The laws of supply and demand for VCs and IT Buyers

There is a supply and demand equation for every startup's product or service.  In early stage companies, I sometimes see too much from the supply side and not enough from the demand part of the equation.  In other words, inventing great products that no one wants to buy is a waste of time, money and effort.  While there are not nearly the amount of startups on the East Coast as in Silicon Valley, being in New York I do have tremendous access to Fortune 500 companies.  One of the ways we like to invest is by talking with the buyers in the market, the CIOs and CSOs, and understanding what their pain points are, what solutions they are evaluating, and how open they are to working with early stage companies.  We have gotten many a referral using this methodology and it has helped us develop our own investment thesis on certain markets where we can look ahead far enough into the future but not so far ahead that we invest in just another technology looking for a problem to solve.  We also like to speak with strategic partners and understand gaps in their product portfolio (to the extent they will share that with us) to further triangulate our thoughts on the market.  Bill Burnham has a great post on thesis-driven investing and why it matters in today's competitive venture world.

Tying together a demand-driven approach to investing means that you have to have access to the IT decision makers with the budgets.  This is typically not easy as every tech vendor in the world is pounding on their door to give them a pitch.  That being said, if there are more IT buyers like James McGovern that understands the value that VCs can bring to IT buyers then we will all be in great shape funding companies that solve real problems. James, an enterprise architect at a major Fortune 100 company, recently wrote a post  on ITtoolbox explaining how his brethren can continue to innovate and stay ahead of the curve.  He goes on to say:

The methodology used today within corporate America is fundamentally busted. Sitting around waiting for a vendor to show up on your doorstep with the right solution at the right time is simply gambling (I really wanted to say irresponsible). Enterprise architects need to not sit on their butts waiting for the "right" solution to magically appear. Instead they need to make sure the venture capital community understands what problems we face so that they fund the right portfolio companies.

Competitive advantage within corporate America via the use of technology isn't gained by implementing service-oriented architectures or any of the other hype in published in industry magazines. SOA is a reality of today's marketplace and everyone will be doing it (hopefully doing it the right way by purchasing my upcoming book).

Competitive advantage can be gained though by being first to implement new waves of technologies before your competitors even learn about it or it appears in a matrix by your friendly neighborhood industry analyst. It is in the best interest of enterprise architects to start setting aside time to learn about technologies that are not yet released within the marketplace and are seeds within the minds of CTOs of Internet startups.

With this thought in mind, I have decided to take deliberate action in making this situation better for both parties. I am reserving Friday's at 5pm on my calendar to talk with venture capital firms who want to bounce ideas off me related to funding or to listen to the pitches of early stage Internet startups that simply need a sounding board for someone who sits in the walls of corporate America on a daily basis...

The same principles go with VCs as well - sitting around waiting for deal flow in this competitive VC market will not get you very far.  Be proactive, develop an investment thesis, and reach out to the end users like James - I wish more IT buyers thought like him.  Of course, as VCs we must remember not to solely rely on the buyer's advice and use as many data points as we can to further validate or kill our investment thesis.  The danger of solely relying on IT buyers is that the solution may only be necessary for a handful of buyers and that the problem is so near term that by the time your product is ready another vendor has already stepped in to fill the void.