Predicting the Future: Research and Thesis Development

Before I joined Launch Capital, I was getting into my fifth year of angel investing and thinking about how to invest more strategically. I had heard about many larger venture funds doing a lot of research into thesis development and building/raising funds on theses. But I really didn’t have a set process by which to approach thesis development.
In Mark Suster’s post Stock Market Drops. Then It Rallies. What Happens Next for Funding?, he mentions that when he first got to GRP, he did some analysis to find some interesting markets to go into. Having met Mark before, I pinged him and we got together and had an interesting hour long chat about thesis development.
This led me to embark on some thesis work at Launch Capital. We are fortunate to have some research resources internally and I petitioned for some time to use them on looking forward. And after talking to Mark, I had a better picture on how to do this myself, and to guide some researchers to help.
Here are some thoughts on developing a thesis:
1. Look at your own personal interests and areas of expertise. Understanding and insight is maximized when you can meld the research with what you know already. When you look at some future research data, you will look at it with the lens of your own experiences and can spot opportunities that only you will spot.
Without experience in other areas, you will inevitably miss what someone else might see, who is more experienced in those areas. For example, if you’re not a biotech guy, you may not see the effect of health trends from a medical perspective, but you’re an internet guy may see opportunities in mobile and tech.
Expanding your experiences can help greatly. When I entered what is now the at Stanford way back in 1989, my art professor would always talk about traveling and increasing ones exposure to art, culture, and experiences in other places. I never understood that until many years later when I was able to travel a lot. It brings a critical widening of your own eyes when you realize the world is much bigger and different than you originally thought.
2. What else is unique about you? These can be things like:
a. Do you have a flow of proprietary deals from some source(s)? The presence of proprietary deal flow in some area or industry means you can more effectively imploy a thesis strategy in that area. Lack of proprietary deal flow can mean you may never ever get the best investments and may be a reason to not execute against that thesis, no matter how attractive it is.
b. Can you influence outcomes based on your experience, contacts, expertise, etc.? For me, I’m a product/UX person so I try to find investments where I can really give them an early leg up on their product strategy. Others might have extensive high level contacts in an industry which can help them generate exits more effectively.
c. Where are you based? It is widely reported that VCs like to only invest in startups that are within an hour’s driving distance from them. So if you are close to your businesses, you can more effectively manage and help them. So examine those strengths that are particular to where you live. If you live in Silicon Valley, you have a breadth of industries to choose from. If you live in Boston, there is a concentration of biotech and clean tech. In Los Angeles, the entertainment industry is entrenched there. But trying to encourage a type of business to start in an area that does not have an ecosystem to support that industry is very tough and provides a disadvantage to those who try, relative to those who are doing similar things in a place where there is a lot of support. (Unfortunately for most of the hot industries, I still think Silicon Valley is the place to be.)
3. Following on 2c, if you decide to build an investment operation in wherever you live, then what are the geographic advantages of your area, that will support whatever theses you decide to go after? (…and hopefully you won’t realize that you’ll have to move to do that!)
Existing industries, centers of innovation like research hubs or universities, availability of talent, or even natural resources (would you fund an ocean energy project that was created in the middle of the US?).
4. Now, we move into lots of data…The idea is to examine this data and to identify not only just trends but those that are secular, or those that seem to be persistent and not just lasting for a short amount of time. As startup building folks, we need secular trends because investing in fads can be extremely dangerous as the trend that occurs may die out unexpectedly. (NOTE: that’s not to say that you couldn’t create a business that deals effectively in fad-like trends; for example, the fashion industry thrives on this.)
Typical data sources to examine are:
a. Demographic Trends – Yes we all know are population is aging and that we are all living longer than before. But what other shifts are there? Movement to cities? More or less divorces? Sentiment? Poverty?
b. Economic Trends – We went through a big reset in 2008 and now that reset is hitting the world. Unemployment doesn’t seem to be going down. Is there a bubble in the tech startup markets? Who is getting affected by government stimulus? A very obvious one that has spawned the creation of a plethora of startups is the fact that the government is giving all medical providers $10K to switch to digital records – what a great way to cause a fast shift in your userbase without having to do it yourself?
c. Political Trends and the Legal and Regulatory Environment – Lots of debates going on about the US Patent Office and the need for reform. Will there be import tariffs on certain goods? Are we extending capital gains taxes for another year?
d. Specific Industry Trends – My area is generally internet, tech, and mobile. For example, nice to see iPads and tablet computing be so popular, dominating in all usage metrics and climbing. However, the ease at which businesses get created means competition pops up quick and can stifle growth of any one business, in a given group of similar businesses.
5. What Character Traits Does the Thesis Developer Need to Exhibit?
One thing that Mark and I talked about was, what kind of skills do you need to have to do thesis development? What kind of character traits? Some of the ones we talked about were:
a. Futurist, Big Thinker, Philosopher. I put all these into a similar bucket. You meet some people who seem to be able to look far into the future and paint broad visions of what that would look like. They are creative, sometimes wacky, and generally very intelligent. They are able to synthesize large amounts of information and generate convincing arguments on their future visions. Generally, they have to be fantastic communicators and can wow an audience with their persuasiveness.
b. Imagination – Somewhere along the line as we grow older, we lose the ability to be imaginative. However, you have to be imaginative in order to paint a vision for the future in a certain area.
c. Active intuition – Someone who is in tune with their intuition will have an easier time letting their brain put together disparate sources of data to generate something interesting and unique.
d. Wide Variety of Interests – If you know a little, or a lot, about a lot of things, I think this is much better than knowing only a few things. Being inquisitive and interested in a lot of the world will enable your intuition to function better. The trick is to not let too much information destroy your ability to imagine.
e. Increasing your Information Sources – One of my favorites is to read a lot of science fiction. What better way to imagine the future than to have someone else create a whole fictional world around them? Other sources are reading a breadth of magazines and books, across a wide range of subjects.
After gathering and examining the data, I believe it can be used in two ways: to build theses to invest against, or to measure your deals against what you know about the future.
1. Investing Against Theses – Say you’re able to synthesize a thesis after looking at all your data. Then you go looking for startups that fit within those theses. For example, I currently am looking at startups in these 3 areas:
a. E-commerce
b. Unsexy traditional businesses newly powered by the Internet
c. Hardware + software + Internet
Each one of these has some thesis thinking behind it and why I think these are opportunities that will become big in the coming years. So I tend to actively look for startups in these 3 areas.
2. Measuring Deals Against What You Know – This is perhaps simpler than trying to create specific investment theses. You gather the data and then every time you meet a startup, you match up their idea, objectives, plan, etc. against the data that you know. Will it survive in the coming years in the environment that the best trend experts depict?
For example, a business that thinks it can make big money by selling DVDs may look great now, but the data shows that DVD sales are quickly being displaced by digital downloads. So this would be something that looks like it would not survive in the future, or be subject to a shrinking market which is very bad. (Ex. Think Netflix’s recent changes in strategy, moving from DVD rentals to streaming.)
Right now, the Launch Capital research team and I are pulling a multitude of data from all sorts of sources. Over the next few weeks, we will be going through it slowly and hopefully developing some insights that will allow us to better spot opportunities. As we progress, I hope to post about what we found, the processes we used, what we derived from the data, and how we’re going to use it.