Thinking through a venture capital investment thesis.

I traditionally think about startup and investment opportunities through broad frames, sectors and trends; but in an effort to get a bit more tactical, here is a general investment thesis:

• Products and services that build markets, networks and/or communities,
• Focused in industries with inefficient, expensive middlemen, high transaction costs,
• That aggregate and structure data,
• To create valuable relevance,
• Created and accessed via any device, anytime,
• Built as an API from the beginning,
• Monetized through API access,
• Requiring a small funding gap between costs and profits,
• Created by founders that embrace a grand challenge.

Perhaps that’s too broad an outline to be a meaningful and actionable thesis, but let’s start here. Breaking it down…

• Products and services that build markets, networks and/or communities.

  Markets, networks and communities form the base of successful next-gen companies; they create and serve niches, promote humanity and meaning, organically incent repeated competition and collaboration, create viral marketing and engagement loops and have “built-in” business models that facilitate creating and exchanging rather than allocating.

• Focused on industries with inefficient, expensive middlemen and high transaction costs.

  The media and entertainment industries get all the attention for the collapse of their legacy business models, but they are just the canaries in the coal mine for many more industries.

  The world doesn’t need another app for sharing photos and music: we need another app for solving expensive problems, understanding our actions and lives, valuing our impact, sharing meaning, being human.

• That aggregate and structure data.

  It should be fairly obvious by now that there are a world of opportunities in a world of increasing unstructured data. Why?

• To create valuable relevance.

  Data is cheap to create but expensive to understand. The basic need of people and businesses to understand the world and make sense of what is happening is the fundamental driving force behind innovation on the web today. Better yet, the high cost of context and relevance is creating opportunities for a variety of businesses. Relevance is a fundamental concept behind many of the web’s current fascinations: realtime, social search, the business models behind news and journalism, social capital, social anything.

  Examples? To start: surfacing and pricing externalities, reducing the cost of relevance, cheaper serendipity, faster, better and cheaper links between online and offline.

• Created and accessed via any device, anytime.

  How, when and why we interact with applications and web services determines their eventual impact; just like “the best camera is the one that’s with you” , the best computer is the one that’s with you. Neglecting to develop applications for mobile interfaces and use cases is at best a limiting strategy, and at worst a death wish.

• Built as an API from the beginning.

  Highlighting a comment by Joe Lazarus on APIs in the Late Afternoon:

  I’m not an engineer, so I don’t know how technically realistic this is, but I’ve always thought that conceptually, companies should build APIs before they build their own interface. That way, they ensure that all the APIs needed to replicate the experience are already in place. The company’s front-end engineers simply become part of their own API developer community.

  Given the importance of APIs (read and write APIs, btw) in linking together web services, creating development communities and building effective business models, developing an API at the same time as creating the technical infrastructure and user interface is an important part of building a web services company today.

  One might read this to think that I’m only creating an investment thesis for a web services company: however, the same principles apply to any company and person today. At its core, an API is a rules-based structure for collaboration, and the basic premise of developing and using APIs can be used by any company using the web for any part of its business.

• Monetized through API access.

  Disrupted businesses often misunderstand what business they are really in: focusing on the products they sell, rather than the needs they serve and the problems they solve, is a recipe for unnovation. Businesses based on multi-sided platforms are often the most confused, failing to understand how to evolve the platform as the markets on either side of their platforms change.

  Media companies are obvious examples of this confusion; but they won’t be the last to make this error.

  Focusing on APIs is a powerful way to focus on the core business, because APIs are structured around exchanging and transacting value. At the moment, only businesses are able to really publish, use and pay for APIs, but eventually using and paying for APIs will be easy enough for individuals to use APIs in their daily lives.

• Requiring a small funding gap between costs and profits.

  Venture capital emerged to serve a need, to fund the timing gap between costs and profits that would otherwise stop new businesses formation. To avoid diving deeper in an oft-discussed subject, the economics of funding new ventures aren’t what they used to be. Start cheap, create a minimum viable product and iterate often.

  Value attracts money; focus on value first and the money will come.

• Created by founders that embrace a grand challenge.

  Embracing grand challenges as an organizing principle helps build adaptable institutions that reward passion and create awesomeness.

  Why place big bets on small ideas?

How would I use this investment thesis? If I was an outside investor, this is how I would use for evaluating businesses as investment opportunities. If I was an entrepreneur, I would start by first determining what problem angers me deeply, and then apply this same thesis to help figure out how to structure the solution.

Obviously it’s only a framework, but it’s a start…

As always, I’m open to thoughts. Feel free to tell me what’s wrong, misguided, unclear, naive; and of course, I’m curious about what’s right…

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Related

• Fred Wilson, Thematic vs. Thesis Based Investing
• Michael Karnjanaprakorn, If I Started an Investment Fund
• Charlie O’Donnell, Free Business Plan: How to start a venture capital fund in New York City
• Seedcamp, Seeding Ideas for Seedcamp 2009
• Seedcamp, Seeding ideas Round 2
• Me, Five cultural and technological frames shaping new business opportunities.