What We Don’t Do
We believe Early Stage investing has to be thought of as an Asset Class, like Large Capital Growth stocks or commodities. Like other asset classes, you can’t invest in just one or even five companies and expect to meet with consistent success. Based on the 2007 Willamette University study, investors need to make at least 15 investments to have a chance of delivering the industry average 2.6X return on invested capital.
Within this, we have learned that one key to success is what you exclude. Simply put, an investment which returns no money to investors greatly reduces the Fund return. So, while not every past – or future – Lateral Capital investment will fit to the list below, we look to avoid the following:
Location or real estate-driven business models.. This is a type of expertise very few people have. The wrong location can sink an entire enterprise.
Businesses where fashion or design innovation is required.. Even the great designers have off years – or decades. Design skill is different from sustainable innovation.
Companies which represent a lifestyle for the entrepreneur.. These companies can be great “occupations” for the entrepreneur, but they typically aren’t built to sell to the next buyer.
Businesses which are largely dependent on sales to government.. We have learned the hard way that governments pay slowly and have politically-driven, unpredictable purchase behavior.
Technologies with regulatory risks we cannot assess.. A 510K submission to the FDA can be relatively simple and predictable, but getting EPA approval for anything can be a world without end.
Software which requires ubiquitous market acceptance to succeed. . If everybody has to use it for there to be significant user value, it is likely to require successive rounds of even larger capital investment – the province of Venture Capital investors.
Businesses that are largely distribution-driven, like food products sold through grocery retail. This excludes most, but not all, consumer packaged goods (CPG) products. Not only do CPG brands have to pay to get on the shelf, but they have to invest in expensive, long payout consumer marketing to stay there.
Situations where spouses, siblings or parents work for each other in the company.. The old saying about blood being thicker than water is also true when it comes to money! We have made this mistake and will try not to do it again.
Business models that are too complicated to explain in three sentences.. With enough time, any idea can be explained, no matter how complex. But we put ourselves in the position of customers who have no patience and have to “get it” instantly
Businesses with no societal upside, like gambling, tobacco, computer games, online gambling or cannabis. We are comfortable with the fact that Lateral Capital will “miss” investments in companies which will be hugely profitable for other investors. This is the nature of making strategic choices and sticking to them. And yes, this means we will miss the next Candy Crush
Pure internet businesses where barriers to entry are low and IP protection is non-existent. We believe every business should be online-enabled, but we would rather not invest in businesses which are online dependent.
Companies that have very few customers or risky customer concentration, like businesses which are dependent on big box retailers.
Businesses which have organized opposition from Labor Unions, social activists or PTAs. For example, many cities are now looking to discourage scooters on their streets and that’s the kind of external problem in which we don’t want to engage.
Products which are only slightly “better” versions of what is currently available. Better, schmetter. In a world where marketing messages are both hard and expensive to drive home, your product or service has to speak (loudly) for itself; to say that it is dramatically, sustainably superior.
Products which are “new to the world”. Early Stage investors have neither the capital nor the lifespan to invest behind entirely new markets. Better to focus on products and services which are dramatically superior to what’s already known to buyers.