I watched this podcast where Lex Fridman invited Jason Calacanis, an angel investor and entrepreneur, to discuss about start-ups and angel investments.
At 1:31:48, it has been discussed the question of when should a startup raise money? Jason Calacanis used the “J curve” to explain what’s usually happening when a group of people decide to start working on something innovative (that is working on unknown problems with unknown solutions). I will try to take the question the other way, playing with its symmetry and ask when should one invest in a startup (innovation)?
First, innovation is all about working with uncertainty. A group of individual, skilled, bring together a vision (about serving a noble and just cause), and decide they will start doing something about it. The very first artefact they will bring to life will have the main purpose to test an hypothesis (which is directly coming from the vision). And they will working iteratively until a point where either they drop out (which is the case for 70% of Startups not making it), or they will follow the “J curve”, with a convex nonlinearity until a big shock or stress occur.
If you look at the “J curve” above, between the initial discovery phase and the real return you’ve got a dip, the big valley of death if you want. You see, the most difficult for anyone who attempts to bring in something new and original, is to work with uncertainties. There is a moment where you need to go slow and try to leave almost no rock unturned, mapping a field of hypothesis where you don’t know nothing! On the individual plan it brings doubt (a lot!), you will have a dip in confidence and people will want to give-up or to redirect the idea to something they are more comfortable with. That’s where mother nature discriminate between the ones fit for survival and the ones that aren’t. In other words, you better be Antifragile if you want to succeed!
Now, going back to what Jason C. told Lex F. back from his question, the idea is to invest after this death valley, being able to recognise when the curve is going-up and invest then. That is based on the point that most Startups don’t need investment before then, because from Jason C. it is best for Startups to try and get some revenues from users/customers first, meaning it has already proven some values to some peoples who are willing to pay a certain price for it, reducing the uncertainty to invest in something that may not have value at all.
But beyond this, I will say it makes sense from an Antifragile standpoint. Indeed, if you look at the Convex and Concave Nonlinearity models below, one can easily see the positive Nonlinearity that constitute the second half of the “J curve”‘, saying that one should invest when the curve starts to go back up, predicting more gain.
So, in short, if you want to invest early in innovation to predict big gains:
- Track the progress a Start-up is making against the “J curve”.
- Wait until you start to see the curve going back up and invest from then.