There Can Be Too Many Suckers at the Table
Everyone knows the old saw about poker: If you can’t spot the sucker, it’s probably you. It’s nice to think you could sit down at a table with incompetent players and take their money. It probably works in poker. Mark Suster applies the aphorism to angel investing in his post Dealflow – Are You Sitting at The Right Poker Table? It’s a good post, dealflow is really important. But the poker metaphor falls short. Too many suckers actually ruin a startup market.
Consider the music business. In nearly every segment, from performers to promotion to distribution, there is far more talent and capital being applied than will ever be able to be profitably returned. People get into the music business as a life choice. Nashville is full of artists just barely getting by, but thankful to be in the business. On the web there are hundreds of startups trying out dozens of business models for selling/giving/pushing/pulling music. Hardly any of them are making profits, and none of them are seeing big exits. But money and talent keeps flowing in, whether it is hedge fund veterans backing LimeWire or Google trying several strategies.
When there is too much capital, the bad can start to crowd out the good. There are only so many early adopters, and they get tired of hearing about all the new things. Your competitors are losing money on every sale, making it up in volume, and setting customer expectations all wrong. Lavish launch parties, expensive marketing campaigns, and picky consumers drain your resources. Incumbents with natural or historic monopolies become demanding and exploitive of new partners. A new entrant who tries to be above the fray doesn’t find anyone doing business at that level.
Music isn’t the only market with this problem. Many other media segments have it too, including video games, Broadway theater, and film. For most of its history the airline business has been losing investor’s money. Nearly any tech-VC fad, particularly one with light capital or intellectual property requirements, can fill up with suckers. The restaurant business may be subject to the same problem, and the nightclub business probably is.
If you know you are in a market full of suckers, it might still be possible to build a successful business. You can find an angle to exploit people who want to be in the market, either in the style of The Producers (generally illegal) or in the style of Ticketmaster (potentially illegal). You can be consistently and significantly better than everyone else, like many Hollywood directors or Apple’s iTunes. Or use the market to prove out your idea and build your brand, but make your money in a more diverse market, like Moontoast (whose presentation at WebInnoinspired this post).
At the poker table, it’s not very often that a sucker turns his two-seven offsuit into a full house. When it comes to startups, there are a lot more ways for people with capital and skills to spoil the game for everyone. If you look around the table and everyone else looks like a sucker, you might be one too.