Building A Thesis

Investing in startups is a phenomenally risky business. True, when compared to the current machine-driven equities market the asset class may not seem as crazy as it did last Thursday, but it’s risky nonetheless.  At the early stage there are very few corporate finance tools that will work for potential investments, which is why the industry typically puts money into team, market and idea, leaving the financial engineering for the later stages.  It’s not out of a desire to do so, it’s out of necessity because most of these companies have a prototype and a thesis and not much else.

Last week I wrote about why VCs may tell you no,  so this week I thought I’d talk about a few places where I think there is tremendous opportunity in the near and mid-term future.

1. Taste Graph and Real-time Data

This “sector” represents the convergence of two trends:

  1. The web is quickly shifting from search-friendly to social-friendly.  Any web user’s online behavior in Facebook, Google+, Twitter and on various web and mobile applications provides a tremendous amount of information about their likes and interests.
  2. Massive amounts of data: web clicks, social posts and other points, are now available in near real-time.  This makes the web a more dynamic environment than it was a few years ago.
I think these two trends present opportunities for startups in the following:

  • Digital Advertising Arbitrage: I wrote an earlier post about this, but it bears repeating because I’m really into it!  I believe that real time data can be used to improve inventory.  Current network CPMs are somewhere around $1-$2, but retailers will often pay very high prices for conversions or acquisitions (CPA, CPL).  I believe that wedging social graph data into the equation creates an opportunity to sell expensive CPA inventory and deliver it by purchasing inexpensive CPM inventory.  There are companies working on this, but I believe that the playing field is still open because media buyers have not adopted this model yet, but they will soon and it will scale.
  • Social Media Marketing:  I may eat these words, but I think this opportunity is less attractive than social advertising.  Analytics is becoming increasingly commoditized as social media monitoring vendors continue to pop up offering cheaper and cheaper solutions. There are also good free options out there for most SMBs.  The same goes for managing social publishing.  I think there are inexpensive options out there that are “good enough”.
  • Content Optimization: Publishers have not utilized social for optimizing content for visitors.  Using link-sharing and application data, publishers should be getting closer to building custom experiences for visitors based on their interests.  I believe there is room for companies that can help publishers bridge this gap and increase time on site and page views per visit.

2. Mobile Social Networks

I wrote about these earlier in the year, but I think that there is a big window that has been left open by Facebook and Twitter.  The mobile experience for these platforms leaves something to be desired:  they’re not addressing mobile experiences.  Instagram and Foursquare are the first success stories to come out of the mobile social network space, and I think that there will be others.  For example, why hasn’t a mobile dating application worked for the straight world yet?  Any solution needs to present a UX that makes people feel safe and that’s clearly been difficult to achieve, but when the straight version of Grindr comes out, it’s going to be a bit of a “duh” moment.  Of course, meeting new people isn’t the only opportunity here, but it’s definitely an obvious one.

3. Mobile Games

People have downtime in life and like playing games: simple premise.  I think the benefit (and risk) of the mobile gaming market is that its largely hit based.  Zynga was able to leverage its scale to create its own ecosystem in Facebook.   I have a hunch that mobile gaming is still in its infancy and that there is a tremendous amount of opportunity here.  The Zynga model of collecting payments in exchange for experience (virtual goods) is going to continue to win in mobile.  I think pay-for games with no trial won’t last and micro-transactions will be the way to monetize mobile games moving forward.

4. Online Education

It seems to me that there’s still a gap between how far the consumer web has come and how little the education industry has changed.  Last fall, I worked on an online tutor marketplace with a few entrepreneurs and in the research process we discovered that there seems to be a general consensus that the way we teach and learn in this country is ripe for disruption. Skillshare, Knewton and Tutorspree are all great startups in the space.  I think that there’s still room for new innovations and intend to learn a lot more about the business this year.  With that in mind, if any of you are in the education sector, I’d love to buy you coffee and learn from you!

5. Healthcare

Aside from energy, the $2.5 trillion healthcare industry in this country is the probably the biggest fish in the sea.  The information asymmetries in the U.S. healthcare system create inefficiencies that cost billions of dollars and thousands of lives every year.  New legislation is driving a change in the incentive structure of the business, the intention being that a payment structure can be built to incentivize value over volume (if you want to know more, check out this guest post from Dave Chase on Techcrunch). New legislation often opens up new opportunities, and this space seems ripe for disruption.  I look froward to seeing new startups in this space.  As with education, this is an industry that I’m interested in learning more about.

That’s about it for now.  Regarding education and healthcare, I believe that much of the opportunity still exists because the sales cycle in these industries is long enough to make the most well-funded company with the best idea run out of money.  As Keynes said, “markets can remain irrational a lot longer than you and I can remain solvent”.  I think this holds true in early stage investing, especially when you’re dealing with industries with large leaders that make plenty of profit keeping things as they are.  However, I believe that the impending  federal spending reform will wedge some opportunities in these industries,  making investments in startups more attractive.

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