As someone that dabbles in the startup eco system, I have always wondered why some ideas don’t get funded and why some do? and the ones that get funded how and why does an idea grow?

Image depicting ideation

How and Why Does An Idea Grow?

Before we talk about how and why does these start-ups scale huge, lets us look at the ones that get funded

  1. Have demonstrable traction or
  2. Are part of a wave that can induce FOMO (Fear of Missing Out) with investors or
  3. May be ones tapping into their old boys network.

Let’s see – Flipkart in its later days, all Ed-Tech (Education Tech) Start-ups at the time of this writing and all other start-ups that made you feel – can’t  believe that got funded all fall into the 3 types I described above. Everyone is fascinated about funded startups but I am fascinated about startups that don’t get funded but then go on to become big. Trust me, there are quite a few of them. If you don’t believe me, go research the missed list maintained by some prominent VC firms. From Survey Monkey to Atlassian and Shopify in its early days, there are several companies that sometimes could not. And did not raise funding. We can add one more to that list – that’s Sirius XM.  

This begs the question, why are these startups unable to raise money? And how do they go on to become so big later? If we understand this, we can also understand a few other questions that could be based on the same underlying principle 

Why do some ideas not get funded? Why do retail investors start buying stocks once they get expensive and start selling when they are too cheap causing them to lose money? 

Notional Value, Latent Demand, Availability Bias

Let me introduce you to a concept called Notional Value or Latent Demand. I can best explain this from a video I watched. In the video I watched recently, (which was of course a forward), a man is tossing paper rockets into a glass bowl. That man has amazing aim – every rocket falls into the glass bowl. Towards the end of the video, the trick that is played on us is shown. The rockets fall down and above the camera (cut off from the frame) is a person dropping rockets from just above the glass bowl. 

This is information that we do not see and hence we tend to believe that what we are seeing is true until we see this new information. This is loosely what is called as Availability Bias that Daniel Kahneman writes about in his best seller Thinking Fast and Slow. We mostly believe in things that we have already heard about, read about and talked about. 

Image of the bestseller book - Thinking Fast and Slow

And hence, when something new comes along, we don’t see the value of it. Our reliance on availability bias gives rise to Notional Value or Latent Demand. Notional Value or Latent Demand is information that only the entrepreneur or the person pursuing the venture or idea and people affected by it see. Any person that is either not touched by the information or the context of this idea is bound to reject it and that gives rise to these ideas not getting funded.

Here are some famous ones that got turned down in their early days:

1. Uber – yeah, you heard that right. Uber launched with Uber Black and nobody believed a big market existed. Its now water under the bridge that Uber Black funded may of the Company’s eventual products

2. Sirium XM – When Martine Rothblatt wanted to launch this Satellite Radio Service, she faced resistance that there was perhaps no more than 100K Listener market in America. Sirius XM eventual went on to notch up 30 Million Listeners and subscribers. Martine parlayed this experience eventually into a BioTech company United Therapeutics which went onto benefit from the research of a large Pharma Company to generate over $1 Billion in Annual sales. 

A molecule that the Pharma company wrote about in an obscure research paper caught his attention since he was looking for a cure for his daughter’s Pulmonary Hypertension condition. It had no cure at that time and more importantly, had only about 2000 patients that suffered from that condition. Dr.Martine’s perseverence lands her rights to the molecule that eventually becomes a $1 Billion Blockbuster Drug. That Pharma Company refused to work on that drug since it did not have a $1 Billion Market. The company could not look beyond the 2000 patients that had that condition. It was handicapped by “Availability Bias” which forced it to ignore notional value or latent demand. 

There are other aspects that make us ignore notional value or latent demand – our limited understanding of how things grow. 

Hyacinths in a lake

When will the lake be fully covered by hyacinths?

Lack of Understanding

Lets learn this thru a puzzle. You pass by a lake on the way to work everyday. On a certain day, you see a hyacinth appear. A few days later you see a lot more hyacinths. On day 49, you see half the lake covered with hyacinths. How much of the lake is covered on Day 50? If you answered anything other than 100%, you’re wrong. That’s because Hyacinths grow exponentially or to put it in mathematical terms – in a geometric progression. In this geometric progression – whatever exists doubles every day. Remember that 1 Paise or 1 Cent in 30 days puzzle that we all got wrong? That’s how things grow. And people don’t understand.

Availability bias makes them ignore ideas that will grow big, lack of understanding that things that grow, grow exponentially makes them ignore the speed and quantum of growth. Together, they make up what I call Notional Value. 

If you are waiting for an answer to that stock market question – that’s also why retail investors always get the short end of the stick. They don’t see opportunities until they have already fully emerged. In this case, they see lake with the Hyacinths only around Day 48 or 49 when “Everyone” is talking about it. And when they buy something at that time since it entered their field of vision or news only then, its too late.

If you are a startup entrepreneur, don’t lose heart. The reason someone turned you down is because they can’t see the notional value or latent value that you see. Now, you’re going to ask me how do I make them see it. For that, we have a Master Class of a Clip that you can emulate:

Watch this awesome scene from the movie – Focus

The next time you see this phenomenon play out, come back to this blog. Until the next one – Cheers!

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