Waiting Room Inventors

“Moonshots” and Abdicating Responsibility as an Angel Investor.

A friend who is an angel investor asked my opinion on a company. I did not like it for a number of reasons, not the least of which was their poor IP strategy.

The real reason why I didn’t like the company was because the inventor was claiming enormous improvements to a technology that has been used in industry for over a century.

Huge “improvements” in well-developed fields do not exist (practically speaking).

There is a tendency for people outside an industry to believe they “see” things that need “improvement.” These people – I don’t want to call them “innovators” or even “inventors” – often come up with “solutions” that they pitch to investors.

Every angel investor loves the story of David conquering Goliath. The bigger the conquest, the better. We sit silent while the entrepreneur talks about “disrupting” giant industries that have been there forever. We salivate at the thought that there is some soft underbelly of a multi-billion dollar industry that our visionary entrepreneur has uncovered.

Waiting Room Inventors

My term for this type of so-called “innovator” is the “waiting room inventor.” It is the person who sits in their doctor’s waiting room and is frustrated with their experience as a patient, so they “invent” a “solution.”

However, this patient has no knowledge for how things work inside the doctor’s practice. They don’t realize how the incentives of the doctor interacts with insurance providers, the medical device companies, or the pharma salesperson who just brought lunch for the entire office. The patient does not work in the industry, but has the gall to suggest some “solution” that makes things “better” – but only from their perspective – and without addressing or even bothering to understand the incentives of all the players in the ecosystem.

These types of “inventions” are sold to angel investors as a magic potion that will “disrupt” a giant industry (and therefore make lots of money).

Well-developed industries and technologies are there for a reason.

Some technologies have been improved by countless people over decades or even a century or more. For example, electric motors have been around since Henry Ford, Thomas Edison, and Nikola Tesla. Since that time, every single engineer that designed yet another electric motor has made improvements (or at least attempted to). They all had similar goals of better efficiency, lower cost, better performance, etc.

Because these types of technologies are so well trodden, there is not much left to improve. The only innovations come from different use cases of existing technology, or minor things that may be tangential to the core technology. It can get to the point where a half percent improvement in performance is a “breakthrough.”

In the case of electric motors, countless PhD theses have been granted to electrical and mechanical engineers for different aspects and “improvements.” People are still getting PhDs in this field, too. Electric motors are one of the best examples of the most thoroughly characterized and well-understood sciences.

The idea that someone outside the industry could possibly stumble across any electric motor invention that produces 20% improvements is utterly absurd. It just won’t happen.

The opportunity costs of the Waiting Room Inventors.

There is nothing more heartbreaking to see angel investors give hard-earned capital to a Waiting Room Inventor. It is not just that someone who aspires to creativity will continue down a dead end.

The opportunity costs are heartbreaking.

My angel investor friend will almost assuredly lose 100% of his investment in the company run by the Waiting Room Inventor. While that is his choice, but the overall cost is not just the money he put into the company.

The real cost is that there were so many other companies that have a higher chance of success.

The responsibility of Angel Investors to use a scarce resource thoughtfully.

Many early stage investors are hobbyists. It is a lot of fun to be around enthusiastic and optimistic entrepreneurs, and the thought of hitting some moonshot 100X return on an investment is the same allure that the Lottery has. We all know that the Lottery is just a tax on people who can’t do math, but angel investing should not be treated this way.

There is a responsibility of a serious Angel Investor to avoid depleting a scarce resource.

Entrepreneurship is a gift that a few people possess. It is a precious commodity that is essential to the welfare of our society and our economic way of life.

Entrepreneurship is a scarce resource that we need to nurture and cultivate carefully and thoughtfully.

Angel investors who indulge themselves in “moonshot”-type investments where the fundamentals go against reality are spending society’s entrepreneur resource poorly. That entrepreneur will spend the next several years toiling on a dead end opportunity, when they could have been encouraged to use their gifts in another way.

A good angel investor will recognize that the only “good” investments are ones that have a real chance of being profitable – and thereby contributing to society as a whole. Investing in so-called “moonshots” makes the scarce resource of entrepreneurship even more scarce, to the detriment of us all.