by Kunal Mehta
“With Nova Credit, if you meet with the founder, Misha Episov, he’s able to captivate your attention. But if you hear the pitch peripherally, you may write it off because of market size. The company is focused on credit for immigrants, but there are tens of millions of immigrants and not hundreds of millions, so how will this ever be a big business? But if you look underneath the hood and investigate, the number of times you need a credit report for an immigrant is 5-6x higher than what you need for someone who is native. So, your total market is much bigger than it seems. Misha understood this. It’s easy to dismiss this off the back but here you need good judgement and be able to make a good call that is informed. Frankly, it comes back to people. You want to sit in the room, and you may be ready to dismiss the idea, but then the founder gets you incredibly inspired by the entrepreneur and you dismiss some of the biases. I do think there are some businesses that are not venture-fundable — commodities, such as solar businesses, that can’t have premium pricing in the market and then need a lot of capital to hit scale. Those two things together are very hard from a venture perspective.”
Multiple Points of Disruption
When discussing why investors made a bet on companies such as Uber, Pinterest, Twitch, or League of Legends, Rick Heitzmann of FirstMark Capital alludes to the ‘jigsaw puzzle’ approach mentioned earlier, as several pieces aligned perfectly to make these companies attractive investments. Heitzmann evaluates investment opportunities as the culmination of converging consumer behaviors, advancements in technology, or incumbents not evolving to meet a customer need, occurring simultaneously to present a founder with an opportunity. Heitzmann describes how his thesis evolves and how he analyses opportunities when investing:
“It is necessary to change and evolve a thesis as it plays out. You see different industries being disrupted at different times. As a VC, you’re constantly looking for the beginning of a disruption. With Riot Games, there was high enough penetration of broadband where users could play social video games digitally. Secondly, there was high enough delivery on that broadband that you could deliver a high-quality game broadly. People were open to digital commerce so you could pay for a game over the computer where the market could move to an item-based, microtransaction economy versus a pay-up-front economy. There were enough gamers out there that could absorb a broad-based game. There were multiple points of disruption, therefore innovation. Online gaming was not as broad, but that market has evolved to where people not only play as online gamers but are now competitive, which has led to our investments in Riot’s League of Legends. We look for themes like this to play out and if it is big enough, in our eyes, we see it pull other things downstream.”
With two other examples, Heitzmann discusses how the idea of multiple points of disruption have played out in different sectors and why investors were willing to make those bets:
“Look at Pinterest as an example. The world is moving mobile, the world has become increasingly visual as people are now consuming more content on a small screen and also commerce trends have shifted to a more visual approach. The world was increasingly becoming more social through this lens as well, so curation is important. All of these multiple points came together to point to Pinterest. Outside of my portfolio, but a perfect example of how multiple points of disruption play out, is Uber. The penetration of smartphones was such that every person driving a cab, or a car is equipped with a smartphone and they now act as a beacon. Everyone who is looking for a cab, for the most part, has a smartphone in large metropolitan cities. Yet, the taxi and limousine commissions were not driving innovation around that. The GPS system across these devices is enough that we know where those people or cabs always are. There is an ability to pay through mobile and to track people through mobile. All of these abilities and points of disruption came together to point to Uber.”
Heitzmann refers to the introduction of mobile technologies as the catalyst behind companies such as Pinterest and Uber. Mobile, as a platform, was a fundamental piece within the jigsaw puzzle that Heitzmann analyzed from the perspective of market penetration, processing power, and consumer behavior.
Similar to a16z’s approach to software or Heitzmann’s approach to mobile, other seed funds such as Eniac Ventures and Betaworks inform their theses through an approach driven by platforms. As opportunities have slimmed with an abundance of capital, they have gone more specific than ‘software’ and developed more vertically-aligned interest areas. As smartphone penetration increased, most investors have developed opinions on the capability of smartphones and where opportunities would arise as a result of penetration, until these opportunities tapped out. They formed their theses around a platform and examined opportunities related to that specific interface. Mobile phones, VR/AR headsets, Google Glasses, Apple Watch, Apple Airpods are all new platforms that may change the way the puzzle is built. Peter Rojas, Matthew Hartman, and John Borthwick, who collectively established Betaworks’ venture fund, suggest that this interface-layer of investing will hold true for its next set of investments, but across new areas such as synthetic media or at the intersection of live experiences and digital media:
“To find opportunity, we begin by looking at interfaces. We look at the platforms or interfaces that are driving change in areas or behaviors now and we believe, in 2018, that those interfaces are voice computing, augmented reality, virtual reality, computer vision, conversational interfaces (chatbots), eSports or game streaming. These are broad areas but reflect the idea that we want to be more forward looking as opposed to looking at established behaviors. We will look at legacy tech if something fundamentally has changed in that space. While audio has been around a long time, we’re investing in audio now because of smartphones and speakers in pockets or the tech that Apple has rolled out with Airpods. So, we invested in five companies within the audio space who we believe will take advantage of these changes.”
Obvious Ventures & Values-Driven Investing
Obvious Ventures is a recent fund (when compared to a16z, Founders Fund, Sequoia, USV, and the likes) to the Silicon Valley VC scene, but they bring a radical approach to investing that its LPs appreciate. The fund was co-founded by Ev Williams, a co-founder of Twitter and founder of Medium, and Vishal Vasishth, the former Chief Strategy Officer of Patagonia. When they set out to develop the thesis of this fund, Williams told Vasishth:
“When I was pitching my startup ventures to investors, I often talked about the metrics, the total addressable market, the customer, the user metrics and rattled those off because it’s what I thought they cared about. We rarely, if ever, spoke about the values behind why we were building what we were about to build together. Why we thought it was better for the world. Investors do think about those things. I think about those things. But that conversation never comes up. Yet, if the values break down while building the company, the entire operation is a disaster. The values breakdown between an investor and a founder is where the true misalignment begins. That should be our thesis, to be value-driven.”
Williams and Vasishth thought through their investment thesis to make them timeless but to also redirect capitalism: to make the world better through technology and innovation, while still returning capital to their investors. The resulting areas of focus for Obvious Ventures became sustainable systems, health and food, healthcare, and people power. A growing number of limited partners and venture capitalists are partnering to determine if capitalism can be used to make the world better through technology and innovation. These funds are still driven to invest in profitable businesses that return money to its investors, but a simultaneous goal is to create a positive impact. Obvious Ventures has looked at resource-intensive industries and invested in businesses focused on renewable energy and the electrification of transportation away from fossil fuels. Obvious Ventures has also invested in businesses that improve the holistic health of humans through healthy eating and nutrition. In that vein, Obvious Ventures invested in Beyond Meat, a company that returned a large finan
cial return to the fund’s investors when the company went public on the New York Stock Exchange. While Obvious Ventures’ investment categories are seemingly broad, Vasishth explains the group’s thinking by outlining the investments that resonated with them:
“Strategically, our investment theses are intended to be timeless and forever in service of that goal. Obvious was built on a conviction that technology is transforming every sector of the global economy, and those doing so through a world-positive lens will be moving humanity forward. If we can invest in these entrepreneurs and these theses, it makes business sense while concurrently solving our world’s biggest problems.”
Venture capital that invests in companies with impact can be used to achieve the same kinds of returns for investors as a traditional venture capitalist can. Rethink Impact, a venture capital fund launched by Jenny Abramson, the former CEO of LiveSafe (a tech security company focused on preventing school shootings and sexual assaults), raised over $110 million to invest in female-led technology companies focused on improving education, healthcare, the environment, and economic inequality. Abramson says that often times, the diligence in a company focused on impact is more rigorous than in other scenarios:
“During diligence, we layer on the impact piece on top of the financial model and we look at both as intertwined. We ask if the quest for impact is deeply embedded in the company. We ask if the company is solving a challenge in a way that is sustainable. The major part of that sustainability is that it has to be a strong financial business where business success actually fuels the impact and vice versa.”
Funds such as Obvious Ventures, a16z, Union Square Ventures, Notation Capital, Betaworks, Greycroft, and FirstMark Capital make their investment theses known to entrepreneurs so that the founders who share their worldview will reach out to them to build that partnership. While USV or a16z have been fairly consistent in their approach, some venture funds actively describe their changing investment thesis each year. They are public about their investment interests and it is up to the entrepreneur to do the work to identify which investors will be the right fit for them and vice versa. One of the more prominent investors to do this is Mary Meeker, a former partner with Kleiner Perkins Caufield & Byers, who launched a $1 billion growth equity fund called Bond in 2019. Meeker issues an “Internet Trends Report” in which she documents the ideas, industries, and changes she is interested in. Collaborative Fund, once focused on consumer ventures, is now looking to behavioral trends of Generation Y and Z and will often publish their perspective on these trends. Peter Rojas of Betaworks is clear about their forward-looking approach and recognizes that some themes will remain embedded in their DNA as a venture fund:
“Betaworks is at the intersection of media, technology, and communications. Going back to the early 2000s, the frontiers of these industries revolved around social, mobile, and real-time data. Those elements came together and changed the way media was organized or monetized. Social changed the way media is curated and engaged with. Now that those behaviors are well established, when we look for investments in social and mobile, we want to see some emerging behavior or element that is changing and now creates an opportunity. When we get pitched the next mobile photo sharing app, we’re not going to take a very serious look at it.”
Bouncing Around the Echo Chamber
The counter point that many entrepreneurs, including myself, have felt about the theses that drive venture capital is that it forms an echo chamber. One investor may write a blog post or publicly proclaim that (picking a random sector for the purpose of making a point) “Voice Interfaces are Dead!” and all investors may follow this person’s train of thought and refuse to fund or meet with founders despite the solution they offer. This has happened in every cycle to different groups of entrepreneurs. It happens to entrepreneurs within media companies pushing advertising business models against investors who claim that Facebook and Google have taken the pie away from them. It happens to education entrepreneurs and investors refusing to believe that there will be a big enough exit within the education sector or that it is too hard to sell into schools and to teachers. This opposition began to take hold, as of 2018, with direct-to-consumer commerce companies and the belief that most of these companies could not survive post-venture dollars or offer a differentiated enough solution to justify a high return on investment. Theses can often be subject to “groupthink” but as all investors will tell you, the investors who follow the pack like lemmings rarely survive, nor offer value to a company when it’s needed. When I asked Ellie Wheeler how she prevents herself from forming a negative perception of an industry just because it hasn’t worked in the past, she recognized the importance of remaining fresh in her approach, despite having a successful career in venture capital for over a decade. Wheeler says:
“Sometimes seeing the same kind of company in a space over 50 times and knowing that it won’t work will make me pass again on the 51st time. Investors won’t invest in a space until they are confident that something has fundamentally changed about that market — maybe it’s a business model shift, maybe it’s that an incumbent has switched their strategy, maybe it’s something novel in the go-to-market strategy, maybe it’s something within the problem that the market did not fully understand. If there are a ton of failures in a space, it colors the water but there is usually an underlying cause behind these failures. There is a tech reason or a go-to-market reason, but a founder’s job is to tell us why the market is now ripe and now ready, where it was not in the past. We have had those experiences in the past, where we think something must exist, based on a thesis, but the rest of the characteristics around the market — competition, regulatory, or another dynamic — were not ready. Sometimes there is a change in the market, but that’s where if an investor is following the herd or not an expert on the space, they’ll miss the opportunity. You need to stay flexible in your thinking and you need founders to challenge you in your thinking.”
Venture capital veteran Andy Weissman, a GP with USV, acknowledges the echo chamber and remains nimble in his thinking. He says that, as with entrepreneurs, being lucky is important to venture investors in determining whether their theses play out as they had hoped:
“I think there is an incredibly healthy and underappreciated amount of luck that comes into what we [venture capitalists] do. There is some skill, but there is an enormous amount of luck. There is so much randomness at the early stage that it is really hard to predict what will work. Theses help to move strategy forward and if you have a point of view about the world and you are constantly unpacking that point of view you get closer to the companies in order to be lucky. We evaluate hundreds of opportunities and are helping to build dozens of companies at a time. Through that experience, you refine your point of view and every now and again, a company comes in front of you that fits that point of view that you’ve been developing. Maybe it’s Tumblr, maybe it’s Kickstarter. There will be 10 companies that don’t work out but over the course of a portfolio, you can find success by being informed.”
SECTION 2
PATTERNS OF GENIUS
CHAPTER 5
IN PURSUIT OF GENIUS
“Smart people are a dime a dozen, and many of them don’t amount to much.”
Walter Isaacson
Genius is reserved for non-conformists who push the boundaries of their fields through creativity and exceptional talent. This is rarely defined solely through a measure of IQ, because geniuses need more than raw intellect to achieve the extraordinary. They often pursue paths of great resistance to redefine our basic understanding of the world around us. Genius manifested itself through the creativity of Spielberg, the athleticism of Serena Williams, the scientific reasoning of Stephen Hawking, the imagination of Rowling, and the political feats achieved by Barack Obama. By studying extraordinary stories of humans such as these, Malcolm Gladwell deconstructed the relationship between intellectual aptitude and success in The Outliers. In a contemporary work with a similar conclusion,
The Originals, Adam Grant writes that outliers and geniuses are not only the ones with exceptional ideas, but those who take the necessary action to will them into existence. Grant argues that being born smart is not enough of a precursor for genius and adds that ‘child prodigies rarely amount to much’ because they never establish an appetite for failure.
Like Grant and Gladwell, Walter Isaacson has studied history’s geniuses — Benjamin Franklin, Albert Einstein, Leonardo Da Vinci, the creators of the modern Internet. Isaacson also studied a modern genius, Steve Jobs, and suggests that his ‘success dramatizes an interesting distinction between intelligence and genius’ in which his defining characteristic as a genius was his heightened sense of intuition. Jobs’ imaginative leaps on human behavior were not developed through analytical rigor, but instead sparked by his ‘experiential wisdom’ which in turn, shaped his intuition. Isaacson writes:
“So, was Mr. Jobs smart? Not conventionally. Instead, he was a genius… Trained in Zen Buddhism, Mr. Jobs came to value experiential wisdom over empirical analysis. He didn’t study data or crunch numbers but like a pathfinder, he could sniff the winds and sense what lay ahead. He told me he began to appreciate the power of intuition, in contrast to what he called “western rational thought,” when he wandered around India after dropping out of college. ‘The people in the Indian countryside don’t use their intellect like we do,’ he said. ‘They use their intuition instead… Intuition is a very powerful thing, more powerful than intellect, in my opinion. That’s had a big impact on my work.’…”
