Venture Investor’s Playbook: Part 3

Identifying and Capitalizing on Macro Market Trends

Chip Hazard; General Partner, Flybridge

This post is Part 3 of a series on Chip’s Playbook of 4 Success Factors for Early-Stage Venture Investors. You can see Part 1 & Part 2 here.

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One of the questions you’ll hear venture capitalists ask about a potential investment opportunity is “why now?”. Said another way, what trend makes this particular company likely to succeed spectacularly at this point? To answer this question at a specific level requires having a distinct point of view on market trends and the nuanced implications of these trends. It’s also essential that your perspective on trends stays ahead of the curve, as when the market direction is obvious to everyone, it is less attractive from an early-stage investment perspective. In other words, the goal as an early-stage VC is to hone in on non-obvious or unconventional trends and back them.¹

For example, in 2008, at Flybridge we had a point of view that cloud platforms represented a major architectural shift in how enterprises were going to deploy applications and that the public cloud was going to be the platform of choice over time. While this seems obvious in hindsight, it was a controversial opinion at the time. Amazon Web Services had less than $100M in revenue, and every major corporation was petrified of the security implications of moving workloads to the public cloud. However, we were confident in our point of view, saw early positive signs across the market and our portfolio, and pursued this theme with conviction.

We further joined this thesis with an understanding that applications were going to be comprised of loosely-coupled components and services. We felt this shift would make the developer the “king of IT”, giving them new power as decision-makers instead of merely being influencers as they would be in a top-down sale to enterprise IT shops. This insight represented the essence of a good analysis of a significant trend:

For Flybridge, this led to our investments in MongoDB, Firebase, Crashlytics, Apiary, Stormpath, Stackdriver and other companies that collectively generated almost 20x returns for us. In hindsight, our mistake was not riding the wave harder than we did. One additional lesson is that when you feel like the thesis is working, lean in hard behind the trend to maximize your returns. (For a painful example of what happens when you ignore this advice, see my previous post on learning from your mistakes.)

At the same time, other investors had a distinct point of view that the smartphone market, after years of being a slow-growth niche, was going to explode and enable new applications that take advantage of the device’s capabilities. This again seems clear in hindsight, but as the chart below shows, it was less obvious in the mid-2000s which way the market would go.

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Investors with this kind of forward-looking perspective were able to see Uber, not as a black-car service but a mainstream GPS-enabled consumer application, and WhatsApp not as an SMS replacement but a global communications platform.

These examples lead us to an important question: what does it take to identify significant market trends before they become obvious? In my experience, it all comes down to being intellectually curious and surrounding yourself with broad networks of talented people. More specifically, some tips that come to mind are as follows:

1. Become deeply knowledgeable about specific topics while continuing to have broad interests. Often times, an insight from area B informs a thesis in area A. Some investors refer to this as being T-Shaped.

2. Meet a lot of entrepreneurs, especially deeply technical ones that seem like they’re operating on the fringe. A dirty secret of VC trend-spotting is that the real insights come from talented founders. Stop to think after every meeting about the patterns and implications of what you just heard.

3. Read a lot. Talk to smart people. Hang out at universities. Go to conferences or small meet-ups on esoteric topics.

4. Always ask the second- and third-level questions, and seek to be continually learning.

5. Be an early adopter. Try new things all the time.

6. Look for platform shifts, not incremental improvements.

7. Welcome being a contrarian or having opinions that differ from conventional wisdom.

8. Build a diverse network that brings insights from other domains, geographies, and demographics.

While there is no silver bullet, relentlessly learning, staying curious, and making connections across opportunities, will help you form your own thesis for what trends excite you now. Armed with these insights on trends and a passion for certain markets, what comes next? Check out Part 4 here on Seeing and Selecting within the venture process.

[1] A further long read on this, largely as it applies to investing in the broader capital markets can be found in the “Dare to Be Great” memo from Howard Marks of Oaktree Capital.

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Seed-stage VC working with entrepreneurs to leverage the power of community.

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