This time of year, basketball is on my mind more than usual as it’s playoff time in the NBA. I thought it made for a good excuse to merge two of my favorite topics, NBA basketball, and startup investing.
Long before the playoffs, and before the regular season even starts, the NBA holds a draft allowing teams to select newly eligible players for their teams. There is a total of 30 teams in the league and two draft selections allotted for each team, making a total of 60 selections per draft. It’s not much different than picking teams for a game of dodgeball as a youngster. The first picks are more coveted, giving you the opportunity to select the more seemingly capable players.
Players who have the potential to be selected with the first ten spots in the NBA draft, garner the most attention. It’s an opportunity for teams to add a potentially transformational player to their team and shape the future of their franchise.
Unlike the NBA, there is no once-a-year draft for early-stage startups. Startups are funded on an ongoing basis. The startups with the talent and most ambitious business models garner the attention of top-tier investors. Like the NBA draft, only certain funds have the opportunity to select the most sought after startups. Due to the economics of pursuing many these vertical-changing, capital intensive business models, only elite funds have the capital required to fuel such a startup. For example, a $50 million dollar fund could not justify investing $20 million into one single company; it would represent far too large of an allocation.
So what about the remaining draft selections? Their significance to the overall composition of the league is important. Often players later in the draft are sought for specialized skills or abilities to support starting players. In startup terms, these are opportunities that may initially look limiting, but there is enough traction to warrant further funding for the discovery of product market fit. These are often business models that don’t show the initial promise of having industry changing, unicorn potential.
These are the Kawhi Leonards of the startup ecosystem. Kawhi was drafted by the San Antonio Spurs with the 15th pick in the 2011 draft. As a small forward out San Diego State University, he averaged 14 points per game (nothing to get excited about). His long frame and athletic abilities were sought by the Spurs to become a defensive specialist. Fast forward five years and Kawhi has lived up to the promise of being a solid defender. He is a two-time recipient of NBA’s defensive player of the year award. What was not expected, Kawhi has steadily grown into an offensive superstar; averaging over 25 points per game and widely considered the best two-way player in the NBA today.
Many companies follow a similar trajectory. They launch with a seemingly narrow focus only to discover a much larger market opportunity never envisioned. Snapchat was a messaging app initial geared towards teens. Today it boasts 160+ million users of all ages. Facebook was focused on providing a social media solution to college students, now used globally by nearly 2 billion users.
As an investor, I’ve had similar experiences. We funded a company initially seeing a path for it to become a solid $50 million company. After a couple more years of market discovery and product development, the market opportunity has found to be many multiples larger.
Like all analogies, this one has its limitations. The key takeaway – startups with an initial business model that is specialized or even narrowly focused, are not precluded from becoming something much larger. The next big thing doesn’t always start out aiming to become such. Often it’s a slower approach to product market fit that leads to the insights of greater opportunities.
And most importantly, Go Spurs Go!