By Andrew Gordon on December 12, 2014 Dear Early Investor,
At 3,600 times initial investment, I lost track.
That was the latest count I had for Uber's gift to early investors, based on its $40 billion valuation.
Uber is a gorilla in anybody's book, including Geoffrey Moore's The Gorilla Game.
Moore makes a strong case for identifying and investing in hugely successful market leaders like Facebook, LinkedIn and Apple. Once these Gorillas establish themselves, he says, they're virtually impossible to compete against. The ones that do (Moore calls them Chimps and Monkeys) seldom achieve lasting success.
The flip side to investing in Gorillas? It's a waste of money to invest in anything else. Why?
Because, says Andy Rachleff, executive chairman of Wealthfront, in an article he wrote yesterday, a Gorilla is usually worth more than all the Chimps and Monkeys in the Gorilla's sector put together.
It's an interesting argument, one I almost agree with - but it goes too far and it sends a misleading message…
That if you're not one of Silicon Valley's leading venture capital firms, you're in deep kimchi. Only the very top echelon of VC companies has access to these Gorilla startups.
Second-tier VC firms end up with second-tier startups. Or, in Rachleff's binary worldview, if you're not first, you're last.
This is where I part company with Moore and Rachleff. |
| First off, investing in early-stage startups is not feast or famine. There are dozens of companies that get bought out or IPO at outsized profits (meaning from 5X to 50X - see my list at the bottom of this article). I'm sure Fred Wilson, the founder of Union Square Ventures, isn't too upset with his very lucrative investment in Chimp company Lyft.
Second, VC companies are driven to go after Gorilla-like returns for economic and political reasons. And they have nothing to do with individual investors. VCs that raise hundreds of millions of dollars need to make a healthy multiple of that to go above breakeven. Politically, if they don't give their limited partners at least one Gorilla, then some could be tempted to jump ship and try their luck with another VC.
Third, I've found several effective ways to play off these Gorillas. None of them involve getting stuck with the Chimps or Monkeys. Let me describe three of them to you.
The "If You Can't Beat 'Em, Avoid 'Em" Strategy
Take LinkedIn. Yes, it's hugely successful and every bit the Gorilla. So, are all the other companies in the professional network arena chumps (I mean, Chimps)?
LinkedIn beat up on PlanetAll, Plaxo, Ryze, Six Degrees, Spoke, Visible Path, Xing, Degrees, BranchOut and Zero. Xing was the only one to experience success. But it's worth only $500 million compared to LinkedIn's $27 billion.
It's as good an example as any that Moore is right, but at the same time, that his argument can be taken too far. Granted, LinkedIn paved the way. And now here comes the next wave of professional network startups - but with a twist. These are niche companies.
The beauty: They avoid going toe-to-toe with the Gorilla, while also meeting very real and widespread needs.
Doximity is a good example. It's a LinkedIn for doctors, and has signed up more than half the physicians in the U.S. It has found market fit (for more details on the importance of finding market fit, see my article right here) and has serious early traction. It may not have LinkedIn's upside, but it has the makings of a great startup investment.
Another example? Zulilly. It avoids a head-to-head clash with Gorilla company Amazon by focusing on the clothing needs of mothers and babies. It made early investors 440 times their stake when it IPO'd (see my article here).
Marketplace niches - especially those that are ignored or have special needs - are fertile ground to find exceptional upside.
The Alibaba Strategy
Look for a hugely successful business model in a different part of the world. EBay and Amazon eat their competition for breakfast. But go to China, and there's Alibaba. It eventually became a Gorilla because it was allowed to flourish far away from eBay's and Amazon's Gorilla-like domination of their home markets.
Another example: Cabify. It's an Uber-like company, but based in Spain. It's now expanding into several South American countries. Cabify is also showing serious early traction, growing revenue at a 30% monthly rate. My colleague Adam Sharp is an investor, and he likes their chances.
The Market-Fit Strategy
Market fit is just one of the things a startup must have to develop into a Gorilla. Not all startups that find market fit become Gorillas, but all Gorillas start off by finding market fit. Some of the other things they need? Outstanding leadership... a potentially huge market (that they're inventing or disrupting)... and better-than-expected traction. AirBNB is a good example of early traction that went far beyond what even its founders thought possible.
So besides market fit, look for those other things as well. And invest in the early stages, when a startup shows promising signs of verifiable market fit. I write about how to go about it in this article, if you're interested.
There's more than one way to play the "Gorilla game." Most importantly, it doesn't leave angel and other individual investors fighting over the scraps left by the indomitable Gorillas and their tier-A VC investors.
Good investing,
Andy Gordon
Founder, Early Investing
*List of startups you've probably never heard of with outsized gains to early investors: Trendy Group (10X), Houzz (11X), VANCL (6.4X), Zalendo (10X), Wayfair (5.6X) and Stripe (15X).
   
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