Naval: You can give every deal one fatal flaw: the thing that traditional venture capitalists will use as their excuse to pass on the deal. If there’s more than one flaw, you have to worry.
A startup that breaks all the rules won’t get anywhere
Startups are rewarded for innovating on something new. If you invest in a startup that’s trying to innovate on things that already work—such as team structure or founder mentality—you’re just taking on additional risk.
You have to use your judgment to figure out when a startup can break the rules and when they can’t. A startup that follows all the rules probably won’t be interesting. A startup that breaks all the rules won’t get anywhere, because they have to reinvent everything from scratch.
Uber was strange when it first came along, because investors considered it a taxi business and they didn’t invest in offline industries back then.
To them it looked like the app was 5% of it and the other 95% was people driving cars—and they were correct. The question, though, is how much leverage accrues to the company that owns the app and how much can they expand the market with the app by introducing new products, attracting new customers and creating convenience.
Google was strange because everyone thought the search wars had already been won by the time they showed up.
Breaking the rules is easier when you understand technology
To know which rules to break, it helps to understand technology. As an investor, the best position is this: Others pass on a deal because they don’t understand the technology, and you have enough technical insight to know it’s feasible. Then, you have to make sure you can get it funded to the point where it’s obvious to everybody.
The value comes in breaking the “rule” that you know isn’t a rule, while everyone else thinks it is.