Or is it?      

At Chenmark, we believe that new ideas can come from unlikely places, which is why we enjoy consuming content broadly.  While reading is our preferred medium for learning, we have recently been fortunate enough to spend quality time with fascinating people who are pursuing ideas across a wide spectrum of industries.

We find great value in this exposure to a wide range of topics, but the reality is that not all ideas are good ideas.  As business owners and investors, our job is to try to shift through opportunities, avoid the bad ideas, and pursue the good ones. Easy enough, right?

The trouble is that most good ideas are not immediately apparent. In fact, many of the best ideas can be disguised as not interesting at best and outright misguided at worst. Venture capitalist Andrew Chen provided some thoughts on this topic in a recent blog post:

“When I encounter a new product idea for the first time, I find myself asking: Is this idea dumb? Or am I just getting old? Early on, there’s often not much to judge it on besides the idea. Sometimes the idea sounds either dumb or trivial. But over the years, I’ve started to not try to judge too much, especially when it’s early. Ideas seem pretty random because in the past few years, some of the biggest wins were: An app that lets you get into strangers’ cars. An app that lets you stay at random peoples’ houses. Disappearing photos. A site that doesn’t let you play video games, but you can watch other people play. Seriously?” 

So, how do we look beyond through the guise of dumb and see potential? On this point, Chen has put together what he refers to as the “Dumb Idea Paradox”, which occurs when an idea sounds borderline ridiculous to an outsider, but is supported by a group of highly engaged people. Although this group is often small at first, their engagement drives growth in what is usually a new or developing market and therefore can represent the greatest potential. Chen further elaborates on his framework:

“these ideas often formed at the seam of the ‘natives’ versus the ‘immigrants.’ If you are Instagram-native, what you consider a great idea for a new retail space or ecomm brand is likely very different than someone who isn’t exposed to the same thousands of pics… for network effects-driven products, it matters that your friends are also into the same thing. If my peers aren’t playing Fortnite every day, then I won’t see the same value and engagement. Contrast that to a fully activated network of kids that are on it every day. Thus, I’m sure that the first time I hear about a wild idea that appeals to this group, it will be easy to dismiss out of hand. And perhaps I’d be more attracted in something that takes on the same trends, but is more familiar. The weak version of a technology is often the more plausible, ‘immigrant’ version of an idea. The stronger version will sound better to folks who are natives.” 

For Chenmark, the first step is a disciplined focus on what is a good idea — for us.  There are lots of good ideas out there for those interested in venture capital, distressed assets, highly cyclical industries, or tech-based companies.  It’s often tempting to become distracted by those opportunities (because, well, they can sound really cool), but what is a good idea for Andrew Chen may not be a good idea for Chenmark.  As such, we try to filter our search efforts by first focusing on what our group is uniquely good at: buying and helping to support the operations of established small businesses. This is an area where we are continually working to develop a “native” edge and are thus better positioned to see opportunity. While this approach significantly narrows the available opportunity set, we believe it increases the possibility that we will be able to sort the good from the bad.