Every year around this time, SXSW provides us with a reliable checkpoint for measuring the growth and evolution of Austin. If you have spent any time in or around downtown Austin since SXSW 2013, you know how quickly the skyline is changing.
I recently read Fred Wilson’s blog post on his waning interest in investing in Pre-Product Phase companies. I’ve always found Fred’s writing to be very self-aware, so this type of post does not surprise me. My interpretation of his post is that he doesn’t believe his personal diligence process is well tuned towards pre-product companies. He states: “Until I can get my hands on it and use it, I have an incredibly difficult time imagining what the thing is.”
He then follows that statement with an expression of where his passion lies: “I really enjoy investing in a business where the product is out in the wild, getting used, and everything else has to be figured out.”
I think this is an interesting framework to think about a VC’s appetite for deal flow.
DILIGENCE CAPABILITIES + PERSONAL (FIRM) PASSIONS = APPETITE
I used this framework and here are the top three reasons Thinktiv likes pre-product phase opportunities:
- We prefer to ask the question: “What is possible with the expertise and assets inside this company?” Many VC’s have a diligence process designed to answer the question: “What progress has this team made and is that progress indicative of future potential.” In order to measure progress, a company has to have something in market and pre-product companies do not. This line of questioning makes sense for VC firms built on financial platforms. It’s an unnecessary question for venture firms built on talent platforms. Since we surround entrepreneurs with talent they don’t already have, we can affect product and marketing outcomes. Therefore, we can base our diligence process on a more valuable question: "What is possible?" The clean slate of a pre-product company is easier to work with. Given we believe we can deeply effect outcomes, we better be willing to invest in on our ability to do so.
- Our diligence teams include designers, marketers and product strategists. We can “see” and paint a picture of a product, marketing strategy and company we’d be excited to build using insights from a multi-disciplinary diligence team. In fact, the headline picture of this post is Alex, one of our product strategists. This is unusual and is only available to firms that have built this into their platform. If the founding team we’re talking to is excited about the same picture we are, then we’ve got alignment. If we have alignment, then we can discuss capital strategy and whether Thinktiv + founding team is a unique weapon capable of creating a category leader. If it is, then we are willing to invest in our ability to create a category leader, together.
- Our talent platform is comprised of people who love to create. Most people at Thinktiv love to create. Whether it’s product strategy, design, brands, code, we’re culturally wired to want to create and launch new things. We are less likely to be excited about operating things that exist in market. Those are valuable tasks and opportunities, but they’re not for us. 100% of the companies we work with have a product to create or a new market to address with an existing product, or both. There are no exceptions to this rule. It’s where our passion lies.
If you're raising money for your startup, what do you want to be part of your investor's diligence process?
The Bitcoin protocol creates a rare opportunity for entrepreneurs and investors to partner on a technology platform that's likely to be a root level service of both online and offline business for years to come. As it relates to the Internet, Bitcoin is a trust network, a decentralized exchange that can be used for a variety of transaction types. Specifically, however, the embedded distributed ledger creates a number of advantages that entrepreneurs will be able to exploit for years to come. Many of them are explained extremely well by Marc Andreesen here.
" ... Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate." - Marc Andreesen
These are important advantages, and they become even more powerful when you overlay the transaction capabilities within the Bitcoin protocol. Bitcoin can support simple peer to peer exchanges, but it can also support more interesting transaction types such as time-locked transactions (send X to Y on the following schedule) or, the most mind-blowing (but perhaps not the most commercially valuable), data driven, conditional transactions. Imagine a world where weather bots, and a Google search are combined to monitor real-world events that catalyze funds disbursement?
If this isn't reason enough to be excited about the potential for venture returns in the Bitcoin ecosystem, we also look forward to advancements in Bitcoin mining technologies. "Miners" provide an invaluable service in the Bitcoin ecosystem. They add and verify transaction integrity in the block chain and are rewarded with a steady stream of incoming Bitcoins. This ensures that Bitcoins are distribtued in a decentralized manner.
This ecosystem is new, and I suspect by 2016 it will be one of the larger segments of venture investing. In Austin, BitAngels, an incubator focused on startups with Bitcoin-related revenue models has set up an office. I'm ecstatic they're here. I've long been a proponent of specialized accelerators and I could't be happier that there's a BitCoin focused incubator playing in Austin. I can't wait to talk to dozens of Austin companies focused on Bitcoin innovation.