitable as well. Baird says start-ups evaluated this way see a 90% survival rate compared to 50% for those measured with usual methods. A final plus: They generate seven times the revenue growth.