Venture Capital is a tricky industry. If you’re funding the same stuff as everybody else and if you started your activities when the clues were obvious you’re much less likely to drive enormous returns.
When Fred Wilson funded Twitter I guarantee you it wasn’t obvious that it was a billion dollar+++ idea. Far from it. Many questioned whether it could survive under the fail whale, inevitable competition from Facebook, founder fighting, fights with 3rd-party developers let alone become a revolutionary business that could make money. Lots of it. He couldn’t have imagined power users would be global political figures, dictatorships, small factions of people standing up to the Iranian army or every sports figure & celebrity in the world.
It was an early and smart bet.
When the early teams: angels, lowercase capital & first round capital funded Uber they had no idea it would be one of the most revolutionary ideas of our time. I know – I was there when the first people debating funding it at less than a $5m valuation.
Airbnb? Ha. Almost nobody believed and now look at it.
Drones. Bitcoin. Online education. VR. Palantir. There were many moments in each space when pioneers were funding startups and the press hadn’t written much about them and if you were a typical investor you were still funding the last trend while some VCs were trailblazing into new categories.
As is often said if you don’t get at least a few fellow VCs (and entrepreneurs) scratching their heads you may not be funding ideas with enough upside. This was certainly the case when I invested in a small YouTube video production company called Maker Studios that recently sold to Disney for just shy of $1 billion.
Internally at Upfront Ventures we talk about “high consensus” vs. controversial deals with “high conviction.” The former are deals where everybody around the table thinks the deal sounds sensible. On the one hand that sounds like precisely the kind of things you should fund. But if it’s a very obvious deal to a group of strong-minded & cynical investment professionals you probably need to think a bit harder as to why.
In other words, if it seems this obvious to us then it must be this obvious to many other investors and probably to many other teams gearing up to compete. Since the majority of VC returns come from a small number of deals, “obvious” investments seldom return such incredible multiples.
What we like are deals the feel a bit controversial – often because they are big, somewhat implausible ideas or ideas that on the surface may not sound like they could become a big business. And rather than a small group of our partners and associates all thinking it’s a good idea we don’t mind if there is strong internal debate and at Upfront there often is. As I like to say, “We need to fight. Let’s just make sure we do it fairly.”
So other partners at the firm might sling mud at your ideas as you go for approval on an investment. They point out perceived market risks, they might question the management team’s experience, they might worry about regulatory risk or incumbent competitive powers. In a way it’s their job to play “devil’s advocate” but often their concerns are real and not just sparring.
And what we like to say is that if the deal is “in our strike zone” and the sponsoring partner maintains very high conviction then he is likely to get the deal approved. If the negative comments begin to erode his conviction he might withdrawal the deal on his own volition.
And I believe this process is very healthy even when it doesn’t feel good.
Periodically we do portfolio reviews to evaluate whether we have enough diversified risk across the fund. We look at stage, geography and of course sector. If we’re doing too many deals in eCommerce or healthcare IT we might ask whether we’re seeing enough deals in other categories.
A couple of years ago we started debating internally what some of the future big themes would be for our fund. One such theme was “water conservation” and we morphed it into a broader theme of agriculture technology or “ag tech” for short.
We decided we wanted to invest more in this category and start to make some early bets to develop knowledge, relationships and bone fides in the sector. The hardest thing about new markets is timing because as they say as an investor, “Being too early is the same as being wrong.”
The interesting thing is that we had parallel discussions about Ag Tech and about “wanting to fund stuff with more meaning.” By that we weren’t trying to demean companies building aps, games, photo sharing, etc., in fact we still look at many deals in the media sector whose main objective is to entertain people.
But many of us as partners were at points in our career and in our fund where we wanted to take on more transformational projects.
A good example of this Ag Tech theme is 6SensorLabs a company out of MIT that we’re very excited about and the funding was recently announced. They make little pods that test food so the potential consumer can know what is in his or her food before consuming it.
The first product tests for gluten and is especially targeted at people with Celiac’s disease which affects 1% of the population meaning millions of people. And of course many more of us are gluten intolerant or want to live gluten-reduced lives. It took me years to understand the negative effects that gluten and carbs were having on my body chemistry in terms of food converted quickly into excessive sugars. So if you add people like me the target market is tens of millions.
And if you want to know more about hidden gluten in your food you can take a quick glance at this, which fingers even some soy sauces at sushi restaurants as being a source of gluten. Fuck. Who knew?
6SensorLabs is essentially a realtime food evaluation company for modern people who eat on the road, in cafes & restaurants, at work or at the houses of friends. The company has an R&D pipeline of similar food allergy areas it will address. I don’t know how much they talk publicly about their pipeline so I better leave it there. Suffice it to say it will drive much demand including from a very close family member of mine who always travels with an EpiPen.
Or you could imagine my cousins not having to ask the waiter to ask the chef whether their are pork products in the soup (kosher) or my brother having to check whether food is fried in animal fat (he’s vegetarian).
Similarly we backed another great team out of MIT called GroveLabs that is building a company to allow you to grow fresh vegetables, herbs and some fruits in your kitchen with no pesticides, no transportation and greatly reduced water consumption. Please take a quick click on the GroveLabs website to see a visual of what the system might look like in your home.
Or take a look at their team page to get a sense of why we were so inspired by their vision for the future.
It is built on what is called “aquaponics” in which food is grown in water (not soil) and connected to a self-sustaining symbiotic ecosystem through the use of a fish tank with acquatic animals that become part of a biosystem to grow organic and fresh veg 7/365 and year round.
There was certainly some strong internal debate about whether US consumers were ready for fresh veg in their home piped into a fish tank!
My partner Yves was the championing partner and our colleague Kevin Zhang had done much evaluation work on the company and market (both also championed 6Sensor Labs). I was firmly on the side of the evangelists.
I have long felt that water conservation would become the defining issue of my adulthood due primarily to population growth but now exacerbated by climate change. If you want to cut back water consumption you need to address how much of it goes into agriculture as this amounts to 80% of all consumed water (90% in many states).
One of the most profound books I have ever read is Jared Diamond’s “Collapse” in which he talks about how and why historical cultures have collapsed and disappeared and the quick answer is that it always comes rapidly from over exploitation of natural resources.
He describes how the world is thought to have a theoretical maximum population of about 10 billion people but those estimates came from an assumption that China and India don’t reach Western standards of living, which of course they increasingly are. He estimates that the effect of developing world catching up with the Western world would mean an adjusted population of about 30 billion people.
Mr. Diamond believes the technology in its own right can’t save the planet but only shifting cultures toward lower consumption rates and his cause for optimism is that younger populations – Millennial’s – are psychologically more geared toward lowering consumption and care about our natural resources because they of course will have to grow old in a world with increased population and decreased natural resources.
So, yeah, I can image the early-adopters wanting chemical free, fresh veg that is environmentally friendly. I’m not saying there will be overnight mass adoption but if you take the crowds in urban zones and target younger people more apt to seek out this lifestyle I’m willing to bet that systems for growing fresh veg will eventually be common across many households in America.
And if that, too, can reduce the rate of heart disease in America hallelujah.
Another company we are super excited about is Santa Barbara based Apeel Technologies and before knowing whether I could even talk about this company had to check whether our involvement had been mentioned in the press before (it has).
Apeel is another Ag Tech company that has invented technology to reduce spoilage of fresh produce by extended the shelf life through natural means. 40% of all produce in the United States is spoiled before it is consumed and in the developing world that can be between 70-90% so as water shortages become more pronounced in the future and as you’re looking to feed larger populations with less resources getting produce to last longer can make a difference.
If you check out the team page you’ll see a humbling list of PhD’s not least of which is the founder, James Rogers who was backable even without his impressive 2 undergraduate degrees, 2 masters and a PhD. He simply is inspirational as an entrepreneur, an inventor and as somebody who wants to make a difference in the world.
We have another investment in the Ag Tech space but as I couldn’t find it in any Google Search I’m assuming neither party has announced the relationship. This particular company deals even more directly with water conservation but I guess I’ll have to save it for another day.
In the next 6 months you’ll hear more from me about bigger bets we’re placing on more transformative technologies. We have a few in the pipeline and a few funded but not yet announced.
I’m super excited but some of the tech development at places like Osmo, Navdy and Doorbot (which although as the name implies has developed a widely sold doorbell system with a camera / mobile phone tracking actually has even broader ambitions once they reach market penetration and the founding team is phenomenal).
As Venture Capitalists we take some near-term bets and some higher beta deals with more risk and more upside if they work. We balance what we know with areas that are so new that you can’t really expect any lay person to be an expert initially.
I enjoy every company we work with and the founders, the journeys, the decisions, the innovation are all magical whether the company builds mobile games, ad technology or photo-sharing apps.
But deep down I personally yearn for bigger ideas and more profound products. I long for products with an important mission that I can be inspired by and that if they are as successful as I hope will be not only hugely financially rewarding but also make that real change in the world that our industry always strives for.
I’m an equal opportunity funder but having a personal mission a few deals can be healthy, too.
(Cross-posted @ Both Sides of the Table)