Finding Genius
Page 6
a16z witnessed this trend play out in media and information and invested opportunistically in companies such as BuzzFeed and Facebook. Chris Dixon, a partner at a16z invested $50 million in BuzzFeed in 2014. As the vanguard media companies were not keeping pace with these upstart technology companies, this bet proved to be a fruitful one to make. At the time of the investment, BuzzFeed had continued to change the way media was consumed. Dixon explains how the investment was in line with the a16z thesis:
“Many of today’s great media companies were built on top of emerging technologies. Examples include Time Inc. which was built on color printing, CBS which was built on radio, and Viacom which was built on cable TV. We’re presently in the midst of a major technological shift in which, increasingly, news and entertainment are being distributed on social networks and consumed on mobile devices. We believe BuzzFeed will emerge from this period as a preeminent media company. We see BuzzFeed as a prime example of what we call a “full stack startup.” BuzzFeed is a media company in the same sense that Tesla is a car company, Uber is a taxi company, or Netflix is a streaming movie company. We believe we’re in the “deployment” phase of the Internet. The foundation has been laid. Tech is now spreading through every industry and every part of the world. The most interesting tech companies aren’t trying to sell software to other companies. They are trying to reshape industries from top to bottom.”
Reshaping industries from top to bottom is how investors like Marc Andreessen like to invest. This persisting trend that dominates the world around them is a lens through which they guide their investment strategy.
As software ‘ate’ the financial sector, a16z invested in companies such as Branch International and Affirm. Looking to the future, a16z predicts this trend will occur in healthcare, government, and other sectors that will be impacted as the Internet continues to grow more entrenched across the global population. Given the broad focus of their thesis, that software will disrupt any and all industries, a16z looks to remain current. When asked by his colleague about pace and staying current, Ben Horowitz responded that investors must approach industries through the unifying approach of an investment thesis:
“Like a lot of things that are extremely complex, if you don’t have some understanding of what’s going on than it does get very complicated. One of the tenets when we started the firm was we were only going to invest in things that we understood. That meant things where software was a core intellectual property. If you look at what is happening across all of those [industries], they are different manifestations of software becoming a more powerful force in the world — the improvement in the underlying platforms; the improvement in the programming languages and connectivity. And so, whether it is software eating money or software eating entertainment, it all comes from the core root phenomenon of software.”
a16z has successfully predicted many of these patterns through a deep understanding of software and technology, perhaps rooted in their experience as founders at the turn of the millennium when the Internet was spreading its tentacles into all areas of life. Yet, Andreessen and Horowitz tied their investment strategy to a specific horizontal platform in a slew of entrepreneurial endeavors.
As theses diverge and converge from fund to fund, tracking and staying abreast of them is a useful exercise for founders who are identifying the investment partners they hope to work with. The a16z foundational thesis has remained largely constant through the multiple funds the partnership has raised. As new partners join the firm, they bring new ideas and worldviews with them to extend this framework of thinking. Similarly, my conversations with investors at funds such as Union Square Ventures, Greycroft, Spark Capital, and Canaan Partners reveal unique insights into how theses evolve as partnerships expand, and how investment partners view the future of technology and its impact on sectors.
Evolving Theses
Union Square Ventures (USV) initially set out with a focus to invest in the ‘application layer of the web.’ Andy Weissman, a partner at USV, shared that their approach, as compared to Andreessen Horowitz’s understanding that technology will continue to disrupt vertical industries, is focused on the network effects created as more people use software and are connected to one another online. Put simply: What exists when software does eat the world and now people interact in that new world? The USV approach is to look at disruption from a different angle and see how networks change as technology permeates our lives. The partnership believed that network effects, where the value of a service increases the more people use it, would play a central role in all web applications. Thesis 1.0 emerged: ‘invest in large networks of engaged users, differentiated by user experience and defensible through network effects.’ This investment thesis focused primarily on consumer businesses that could point to a highly engaged user base. USV’s astute understanding of what drives networks across the web became the foundation for their investment decisions. These network effects lead to defensibility and scale. From this thesis, USV invested in valuable businesses such as Etsy, Twitter, Tumblr, Foursquare, and Kickstarter.
As existing networks became impenetrable, including those within and outside of USV’s portfolio, the partnership evolved its thinking to focus its investments on the next layer of the web as it related to companies built around networks. Led by Andy Weissman, the partnership spent its second generation investing in networks and marketplaces that were vertically oriented within specific sectors — healthcare, education, finance, etc. — where a network could capitalize on a specific value proposition to an engaged group of users focused on a specific behavior. Within this second thesis, Weissman prescribed the fund invest in the technologies that power existing networks. Juxtaposed with its original thesis, USV began making investments in ‘enablers of decentralized open technology and decentralized data which have the potential to counteract the centralizing force of the large Internet networks.’ This included companies such as Coinbase.
In its third and most current generation, USV refined its original theses to invest in companies that ‘broaden access.’ Rebecca Kaden, a recent partner at USV, expanded on this thesis:
“In education, for example, Duolingo allows users to learn new languages around the world, on their phones and from their couches, for free. In healthcare, Nurx creates new ability for consumers to access medical care at dramatically reduced cost. Coinbase makes an emerging asset class accessible to mass markets. Twilio allows developers anywhere to easily access the world’s voice and text communications infrastructure. We believe we are still at the beginning of the opportunity to broaden access with the most critical implications ahead of us. As a result, we decided to revise our thesis into a third version: ‘USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.’ We think of knowledge, capital, and well-being as each encompassing multiple components. Knowledge includes education and learning, but also data-driven insights and access to new ideas. With capital, we include financial capital from financial services innovation, whether in the current system or emerging financial platforms like crypto, but also human capital and technology infrastructure. And with well-being, we think about health and wellness, but also entertainment, connection, community, and fun. The goal of these businesses is to build trusted brands; products and services that not only serve a purpose but integrate into the hearts and minds of their customer in a way that is durable and important. Trust comes from true alignment and convincing the customer that their values and priorities are shared. The bar for this is higher than ever but the best businesses will continually meet it.”
Jigsaw Puzzle
Through the theses established by the reputable funds of a16z and Union Square Ventures, the partners were able to specialize and identify trends and patterns to invest from. They developed an information edge in a competitive financing ecosystem and continued to refine it over decades. The process of rapidly learning about diverse sectors and technologies and synthe
sizing that learning to make quick investment decisions is a unique skill investors develop that I sought to learn more about.
Peter Rojas, an investor with Betaworks and former founder of Gizmodo and Engadget, shares his perspective on theses:
“Our job is similar to that of a critical theorist: take in information and synthesize it into some analysis of a bigger framework. We (Betaworks) think about things as systems. We have to be good at understanding emergent systems and figuring out tactically where the opportunities exist. If an industry is a cube with different layers in the stack and different players in the market, an investor’s thesis is a multi-dimensional approach to understanding how an individual company fits within that stack.”
While most founders take a hyper-focused approach and examine how their specific startup venture or technology fits into a larger competitive landscape and industry, Jeremy Liew of LightSpeed Venture Partners calls his approach to investing a ‘jigsaw puzzle’ and says an investor’s focus should be a higher-level, systems approach that transcends any one particular industry. Investors systematically work through this ‘jigsaw puzzle’ and identify how shifts within an industry present entrepreneurs with opportunity. Yet their approach is structured to focus on the full stack and see where each element meshes with the other. How will regulation play in one entrepreneur’s favor over another? How will the past investments in this space dictate the future? Is the industry, overall, prepared for this shift? While entrepreneurs will undoubtedly be asking the same questions, an investor has the liberty to analyze the stack from a new perspective after meeting several companies approaching an identical problem from different angles, and to patiently wait for the market to mature. With each relationship and funding, entrepreneurs and investors continue to become better at understanding each other’s motivations and a thorough understanding of thesis continues to mature.
Proving these theses true or false, with startup experiments, is something that will drive an investor’s career, much as it does for an entrepreneur. Portfolio construction, or the investments made, reflect this. Ellie Wheeler of Greycroft describes thesis-driven investing as a time-bound approach. It takes five to 10 years to determine if a thesis proves to be true:
“Through the years, the common wisdom you hear in the industry is that you get a chance to figure out if your thesis is true for yourself and you tweak your investment model so that you either go further away from the common wisdom that is relevant or you actually find that it is true and holds true. Investing in people for example that exhibit certain qualities, investing in spaces that might be considered unsexy because you get higher leverage for each dollar invested, or patiently understanding an industry and waiting for the right opportunity to present itself when the market is mature enough are all important in our field. This requires incredible patience and rigor in order to find, as you put it, entrepreneurial genius that you are willing to take that once-in-a-decade bet on.”
As Wheeler suggests, investment theses are not set in stone, nor should they be. They are continuously evolving and the venture funds behind them spend a significant amount of time informing their opinions about a space. In my own experience, I have worked with investors who will spend years on a specific technology, business model, geography, or stage, and meet with every company or expert in the space. As they gain a deeper knowledge about the landscape, they articulate where they believe the dollars will flow and how those dollars will exit the space as the industry ripens. Should this thesis not play out, the same investor will move to another sector and so on and so forth. Wheeler’s thoughts on the topic, informed by her time at Lowercase Capital observing investors like Chris Sacca, and now proving out her own theses true at Greycroft with investments in companies like Plated, Blinkist and ELOQUII, remove the sense of randomness behind venture capital and introduce a more structural approach to how some of the best investors think about this topic. She describes this rigor and the mechanics behind developing theses:
“Investors have to remain flexible in their thinking and remain curious and willing to learn. That is the job. I’ve evolved my own thinking over time and a lot of that has to do with going through more repetitions. Meeting more and more founders, learning about more businesses and what works, seeing multiple lifecycles of the same company, or different companies informs your theses and builds a muscle memory to do it again with new areas. This information edge is important in our business.”
The flexibility and curiosity Wheeler refers to is magnified by most investors I spoke with. As the pace of innovation accelerates and consumer trends and technologies go in and out of vogue, investors need to be at the precipice of each wave to catch it at the right point and ride it through subsequent cycles. Naval Ravikant, an angel investor in companies such as Uber and Lyft, has said across multiple interviews that ‘new companies always look really strange and they don’t look very much like previous companies.’ As a result, investors can often miss great investments because they were not flexible in their thinking. They will come to believe that there is a certain way of thinking and doing things to build successful companies and will miss exceptions to that rule. Spotify and Facebook are examples of companies that were not the first attempt in their category, but both turned into outsized returns. In his podcast, Ravikant references Sequoia Capital, a fund that invested in Uber, and expands on how investors remain flexible in their thinking:
“Before Uber came along, it was believed that the money was in all virtual goods and software, and not in handling real-world things like taxi dispatchers and dealing with unions. The conventional wisdom is always wrong. So as an investor, if you have a failed investment in one space, the worst thing you can do is write off that space and not make an investment again. For example, Sequoia Capital is one of the best investors on the planet. They were investors in Webvan, which was the failed grocery delivery service in the late ‘90s that blew up very badly. That they saw their own investment blow up, they lost a lot of money, they had egg on their face; they didn’t care. They actually reevaluate every opportunity on its own merits and they know that a lot of these things are about timing. It might have been the right idea at the wrong time. And they also know that each great business looks weird, and there’s no such thing as the perfect deal. So, there are lots and lots of venture capitalists who miss out on the great companies because they’re looking for the perfect deal, and there is no such thing. So, I think anything that becomes conventional wisdom in this business gets blown up. ”
In speaking with the successful entrepreneurs behind companies such as Pinterest, Betterment, and Learnvest, founders often take this landscape approach to building their company as opposed to being too myopic about their unique solution. To be a successful founder or investor, you have to be free of preconceived biases or concepts on how the world works and look for opportunity in areas that may appear strange or opaque at first.
Ilya Fushman, a partner with Kleiner Perkins (a venture fund founded by John Doerr that has invested in Amazon, AOL, Google, Spotify, and Twitter) has evolved as a venture capitalist through an investor role with Index Ventures followed by an operating role at Dropbox, when the company had less than 50 employees. Prior to these roles, Fushman earned a Ph.D. from Stanford University. In seeing the paths to which these partners have found themselves leading investments for venture capital funds, I became interested in how the theses or investment perspectives have evolved over a long career. Fushman elaborates on how he believes being thesis-informed is, at times, the optimal way to approach investing:
“When you grow up in academia, you focus heavily on the problem and the solution and a lot less on the people. Over this whole journey, my biggest realization was that it is really all about the people. When you talk about being thesis-driven, I think about it as being thesis-informed. If you’re truly thesis-driven, you have a bias. You’re going to try to find the company that has the solution to the problem that you’ve identified, as opposed to finding the team
in a space that you think is interesting and that has what it takes to build something that’s big. That nuance is quite significant at the end of the day. When you get into early stage investing, the investments are 80-90% based on the team. Over time, it’s still very much about the team, but you have more data to understand if the initial hypothesis on whether this market is playing out or not. You have more data around the product, the go-to-market, or whether the path the organization is taking is successful or not. You can be thesis driven at the later stages, but at the earlier stages you have to have a gut feel for people, which is what this book is getting at.”
Over 15 years, Fushman has developed that ‘gut instinct’ on people within sectors he is interested in. Building on his experience as the head of business development for Dropbox, Fushman admits that when he first began his career, he had inherent biases and beliefs that were challenged by the people he worked with. These people, his fellow GPs at Kleiner Perkins, help keep Fushman’s perspectives fresh and prevent any preconceived bias from blocking lucrative investment opportunities. With time as a venture capitalist’s scarcest resource, it is often easy to dismiss new ideas that never worked before. Fushman says being thesis-informed and having the discipline to dig into new opportunities is important in his role as an early stage investor. Most often, it is a founder’s unique perspective on an opportunity that is contrary to how the rest of the world thinks. It is this perspective that helps eliminate bias. Fushman shares an example of Nova Credit, a portfolio company of Kleiner Perkins that helps immigrants secure access to credit within the United States, that has helped to define this unique perspective: