What do you fear?

Recently an institutional limited partner asked me one of best questions I’ve ever received. When making investments, what do you fear? This question, unlike most that I get, required a little reflection before answering.

At Stage VP, there are many things we do not fear. We do not fear first time founders, startups that have not yet released a product, or new markets for software innovation. We do not fear being the first to commit to a round, or the work required to syndicate a seed round among other investors. With startups from Seattle to San Luis Obispo to St. Louis, we do not fear investing outside of our home market in Southern California.

As expressed throughout our portfolio, the two things we fear most are commoditization and competition. Sustainable software companies are built around ideas that are difficult for others to replicate. The risk of competing against twenty other venture backed startups scares us more than the risk of building a product that has never been built before, selling to customers who have never bought software to solve their problems before, or navigating lengthy sales cycles. Competition kills returns, while other challenges preserve returns for the few companies that manage to overcome them.

In practice, the fear of competition results in a portfolio filled with companies that defy attempts at classification. Whether selling to police departments, pharmaceutical companies, or property owners, our portfolio companies are creating categories rather than trying either to displace incumbents or to overcome indistinguishable competitors. If Gartner has a well organized report analyzing a software sector, filled with charts, graphs and company profiles, then that sector is probably not one we would fund.

Fortunes are found along lost coastlines, not on well mapped territory. We fear the center of the map far more than we fear terra incognita.