In this article, Nicolai Chamizo, CEO of Incore Invest, cautions venture capitalists against the enticement of trend-chasing. He emphasises the importance of thorough due diligence, a vision for the long term, and a focus on sustainable innovation with genuine market potential.
The venture capital sector’s obsession with uncovering the ‘next big thing’ is simultaneously its greatest strength and its major weakness. While this relentless quest undoubtedly sparks groundbreaking innovation and drives the industry forward, it can also lead to ephemeral frenzies, often obscuring businesses with sustainable, long-term strategies.
For investors, it’s critical not to fall into this trap. Companies with solid business models, a clear path to profitability, and an experienced management team should always be valued higher than those simply riding the wave of a passing trend. While openness to innovation is crucial, trend-chasing should be avoided at all costs.
Avoid the fad
One of the most significant risks of trend-chasing is the potential investment in businesses lacking a robust foundation. This oversight can lead to ventures that are more speculative and less likely to deliver sustainable, long-term returns. The annals of venture capital investment are littered with such trends that failed to live up to their initial excitement.
A prime example is the late 1990s and early 2000s ‘dot-com bubble’. This period witnessed a surge in investment in internet-based companies, driven by the enthusiasm surrounding the internet’s potential. However, when the bubble burst, it revealed that many of these companies lacked viable business models, resulting in substantial financial losses for investors.
Due diligence is due
To navigate these choppy waters, thorough due diligence is essential. This involves a comprehensive analysis of potential investments, focusing not only on the product or service but also on the overall sustainability and scalability of the business. Due diligence should include a critical examination of the company’s financial health, market viability, competitive positioning, and the strength of its management team. Venture capitalists must delve deep into these aspects to ensure their investment decisions are based on solid business fundamentals rather than being swayed by market euphoria.
Additionally, due diligence should encompass an assessment of the company’s broader impact, including how the company aligns with societal and environmental values, and its potential to contribute positively to its industry and community. This approach ensures that investments are financially sound, socially responsible, and sustainable.
Prioritising long-term vision
A focus on long-term vision is also vital in venture capital investment. While trendy investments might offer immediate appeal and potential for short-term gains, true sustainable success is driven by long-term prospects. Venture capitalists should seek companies that address current market needs and have the potential to innovate and grow over time. This long-term perspective aids in identifying companies that are building something transformative rather than merely capitalising on temporary market excitement.
Another key aspect of avoiding trend-chasing pitfalls is understanding the market dynamics and consumer behaviour that drive these trends. Venture capitalists need to discern whether a trend is a fleeting fad or indicative of a lasting market shift. This understanding requires in-depth analysis of market data, consumer trends, and technological advancements, enabling VCs to differentiate between temporary hype and genuine innovation with the potential to disrupt industries.
Investing in innovation
Investing in innovation with real market potential means looking for companies that solve actual problems or fill genuine market gaps. These companies typically have a clear value proposition and a defined target audience. Their innovation is not just technologically advanced, but also commercially viable. They have a strategic plan for how their product or service will evolve to meet future market demands and adapt to changing technologies.
Diversification is a strategy to mitigate the risks of trend-chasing. By building a diverse portfolio that spans different industries, technologies, and business development stages, venture capitalists can spread their risk. This approach allows them to invest in some trending areas while maintaining a stable investment base in more traditional or proven sectors.
Networking and building relationships within the startup ecosystem is another crucial strategy. Staying connected with entrepreneurs, other investors, and industry experts provides VCs with insights into emerging trends and the true potential behind them. These relationships offer valuable perspectives that extend beyond the immediate visibility of market reports and hype cycles.
Critical to be critical
Maintaining a level of scepticism and critical thinking is also essential for VCs. The excitement around a new trend can often lead to a herd mentality, where fear of missing out drives investment decisions. It’s important to step back, assess each opportunity on its own merits, and not get swayed by the market’s exuberance.
Venture capitalists should also consider the impact of their investments on the broader ecosystem. Sustainable and responsible investing is becoming increasingly important. This means looking at how investments contribute to economic growth, social development, and environmental sustainability. Responsible investing mitigates risks and aligns VC firms with the growing global focus on sustainability and social responsibility.
While staying abreast of market trends is important, maintaining a disciplined investment approach is crucial. This involves thorough due diligence, focusing on long-term vision, and emphasising innovation with real market potential. By looking beyond the immediate allure of trendy investments and focusing on sustainable, impactful opportunities, VCs can make more informed decisions that yield long-term benefits for themselves, their investors, and society at large.
Nicolai Chamizo is CEO of Incore Invest.