Venture capitalists spend much of their time exploring ideas and sectors that they end up never investing in. I used to consider this to be ‘wasted time.’ I was wrong.
While knowledge is often sector specific, the knowledge gained in one arena provides insight as to why other types of innovations are important. As an example, when I was researching different ways to access the internet (DSL, cable, fibre, mesh, Wi-Fi, etc) across various markets during my summer internship at Union Square Ventures, one particular problem caught my attention: authentication. Authentication is a major factor limiting the number of WiFi access points. It is not technically difficult or cost prohibitive for internet service providers (ISPs) to provide wireless access points city-wide in the areas where they have existing underlying infrastructure. So why don’t they?
The answer lies in a fear of cannibalisation. Specifically, ISPs cannot be certain that only paying customers are accessing its WiFi access points and not friends or neighbours of a customer with a “borrowed” password. Why subscribe to a Comcast type service at home if you can instead simply login to a friend’s account to access WiFi, especially if WiFi becomes ubiquitous in your neighbourhood?
While cannibalisation is a valid concern for individual ISPs, it unnecessarily restricts the growth of internet access in our society. We must develop a way to encourage innovation and access while still allowing ISPs to remain competitive. The answer may lie in better authentication practices. Better device identification and verification will assuage the cannibalisation fear by ensuring that everyone using a WiFi access point is a paying customer and not a friend with a borrowed password.
This example demonstrates how research in one area of interest (internet access) can actually expose another related technical problem (authentication) and an investment opportunity. The next time USV considers investing in an authentication business, I will better understand the reasons why it will be important and, from my experience in the access market, realise the questions we must ask to understand if it will work.
Ultimately, there is no ‘wasted time’ — fully exploring one topic often leads to a better comprehension of another. And, with more cross-sector knowledge, you are more likely to recognise the potential of any deal that may arise. This process is particularly important in the venture capital business where VCs try to identify, fund and promote ideas and products before society recognises them.