The Value of a Counterintuitive Thesis

In order to beat the averages in any game, you have to disagree with the average opinion and be right. To get top decile investment returns as I have in angel investing for over 25 years, you must have a counterintuitive investment thesis. And you must be right. If you are right, the counterintuitive thesis will become the prevailing opinion and you will be rewarded 10-100X versus those who stuck with the prevailing thesis. You will also get some be wrong. Good bankroll management and the magnitude of being right will over time make up for the times you are wrong.

coun·ter·in·tu·i·tive: contrary to intuition or to common-sense expectation (but often nevertheless true).

A counterintuitive thesis is especially important in early-stage investing. Disruptors are unlikely to have disrupted much when you place your bet on them. The incumbents will have more money, more investors, and more customers. This is where you must have a thesis about how the disruption will play out and the ability of management to execute the complex environment.

Here are a few opportunities to place bets that I have had over the years and the counterintuitive thesis at the time.

  • Amazon in 2000. In May of 2019 Barrons ran a cover story called Amazon.bomb. It was the start of the DotCom bubble which burst in March of 2000. The prevailing thesis on Amazon is best summed up by [[Kurt Barnard]] at the time: “…Once Wal-Mart decides to go after Amazon, there’s no contest, Wal-Mart has resources Amazon can’t even dream about.”. The counterintuitive thesis was “Amazon is not a retailer, it is in the customer service business and Amazon’s model can deliver a higher level of customer service (low prices, fast delivery, easy of buying) over time than WalMart can.” I had this argument with a hedge fund friend at the time (me for Amazon, he for Walmart) and we made a bet. $10,000 into Amazon and Walmart in 2000, who would have more in 2020. In 2020 he had turned $10K into just over $100K and I had turned $10K into over $10M. The reward for being right about a counterintuitive thesis was 100X better than following the prevailing thesis. That is the power.
  • Docusign in 2004. In 2004 paper and the fax machine ruled for contract signatures. Everyone still had a dotcom crash hangover and was skeptical of tech disruption claims. Electronic signatures were not even legal in most jurisdictions. I was at Ignition Partners at the time who was considering investing in Series A. The counterintuitive thesis, which I stated in the partner meeting, was “Digital signatures reduce so much friction that users will demand them and legislation will get fixed to allow them. Docusign will create a whole new category that doesn’t exist today.” It was a bumpy road in the early years at Docusign as regulations and change of customer behavior at scale took longer than expected. Yet the thesis proved out. The default for most contracts today is a digital signature. I get offended when someone asks me to print and scan a document. That is the Stone Age.
  • Google at IPO 2004. I was an investor pre-ipo in Google through a venture fund and received O{P shares from the fund. Yahoo at the time was valued at 50% more and Google the prevailing thesis was that Google was overpriced and Yahoo would continue it’s lead. The counterintuitive thesis was that Google’s algorithm was a step function better than Yahoo and everyone else and the company would create a more valuable ecosystem. Google priced at the bottom of the range at $85 per share after originally targeting $108-$135. We all know the outcome, the counterintuitive thesis proved to be right. Google has averaged 24.8% annually since IPO, I still own those shares.
  • Peloton in 2012. In 2011, Equinox bought Soul Cycle and all the talking heads believed that deal had anointed the winner of cycling fitness. Equinox with its leading brand would own it. In Feb 2012 Peloton raised their seed round of $400K from three guys with a very counterintuitive thesis: “People who love studio cycling will prefer to do it in the privacy of their own homes connected to a virtual community instead of in a physical studio.” In Dec of that year, more people piled into the $3.5M Series A believing that thesis even after Soul Cycle grew much faster that year and Peloton didn’t have a shipping product. While I did not place a bet (big regret), today Peloton is worth over $30B and is much larger than the entire studio cycling business.

At Incisive Ventures, I continue to bet on counterintuitive thesis. While too early to tell if we are right, some of the recent ones include:

  • Yuva Pay early 2021. A prevailing thesis around connectivity is that everyone has a smartphone, everyone has fast connectivity and broadband will soon be cheap everywhere. Yet in India, they are selling 20M feature phones a month and broadband is only available in the cities. The counterintuitive thesis is “Feature phones will be around for a lot longer and broadband, especially at affordable rates, will take decades to roll out, especially in secondary and rural markets.” Mobile payment and digital bank companies are all the rage these days, but most of them require a smartphone and a stable high bandwidth connection. Yuva Pay delivers a mobile financial platform on feature phones AND smartphones over the SMS data channel without the need for a separate internet data connection. They have a proprietary, patented, very data-efficient protocol that gives rich financial transactions on any mobile device. I am betting the lower end of the mobile market will want the rich features of the higher end.
  • SilverTree in late 2020. Apple is the most valuable company in the world because most people believe they will own hardware devices including the general-purpose wearable with the Apple Watch. Adherents to this viewpoint to the rise, fall, and subsequent fire sale to Google of Fitbit. Most investors hate hardware and very few want to compete with Apple. The counterintuitive thesis is “Some specific wearable applications cannot be well designed into a general-purpose wearable and require a specifically designed device to deliver specific functions into meet specific market needs.” Silvetree is building an active adult wearable to help with fall detection, location, and communication needs of that market. A key user requirement for such a device is long battery life (2-4 weeks) and the Apple Watch needs to be charged daily. The current specific devices in this area were mostly designed in the ’80s and ’90s and do not have modern technology or aesthetics. I am betting a well-designed modern specific function wearable will disrupt the incumbents and the general-purpose wearables.
  • FightCamp fall 2019. By 2019, Peloton had gone from counterintuitive to obvious. In 2020 the obvious became necessary as everyone upgraded their home gyms. The prevailing thesis in 2019 was that Peloton or Apple would own home fitness. I was thinking of what would disrupt them, what would people want in addition to Peloton, Apple, or others. The counterintuitive thesis was “There is lots of room in-home fitness, especially if it is portable.” FightCamp is bringing a boxing workout into the home with a Peloton-like model, but also an app that lets you bring the gloves and workout with you when you travel. I placed a bet. FightCamp grew like crazy in 2020 and has become one of the best investments in my over 200 company portfolio.

Counterintuitive and right. Two things that are hard to achieve, but very rewarding when you do.

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