Video games that can cure cancer…
Computerized contact lenses…
A train that travels at the speed of sound…
It’s exciting to hear about far-out ideas like these when they show up in the news. But like many “big ideas,” they can be closer to science fiction than to reality.
Actually, some of them seem downright insane.
Which is why, when they need capital, they often end up being funded not by typical financial investors like venture capitalists and angels, but by governments and universities who might value their technologies, or their potential for making the world a better place.
The fact is, pure financial investors have a hard time calculating the potential “Return on Investment” on a business idea that, at the moment, is pure speculation or fantasy.
Recently, however, we’ve seen a handful of companies with really big (and seemingly insane) ideas raising money via equity crowdfunding.
These companies hope that by leveraging crowdfunding – where individuals take on a relatively small amount of risk by deploying small amounts of capital – they can convince investors to “take a shot” on a potentially world-changing idea.
Here are a couple of ideas that sound like they’re out of a Hollywood movie – as well as the filters a financial investor would use to gauge whether they might turn into a “blockbuster” investment.
Idea #1 – Flying Cars
Yes, you read that correctly. There’s a company out there trying to build a flying car.
Actually, they have created a flying car – it works! They also have over $30 million in pre-orders.
The company is called Terrafugia, and it’s currently raising capital on Wefunder.com »
The company was founded by a team of MIT Aerospace grads – literally, rocket scientists – in 2006. With some outside funding and DARPA grants (DARPA is the research arm of the military; it generally funds experimental projects that might have military or defense applications), the company got the first “flying car” off the ground in 2009.
Here we have a company with an amazing team, a novel and potentially breakthrough product, and substantial pre-orders. Could this be a good investment?
Perhaps. But looking at this through the eyes of a professional, it’s important to remember that you can’t swing at every pitch. The pros look for pitches that fall into their “sweet spot” and then swing for the fences.
While exciting, Terrafugia is not in “the sweet spot.” Let me explain…
When evaluating a new opportunity, I always like to refer to our checklist from the 10 Crowd Commandments »
When going through the checklist, I see the company seems to meet many of the criteria we look for: simple business model (even though the technology is complex), strong founders, signs of early progress… and the list goes on.
However, there are a couple of red flags.
Commandment #7 – Thou Shalt Ask “Why Now?
Why is right now the right time to launch a product like this?
This is one of the most important questions we try to answer when evaluating a new investment opportunity. Reason being, when there’s a clear catalyst for the business to exist right now, it makes life so much easier for the company and its investors.
For example, would Zynga (maker of “Words with Friends” and other social games) initially have been so successful if Facebook hadn’t paved the way with its hundreds of millions of users? Would LinkedIn have worked had MySpace and Facebook not already made social networking a common activity?
On the flip side, when a company doesn’t have the wind at its back, everything becomes far more difficult.
In Terrafugia’s case, it’s difficult to see why this product would become a “hit” right now.
The mission to create a “flying car” has been around for more than 80 years. In fact, according to CNN Money, “Since the 1930s, more than 30 patents have been filed for flying car designs, documenting the dreams of dozens of aviation entrepreneurs enthralled by Jetsonian ideals of zooming around dodging traffic in tiny, efficient personal aircrafts.”
Until this product costs as much as a Honda, and the FAA makes it legal to take off from public streets, it’s unlikely to gain substantial customer adoption.
Basically, unless a clear catalyst emerges for cars that can fly, Terrafugia runs the risk of running out of money before its business can lift off the ground!
Idea #2 – Robots as Security Guards
There’s another interesting business we discovered on WeFunder recently – robotic security systems from a company called Knightscope »
Actually, these devices are a bit more than security systems… they’re security systems that get smarter over time. The core of the technology is a robot that “patrols” a given area and notifies authorities when unusual activities are underway.
Whether the device is used simply as a mobile security camera, or as a way to track down criminals, the possibilities here are very exciting. Imagine R2D2 from “Star Wars” patrolling your neighborhood or child’s school? Fascinating stuff.
The videos and product descriptions on the company’s WeFunder page are very entertaining.
However, after reviewing some of our “Crowd Commandments,” it seems there are red flags we should take into account.
Commandment #4 – Thou Shalt Look for Quick Progress
First of all, for a product that’s as ambitious as Knightscope, it would be encouraging to see a bit more progress before they started asking investors for money. While Terrafugia had a working prototype and $30 million in pre-orders, for example, Knightscope doesn’t appear to have either.
Commandment #6 – Thou Shalt Know Thy Competition
Furthermore, the company says it has no direct competitors.
That might be true if you define “direct competitors” as robots with cameras on their heads. But if you broaden the definition to include other security systems – which is precisely who they’d be competing against – the competition looks pretty tough. Knightscope is going head-to-head with everyone from alarm companies and security camera businesses, to human security guards.
While intriguing and futuristic, this is a company with an unproven technology, unclear customer demand, and heading into a highly competitive space. You probably don’t need a robot to tell you that this investment has some risk to it.
Insane vs. Investment
To be fair, we’re using the word “insane” to illustrate a point. Neither of these two ideas are “lock-‘em-up-and-throw-away-the-key” insane.
When building a portfolio of early-stage investments, you need to take some risks — but you still need to “de-risk” them as much as you can.
Which is why we wrote the 10 Crowd Commandments. We wanted to share our process for evaluating (and mitigating) potential risk factors from early-stage investing. Part of the formula for success in this game is learning when to say “no.”
With all that being said, plenty of people probably thought companies like Apple, Tesla and Twitter sounded “insane” at one time, too. Those companies have gone on to change the world — and have made their investors very handsome returns.
So don’t dismiss an idea just because it sounds crazy – but do be sure to put it through the proper filters first.
