Too Late vs Too Early

In the past venture capitalists and entrepreneurs have been very concerned about "market timing" - is the market really ready for the new innovation or service or will it take too long to gain widespread adoption.  Many companies didn't make it because they were simply too early and ran out of cash.  I faced this real issue when starting Snapfish - we started in 1999 when digital camera penetration was very low.  For that reason, we focused on film users and thought we could service their photo needs online and when they transition to digital, we would be there.  We couldn't predict exactly when the transition would occur so we focused on creating a business around film so we could wait it out.  This kind of worked - digital took a while to adopt - but we over-estimated the consumer propensity to change their photo processing habits for film - despite the attractive low prices and online value we provided.   It ended up taking a lot of capital as the film business coudn't support our fixed costs and thus we were somewhat a victim of market timing. (Of course, the story ended well as the transition to digital accelerated and we cut costs to survive).  

The reason we were so focused on market timing risk was because of our high fixed costs.  Back in 1999/2000 you needed a big engineering team, massive hardware, and expensive software to keep an internet service running and constantly improving.  That was then - now, its all changed.   Almost every cost can be "variable-ized" for an internet startup.  You can consume only the compute, storage and bandwidth resources that you need and you can do it with a lot less engineers due to plenty of open source software, exisiting SaaS services (e.g. billing, customer service platforms), and simpler languages to quickly test and deploy new applications.    

Thus, I believe market timing is not as much an issue anymore for internet startups.  I'd rather be a bit early on a market, keep the burnrate low and iterate for a while until the startup hits it.  This has worked well for my companies especially where there is a network effect and being first matters a lot.  One example is Qunar - which is now the largest travel site (in terms of users) in China.  It started out at a time when online travel and moreso online advertising in China was very tiny.  We knew from our experience in the US that a Kayak-like experience would ultimately win over consumers (especially since they didn't have the OTA (e.g. expedia) habit as much - Ctrip was more of a call center business back then) but we couldn't accurately predict market timing for revenues from advertising and online ticketing.  The company had a very low burn rate so we took the market timing bet and supplied enough cash to ride out the market for a few years.  The bet paid off as the market took off (we never could have guessed exactly when) and we were there to ride the wave vs scrambling to start a company when everyone else saw the opportunity.

Internet startups today are better early to the party vs late - they just need to keep the burn rate low and have enough cash to ride out the timing.  I know some angels like to fund a new startup 9-12 months but if I sense a market timing issue, I'd like to see 18-24 months of cash.   

What do you think?

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