Group thinking, herd mentality, or bandwagon effect - one of the most serious cognitive biases leveled against venture capitalists by entrepreneurs in the consumer space for picking already “proven” business models over otherwise “new, and innovative ideas” with no global precedence. The argument hence is that such an act is stifling innovation one of the reasons why a consumer Internet start-up with a global footprint is yet to emerge from the world’s third largest start-up ecosystem.
VENTURE CAPITALIST (VC): How much is your monthly traction?
FOUNDER: Around 100 downloads…
VC: So… You think 100 is enough for the amount you want to raise?
FOUNDER: Our app abandonment rate is very low and moreover this is a new market altogether.
VC: Hmmm…Oh! Have they (another premier VC) committed to invest in you? We might join as a syndicate if they lead the round.
FOUNDER: They probably would… This is the excerpt of a Delhi-based hyper local travel start-up founder’s interaction with a tier one VC firm in India in February this year.
Playing Safe
Globally, early stage investors bet more on start-ups, which either belong to large established markets like retail, finance, healthcare, and transportation, which have been validated with existence of different start-ups, some that have scaled, while few others that have burned their fingers; or which have already raised funding from some marquee investors, which again acts as validation of those start-ups’ business models. This is because of the high risk nature of early stage investments and it is fine with entrepreneurs who are digging into completely new spaces, but what’s irking them is that in the process, their completely new ideas and innovation that have no similar businesses globally to act as a measuring stick are being left high and dry by investors. So, investors fear of missing out on backing scalable ideas in high performing sectors that can offer handsome returns and hence run after few selective markets instead of staying true to their high risk profile and backing crazy yet scalable ideas.
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