AGILEVC My idle thoughts on tech startups

May 16, 2012

VC investors take different approaches to finding new investments.  I tend to think of it as a continuum with purely thematic investing at one end and a purely opportunistic approach at the other.

Thematic investing is where VCs research a macro trend or specific market, form a thesis around why this trend/market will serve as a good basis for building great startups, and then pursue as many exceptional investments in this theme as appropriate for the VC’s strategy.  IMO Bessemer is perhaps the most emblematic firm of thematic investing… all the investment professionals in the firm from senior partners to more junior staff team up in small groups to construct “roadmaps” of the themes in which they intend to pursue investments, which are then articulated more broadly within the firm.  While these roadmaps are used as guides rather than bright line rules, my experience suggests Bessemer tends to be fairly disciplined about this process and will pass on opportunities that might be compelling but are clearly outside the roadmaps they’ve constructed.  Other notable examples of highly thematic investors include Foundry (current themes here) and IA Ventures‘ overall focus on big data.

Opportunistic VC investors focus less on developing very specific theses and more on cultivating a deep, rich network around the entire firm.  Sometimes “opportunism” is used pejoratively but that’s not the case here… it’s not that these investors don’t have a clearly articulated strategy or will simply invest in any company that walks in the door. Rather these firms know that there are countless bright, hard-working entrepreneurs out there thinking 24/7 about the next big thing and so they remain open to these innovative ideas even if the firm hasn’t previously formed a specific investment thesis about that space.  Also really great opportunistic VCs are highly intentional about how they build their sourcing network and brand.  Two firms I respect in this regard are Greylock and Andreesen Horowitz.

It’s my experience there are relatively few absolute truths in venture investing… there are incredibly successful investors that pursue a purely opportunistic approach as well as ones that are thematic in nature.  There’s also plenty of examples of both who’ve been wildly unsuccessful.  So there’s no right answer about which approach is better.

At NextView we’ve intentionally taken an approach which combines both thematic and opportunistic investing for a couple reasons:

1) Our Overall Strategy is Highly Focused - We’re a dedicated seed VC fund, so we invest in startups exclusively at the seed stage.  We also invest only in software & internet enabled businesses.  And we invest in US-based startups,  primarily on the US east coast though we’ll consider other parts of country on a selective basis (roughly 15-20% of our portfolio is in the SF Bay area).  So NextView’s strategy already excludes large portions of the VC landscape in terms of stage, sector (no cleanteach, life sciences, IT hardware or semiconductors, etc), and to some extent geography.  This enables us to be opportunistic within the confines of a fairly narrow strategy, yet still meet very high quality startups within this smaller sphere.

2) Vast Human Capital Outside Our Walls - Rob, David, and I all try to draw on our experience as founders, operators, and investors in software & internet companies both in looking at new startups and forming investment themes.  But at the end of the day there are thousands of entrepreneurs out there who have deeper knowledge about exciting markets than we will ever have.  There are also new vectors of innovation (wholly independent of any industry sector) that are constantly emerging.  I have no doubt there will be exceptional entrepreneurs working on startups that fit clearly in NextView’s strategy, but might be outside themes we’re currently pursuing or who’ve come up with incredible innovations that can disrupt an area we previously dismissed.  We want to make sure we’re open to thinking about these opportunities with a blank canvas.

3) Great Opportunities Help Draw Us into Some Themes - While we are opportunistic in some regards, we also think specific themes can be very important.  Sometimes we develop themes on our own and then pursue investments based on that thesis.  A good example of that has been the thesis my partner Rob built around online education which actually began even before we formed NextView.  It led us explore a large number of potential opportunities, including our ultimate investment in Boundless.

But other times the entrepreneurs we meet opportunistically end up catalyzing new investment theses we ultimately pursue more thematically.   A good example of that is our theme around the consumerization of business software.  Back in 2010 we were observing more and more new B2B startups emulating the product and customer acquisition strategies of existing consumer web companies which my partners & I have long been familiar with.  We ended up making two investments in these sorts of B2B SaaS companies in 2010 (InsightSquared and SalesCrunch) and as they say two points forms a line.  In 2011 we developed this into a more comprehensive theme which helped form the basis of our investments in GrabCAD and Objective Logistics.  We VCs like to pride ourselves on pattern matching, and in this case a pattern emerged from our opportunistic approach which directly led to a more specific theme.

So we’ll continue to blend both thematic and opportunistic investing here at NextView.  It suits our team and investing style, and it least for us we find the two approaches to be highly complementary.