At Incisive Ventures, certain Themes drive WHERE we look for investments. The short answer is where we believe we have an ADVANTAGE. Some kind of information, insight, or talent advantage that is not available or at least non-obvious to others. The long answer is the rest of this post.
Having far exceeded the 10,000 hour rule over decades of Venture investing, I have found an advantage when I follow these seven Meta Themes. These themes emerged from careful analysis of every check I ever wrote, the state of the company when I wrote it, and the eventual outcome. Turns out, the best returns (10x or more) have ALWAYS occurred when 5 or more themes are present. I now search exclusively for investments that fit 5 or more of these Themes. While I occasionally do invest with a looser fit, (say in an extremely strong founder outside technology), approximately 90% of our capital is deployed in line with these Themes.
- Software eats everything
- Great founders figure shit out
- Disruptive innovation creates new markets
- Platforms win
- Laziness wins!
- Invest only when I can be helpful to the company
- Invest alongside other very smart, committed people
We find these themes across many industries and product ideas, although they are rarely present in Crypto (Web3), Hardware, Biotech, Drug discovery, DeepTech science projects, Consumer packaged goods, or Cannabis making those unlikely industries for our capital deployment.
Great software significantly reduces market friction and creates new markets and value. Bezos is right: “Your margin is my opportunity”. Amazon’s software ate retail. eBay’s software ate the classifieds business. Online banking software ate retail banking. Uber’s software ate the taxi market. Redfin’s software enables efficiencies that they pass onto customers while remaining profitable. Software “eats” another industry when it delivers greater value at a lower cost. In eating an existing industry, the best software can actually grow bigger babies. There are 100x more people hiring drivers through Uber than anyone who ever took a taxi. I buy stuff on eBay which is NOT available locally, new purchases that are impossible without eBay. This is especially true when your competitors’ core assets are not software or technology-based.
I have a friend who started shorting Amazon around $300 saying Walmart was much more profitable and had better physical assets. Yea, but those physical assets were costly, not scalable, and created friction in the retail process (get in car, drive, check out lines, etc.). Amazon’s core assets were software which fundamentally reduced customer friction allowing Amazon to grow sales much faster than Walmart. Software won. Investors in Amazon have been rewarded with orders of magnitude greater returns than investors in Walmart (a $10K investment in both in 2000 would yield approximately $100K for Walmart and $9.2M for Amazon) by mid 2020 (a $10K investment in Amazon’s seed financing would be worth over $1B).
Not all software “eats” another industry. Many software companies are competing against other software companies. That is not eating, that is competing in a red ocean. These can still be great companies, but the greatest software companies “eat” an inefficient, slow industry.
Incisive Ventures recently invested in a company that has replicated the therapeutic effects of most drugs and over the counter medicines (anything with a non-covalent bond method of action) in software. They have double blind placebo controlled scientific proof that it works, and patents. Yes, software may eat one of the most profitable industries on the planet, pharma. Didn’t see that one coming did you? We were looking for it.
Investing in “software eats…” ideas tends to produce superior returns.
Great Founders figure shit out.
“Everyone has a plan, until they get punched in the mouth,” Mike Tyson said. A startup founder is going to get punched in the mouth over and over again. Great founders can take the punches and figure out how to win anyway.
Management commands a 50% weight in my decision process for a new investment because of this Theme. A start-up is a journey through a land of incomplete information with limited resources. Opportunities abound and resources are limited. Great management is skilled as guiding the ship through the journey. This is a constant decision process, under pressure of where and how to allocate limited resources. Great founders pivot often. They attract other great people. They inspire customers. They modify their original plan to meet the engagement they find in the market. Great founders have a personal stake in the company or product.
I often ask founders to explain a failure (or two) as well as a success. How a founder talks about failure and success is very instructive. During the failure, were they animated, doing every next right action they could think of? Or paralyzed. Are they accountable for their part, or do they put blame or not credit on others? How much did their actions contribute to the success and how much was right place right time? Many founders from successful companies overvalue their contribution to the prior success and underestimate their own role in failures. I avoid these founders. Great founders are very self aware of their strengths, weaknesses, and those of their team. Great founders are very accountable for their actions.
Disruptive innovation creates new markets.
How big was the ride share market before Uber? The cell phone market before iPhone? Premium coffee before Starbucks? Streaming video before NetFlix? Great innovation allows people to buy stuff they never thought they needed. This is the Blue Ocean Strategy. While the “Software eats…” theme is looking for technology companies disrupting traditional businesses, this theme is looking for innovation to OPEN NEW MARKETS.
So I look for category creators. The first brand to reach scale in a new category, or the early start up who could possibly create a whole new category. This is related to the “winner take most” fact behind category creators. The followers of eBay, Amazon, Netflix, etc. all have crumbs compared to the category creators.
The key is that the external value created by the platform exceeds the internal value. Platforms exploit network effects and investments in integration to create outsized value and make replacement very difficult. Amazon is a platform. Microsoft is a platform. Facebook is a platform. Slack is a platform. Zillow is a platform. Adobe is a platform. Apple is a platform. Google is a platform. Cisco is a platform. SalesForce is a platform. Shopify is a platform. Coca-Cola is a platform. Cargill is a platform. A platform is any company that has very deep customer relationships, controls multiple parts of the value chain, has a shared infrastructure across multiple product lines, has an ecosystem connected to products and services, and continues to deliver new innovation into the ecosystem.
Very few start-ups ever reach platform scale. Those that do deliver orders of magnitude greater returns to their investors.
Most start-ups are solving a niche problem. These can be great investments and I have made good returns with best of breed companies with a single product. And the absolute best returns have come with companies that were able to become platforms. So I keep an eye out for those.
While I would like to believe consumers are rational and make considered choices, I have found that whatever product enables the consumer to be the laziest usually wins. Even if it is more expensive. If it is less expensive, you have a unicorn. Why drive to Walmart when you can One-Click Amazon from your couch? Why go to the movie theatre when you can sit in your underwear and watch NetFlix on your couch? Drive-through coffee that costs 100x making it at home? Starbucks crushed that.
While this is somewhat true across the world, this theme is on steroids in America. Americans are always looking for the easy, quick solution. The One pill, The One Diet. The One-Click purchase. While there is much snake oil sold this way (don’t invest in those), the companies that actually deliver a quality product that enables laziness tend to win.
Invest only when I can be helpful to the Company.
I have found Venture investing to be a two-sided problem. The best companies can easily raise money, so why would they take mine? I have more opportunities than capital, so how do I convince the best companies to take my money? While a company may look great in the deck, if I can’t come up with three ways to help the CEO before my call with him, I will pass. Being helpful to the company will improve their chances of success, growing my investment. Startup companies always need help. Customer, employee, business development, product development referrals, and review.
We recently invested in a consumer products company selling paleo baby food. While outside my normal technology focus and failing a number of my major themes (Software eats.., new markets, etc.), I had kids, a paleo influencer wife with a huge network, and some retail relationships for business development. I made the investment and delivered the influencer network and retail leads. The company exceeded their sales projections for the next three quarters and just closed an up-round at 3x the valuation we invested at. Being helpful is good insurance after the investment.
Remember, these themes are all about how to improve the odds that the investment returns 10x or more. Investing in companies where I can be materially helpful improves the odds materially.
Invest alongside other very smart, committed people.
Lets unpack that a bit. There are three key words here: “alongside”, “very smart”, “committed.”
As a smaller check Venture Investor, I am rarely the lead investor. That means I am following other investors who have done some level of diligence. You are always “alongside” other people, so you better figure out who they are and if they have a track record of good decisions. The deeper their diligence, the deeper their relationship with management, the more confidence I have. Some investors will blindly follow other name-brand investors, and companies will often roll out their name-brand investors to attract others. I am aware of this trick and dig deeper. Figure out who you are in the boat with. People just along for the ride (momentum players), or thoughtful, driven people?
There are smart people and then there are Very Smart people. Bill Gates, Jeff Bezos, Elon Musk, Steve Jobs are all Very Smart. Very Smart people are the top 5% of smart people. When I was at Microsoft, when someone was called “smart”, that was translated “average” (everyone there was “smart”). But “Very Smart”? Ok, you better listen to her. Investing with smart people is a given, table stakes. Investing alongside “very smart” people has produced outsized returns for me over the years.
I always want to know the level of commitment from my co-investors. What is the ratio of their check size in this deal to their net worth or typical investment? The higher the ratio, the stronger the commitment signal. Also, how active are they? When was the last time the CEO spoke to them. I once looked a deal where the CEO was shameless flogging a name brand investor. During the call I asked the CEO when the last time he talked to the name brand investor was. “Actually never, his team made the investment.” Pass. That is not commitment. In fact it is dis-honest for the CEO to flog the name which signals a deeper issue with the CEO.
“Crowdfunding” platforms, while significantly increasing access to products and even angel deals at very low levels of risk capital, simultaneously put your investment alongside the masses of not so smart, not very committed novices. Follow that crowd at your peril.
These seven Themes are the top-level filter every deal goes through in my Angel investing funnel. If a deal ticks 5 or more or a couple super strongly, I move the deal down the funnel to “how to decide”. These themes have given me an advantage over time and kept me out of investments where I do not have an advantage. While there are plenty of people making money in areas where I don’t have an advantage, they likely have animating themes in those areas which give them an advantage. For those areas, I invest in Venture Funds with competent managers. One can’t have an advantage everywhere.
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