Thinking about VC themes

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A few personal thoughts on how to think about VC investment themes, and some detail on a few themes I think are particularly interesting right now.

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Thinking about VC themes

  1. 1. Thinking about themes Gil Dibner Partner, DFJ Esprit LLP @gdibner | gil.dibner@dfjesprit.com | www.dfjesprit.com http://yankeesabralimey.tumblr.com/
  2. 2. What is a VC investment theme? • A unifying idea that underlies the investment thesis for multiple potential investments • Each theme arises from a set of “drivers” • Theme gives rise to a set of “opportunities” – a sub-grouping of potential investments • Broad enough to capture a meaningful portion of an individual’s/firm’s activities (perhaps 5%-30% at any given time) • Narrow enough to serve as effective filters and hang together tightly as an area of expertise • One investment may reflect multiple themes Drivers (eg. proliferation of smartphones) Themes (enterprise mobility) Opportunities (BYOD management, app mobilization) Investments (MobileSpaces, Enterproid)
  3. 3. How would we (loosely) score a theme? Category of assessment Individual investment criteria Theme assessment criteria Examples People Existing team’s abilities to execute? Ability to recruit necessary talent? How difficult is it to recruit talent within this thematic area? Experienced data scientists are expensive and difficult to find. Technology Technological barriers to entry? Technological significance? Roadmap development risk? How significant is technology to customers and acquirers in this area? Technological factors are significant value drivers for database customers and acquirers. Market potential How big is the specific opportunity? How big is the aggregate set of opportunities within the theme? The financial sector is a major component of GDP that has not been sufficiently brought online. Ability to penetrate Strategy for winning initial customers and generating credibility? Do industry dynamics allow start- ups to capture market share from incumbents? Innovators in the offline retail technology industry face very long sales and deployment cycles. Ability to scale Strategy for replicating revenue, economies of scale, and margin leverage? Do industry dynamics allow start- ups to scale revenues and expand margins? Data aggregators benefit from economies of scale and significant margin leverage. Exit outlook IPO viability and likely acquirers? What is the history of IPOs & M&A in the space? Are there many active acquirers? Lack of broad base of acquirers in the developer tools market. Geography Where does the company need to be located in order to maximize success? How does this theme map to a particular geography’s HR pool and tech eco-system? Fraud detection companies in Israel can draw on a very deep talent pool. Valuation Potential for venture returns given investment valuation? Where is the theme on the hype cycle? Is it over-invested or under- invested? Hadoop/NoSQL has been massively over-invested over the past 3 years. Timing Is the venture’s roadmap in sync with the market’s maturation trajectory? Is the market ready / almost ready for companies of this category? Increased cord-cutting and online video explosion may drive jump in interactive video advertising.
  4. 4. Applying the hype cycle to VC investment themes Time Expectations Technology trigger Peak of over- investment Trough of disillusionment Slope of enlightenment Plateau of rationality Descent into irrelevance Digital Society Online Finance BI Infrastructure Data Science Data Pipeline Software is eating the world Mobility Cloud infrastructure E-Commerce New advertising battlegrounds Sustainability Education Legal tech Pervasive computing Reinvention of retail PV generation technologies Social media monitoring Heightened valuation risk Heightened general risk Unlikely to generate return Zone of balanced risk/return 3D printing
  5. 5. A framework for scoring themes • Generalizations upon generalizations – but potentially directionally useful • Offers a general sense of potential headwinds and tailwinds faced by companies in each theme Theme Ease of recruiting talent Potential for technical barriers Typical opportunity size Ability to penetrate Scalability of models Exit potential (# acquirors) Hype cycle status & maturity Overall Cloud infrastructure +1 +1 +1 +1 4 Online finance +1 +1 -1 +1 +1 +1 4 Mobility +1 +1 +1 3 BI Infrastructure -1 +1 +1 +1 2 Digital society +1 +1 2 Data pipeline -1 +1 +1 +1 -1 1 Data science -1 +1 +1 +1 -1 1 New advertising battlegrounds +1 1 Software is eating the world +1 -1 +1 +1 -1 -1 0 E-commerce +1 -1 +1 -1 +1 -1 0 Reinvention of Retail -1 -1 +1 -1 Sustainability +1 +1 -1 -1 -1 -1 3D Printing / Hacking hardware -1 +1 -1 -1 -2 Legal services -1 +1 -1 -1 -2 Pervasive computing -1 +1 +1 -1 -1 -1 -2 Education -1 -1 -1 -3
  6. 6. SaaS/Cloud Infrastructure Commoditization of hardware and IT stack management Meaningful cost, time savings associated with on-demand infrastructure Digital native employees look to cloud services naturally Cloud security concerns transformed from barrier to opportunity Secular trends towards infrastructure abstraction and hybrid architecture Cloud security Cloud-based IT service providers Cloud-based business infrastructure Cloud IT management solutions
  7. 7. Online Finance Digital natives willing to trust online challenger brands. Growing volumes of social data available online Existing fee structures too high to be sustainable; fraud costs remain high Financial products are an ideal “digitally delivered” service. Increasing centralization and automation of financial controls and processes. Digital banking, payments, & wallets Innovative asset management and insurance companies Fraud & credit analytics Digitally enabled credit: lending & factoring New currencies and value-stores (Bitcoin?)
  8. 8. Mobility Proliferation of mobile devices and operating systems Drive towards outsourcing and porous enterprise boundaries Mobile device is becoming a preferred data consumption device Consumerization of IT by digital native generation Increasingly mobile workforce operating from home and from the road Enterprise application mobilization Website mobilization, refactoring BYOD / mobile device management Dedicated mobile security providers
  9. 9. The digital society Growing population of digital natives Rising structural unemployment, particularly among youth Coding and web admin becoming second languages Online trust: Willingness to communicate, transact, and relate via digital means Societal trend towards self-reliance, entrepreneurship, and “making.” Everyone is a web master, e-commerce shop owner The P2P economy Enabling digital cottage industries The maker movement Digital intimacy and relationships
  10. 10. The Data Pipeline Enterprises are increasingly leveraging structured data from multiple 3rd party sources Massive quantities of data exist unstructured on the public web Storage is getting cheaper, but preparing data for analytical applications remains a challenge Business users increasingly demand access to data and analytics Data complexity keeps rising Dataset creation tools & platforms Data marketplaces Data integration API management tools Next-generational departmental and enterprise reporting and visualization
  11. 11. Data Science New sources of data: APIs, public web, social data, etc. Cheaper storage and compute Data analytics is in fashion Proliferation of analytical DBs Success of data- driven businesses Data science as a service Democratization: Making it easier for more users to apply data science. Verticalization: Industry-specific applications of data science techniques Machine learning platforms Embedded data science applications
  12. 12. New advertising battlegrounds Proliferation of smartphones, tablets, smart TVs, wearable computing, and cord- cutting. “Online” attention fragmenting across identities /devices Proliferation of “walled garden” online environments (istore) & failure of traditional tracking tech. Increasing new data types (location, usage, social, etc.) and analytical power Inevitable shift of brand-oriented advertising online Interactive television and TV advertising Statistical attribution Automated campaign and landing page optimization Traffic arbitrage
  13. 13. “Software is eating the world” Increasing number of enterprises and individuals are writing code Commoditization of basic (cloud) computing infrastructure Recognition that “software/IT” can drive value creation across many industries Continuous deployment & integration are widespread Greater use of open- source and third- party code & binaries. CI/CD/Devops: Tools to help deploy code faster, better, cheaper Developer tools:: Tools to help developers create value faster Analytics: “BI for the software production process”
  14. 14. Reinvention of (Online/Offline) Retail Ubiquity of smartphones; e-mail, and other digital channels Consumers expect personalization Online retail taking greater wallet share Availability of big data analytics Every physical retailer is now an online retailer as well Highly personalized CRM Enhanced in-store experience Next-generation loyalty programs Next-gen point of sale Social commerce
  15. 15. Sustainability Expanding global middle class with higher expectations Widespread recognition of sustainability and environmental issues Rising commodity prices Increased consumer interest in organic and locally sourced food Approach of grid parity in some alternative energy areas Agricultural efficiency SW Food-tech: New food production technologies and delivery systems Locally-sourced food retail Renewable generation tech Power consumption efficiency technologies and solution
  16. 16. Pervasive Computing Rapid prototyping and crowd-funding of hardware WiFi and GSM connectivity is everywhere Sensors and processors are getting more varied and cheaper Consumers and workers are carrying powerful devices with them everywhere Manufacturers increasingly seek the benefits of devices that “phone home.” Infrastructure for the “Internet of things” Networked Consumer Electronics Wearable computing, quantified self Smart cars, drones, and other vehicles Connected home

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