It’s important to remember that investment isn’t a completely altruistic act. While investors clearly want to encourage innovation, a primary motivation is to see a return on that investment. At the end of the day, they’re gambling that your idea will make them money.

This can make investing in true innovation tricky. True innovations are those rare game-changing technologies that revolutionize an industry. They’re notoriously difficult to spot. How often have you heard that people thought Apple would fail when they released the first iPhone or didn’t believe in Facebook when it first went public? True innovation rarely looks revolutionary to begin with. So how do investors spot which ideas are worth the effort?

We spoke with Jason Warner, managing director at Redpoint Ventures, to understand the reasoning behind investments and why investors are so picky.

1. Typical SaaS companies are easy to invest in, but true innovation doesn’t follow the same model

When developers start searching for investment, it can often be discouraging. While investors might not understand the intricacies of every technology company they invest in, they can at least spot the trends. They know and understand how a Software-as-a-service (SaaS) company grows.

If a company is growing, it has a very familiar pattern. And so investors can be quite confident that they’ll see a return. They’re much more willing to take a risk and ‘YOLO’ an investment.

“SaaS companies are really well understood in terms of how they grow,” explained Jason. “There is no real investor challenge to understand that if a company is growing 2x and its enterprise sales look good then … [investors] can just “yolo” invest into them. Because they understand what these companies look like … It’s all just Excel spreadsheets.”
-On the Dev Interrupted Podcast at 40:29

2. Investors often wait until the first round of funding, but developers need seed funding

If you’re developing a revolutionary piece of technology, then it’s likely that you need investment to get you off the ground. However, it’s difficult for investors to sort the good from the bad. How do they know you’ll be successful, without a few years of revenue behind you? It’s a catch 22 situation. You need the investment to get those first few years, but the investors need to see a few years before they’re willing to invest.

Look at how Netflix completely surprised the world. Nobody predicted that it would change how we watch video (most of all Blockbuster, who fatefully ignored the potential). This is a trend that harks back decades. Online shopping, personal computers, the television, even electric light bulbs were all disregarded when they were first conceived.

These industry-changing innovations need investment much earlier than typical SaaS companies. And spotting what works is more of an art than a science.

“[Investors] miss the fundamentals. They can see the ones that are the trends,” Jason said. “It should [then] become obvious in the next round or the round after that from other investors … oh yeah, that is a great company.” -On the Dev Interrupted Podcast at 41:18

3. Developers need to seek out companies like Redpoint for seed investment

If you have a truly new idea, you’ll need to find an alternative to the usual investors. A company like Redpoint, which focuses on giving seed funding, is much more likely to take the time and actually investigate whether your technology will be a success.

It will take longer, of course. And it might not be the full amount you need to get your business started. But it’ll be what you need to begin building a proof of concept, get those first few years under your belt and start pitching to other investors.

“[If you’re] talking to a Redpoint investor, you should be flattered,” Jason explained. “What we’re thinking is that you are a majorly important company in the future. You have the potential to land … If Redpoint invests in you, we want it to basically mean that we think of you as a new primitive on the Internet or in whatever sector that you are in. And other people are going to build upon you.” -On the Dev Interrupted Podcast at 41:35

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