Understanding risk/reward as it relates to stage of company
The greater the number of steps it takes to enter the market and then dominate the market, the greater the ultimate reward must be to make the journey worthwhile. Most companies starting at the left corner of the chart below simply do not grow rapidly enough to reward taking early stage risk. By comparison, those on the right often accelerate so rapidly in value that coming in late pays few dividends. The rare company that can combine both to create significant barriers to entry, while leveraging core technologies developed by others (or on an outsourced basis) and getting to market quickly and cheaply enough to pivot in response to the market can define the single investment that returns an entire fund.
More importantly, understanding where you are and the costs of forward progress is critical to obtaining attractive returns on investment.
Big Problem, Large Market, Inventive Challenge:
Each of the Information Technology, Biotechnology, Data Communications, and Cleantech Sectors have struggled to produce economically attractive returns from the companies that took on the challenge of building the critical infrastructure to support these sectors.
Use Critical insight to Leverage Existing Technologies:
The biggest winners in sector after sector have been the rare company that found a way to leverage key technologies developed by others through a critical insight that combined known components in a previously unrecognized fashion. This is Ford Motor, Apple, Microsoft, Google, Tesla
Have a Critical Market Insight (Trade Secret):
These are the “capital light” companies that form the heart of venture capital returns, they absorb minimal cash developing a first product, get to market quickly, pivot easily in response to market feedback and use larger capital to scale rapidly and drown the competition.