The Birth of a Venture Capital Investment Thesis

As a new VC, I often ponder the investment theses that drive other, more established investors. I look at their clear focus, specific direction, and well-articulated investment goals with a bit of envy. I’m not sure how other investors were able to develop their strategies. However, I wanted to share my thoughts on why Deep Space Ventures has thus far primarily focused where we have. We are a seed and series-A investor and we started out with a B2B focus (which we still have) and we have recently started building a portfolio, and a thesis around the Esports space as well. If you’re a founder in one of these spaces with a seed stage business, then we want to meet you.

Hopefully, this blog post is helpful to some other aspiring early-stage investors out there and maybe even helpful to some founders who are curious about why some investors are focused on “this” or “that.”

Bottom line up front: We invested our way into both focus areas and will find our third thesis the same way.

I’m just as curious as you may be, to figure out what our third focus area will be and when we will know it! Frankly, we didn’t call them focus areas until we had completed 2–3 deals in each space. Below is an explanation of how we got here, and a few anecdotes from my experiences as a first-time early stage investor on my way to developing multiple investment theses.

B2B Enterprise Software and Services — Our First Thesis

When I first started seed investing in late 2015, I sought direction, even if it was fabricated or maybe even not the perfect direction. My intent was to avoid drowning in a sea of opportunities. Combining my investment banking experience (working with large cap public companies) and my location (I’m in Texas, home to the 2nd most Fortune 500 Companies in America, second only to NY and that gap is miniscule — 55 versus 54), I rationalized that investing in startups that sell B2B software and services could make a lot of sense.

Fortune 500 Companies by State in 2015 (https://www.geolounge.com/fortune-500-list-by-state-for-2015/)

When you consider the cost of living in Texas (lower burn rate), the proximity to corporate B2B customers, and the vast amount of talent in the area that knows how to sell into these companies, it seemed reasonable that investing in capital efficient, local B2B startups made sense. Our B2B focus has expanded outside of the region lately, but our access to local large cap customers as a value-add for our portfolio companies remains, regardless of where the startups are located. In fact, often times, during diligence I like to make an introduction to a potential large B2B customer, and then get their feedback on the startup.

There you have it, our first thesis. Is that how everyone else comes up with their investment focus? I couldn’t tell you. At the end of the day, I learn by trial and error. I’m alright with running in a direction, the wrong direction sometimes, and banging my head against a wall to find out I need to go the other direction. That’s how I learn. That’s how I find my way in the world. People with more intellectual horsepower probably avoid doing it that way, but those people aren’t me.

I’m not sure if that was the right formula to start investing with or not, but I’ll let you know when the feedback loop closes in about 6 more years (or longer). We recently added our second “thesis” or “focus area” which is Esports. Seems kind of random when you consider we started off as a B2B SaaS investor — I’m thinking the explanation below will be helpful for some new early stage investors.

Esports — Our Second Thesis

In September 2016, I attended the Tech Crunch Disrupt conference. I had only been an early stage investor for half a year at this time. Conferences like this give me (and other new investors) a great opportunity to gain market awareness. Often as a micro-VC living in a “flyover city” you have blind spots in terms of market awareness. Going to conferences helps with that issue as it gives you in-roads to other ecosystems where you can learn about the problems those founders are solving and maintain more situational awareness.

I met the founders of Mobalytics mid-way through the conference and really loved their business. They ended up winning the Disrupt Battlefield pitch competition. After the conference, I called one of the founders, not sure if they would even remember me after they had Founders Fund, General Catalyst, GGV Capital, Almaz Capital and others lined up to invest.

That phone call went great. In fact, I later asked the founders why we even got into the deal (considering how strong the cap table is with top tier investors), and he told me that it was a genuine approach and a sense of hustle, as well as a personal connection that made him go back to his partners and ask for us to get an allocation. That right there, is how new early stage investors (micro-VCs), can get into the best deals. Hustle alongside founders, be authentic and let them know you that empathize with their hustle because you too, are a startup trying to get traction.

Time to step away from the Xbox man!

Back to the Esports thesis: I grew up playing video games, and being told by my parents to not play too much or my eyes would be permanently damaged (I would stay up playing Zelda, and Kung Fu on NES at all hours of the night). While I’ve never been a great gamer, I do love gaming and use it as a way to decompress after a long day.

On top of my personal interest in the space, I realized really quickly how big this market is (more people watch League of Legends world finals than the NBA Finals), how early we are in the evolution of the market, how fast it is growing, and how intensely passionate the individuals who comprise this market are about playing, improving, and following the space. This drives a level of engagement with the end user, that I can’t find in most other markets. The ability to play the game, be in the game, watch others, and play against anyone in the world, at any time, is unlike any other hobby, sport or pastime. I don’t think anyone will argue about the market dynamics from an early stage investment point of view, so the focus now is on where exactly to put money to work within the sector. This is a chicken or the egg situation, so our approach, is to put money to work, then find our way and put more money to work.

The level of insight gained from being invested in a business in this space, was far greater than if I had just done some reading on the space, asked an intern to research the sector, or taken another investor at their word about Esports. This was the birth of a thesis. An observation born out of personal experience, personal interests, and visibility into the inner workings of one of the hottest startups in one of the largest, fastest growing markets out there. As I said in the intro, I invested my way into this space, and the requisite knowledge to build a thesis around Esports came as a dependent variable in that equation.

Couple of major takeaways here for aspiring early stage investors:

1. Learn by doing — try, fail, and change directions. Don’t be paralyzed by over analyzing and slow decision making processes. Avoid analysis paralysis. You’re going to make some bad investments, so go make them, and start learning from them. Go explore, invest, learn and see what happens.

2. Hustle your ass off — you want founders to say things to you like “you really get us and what we are going through” when they see how you operate. That’s what will get you into great deals.

3. Do it differently — for so many reasons, do not copy the way someone else does it (unless your fund strategy is to just invest alongside other successful investors, in which case, have at it), rather go find your own way and don’t let anyone tell you you’re doing this wrong, because even the most successful investors have more losers than winners.

4. Focus on learning and meeting people. Those are the most important things you can do every day. It’s similar to Thermodynamics, in that the more you know, the more you know (the faster you go the faster you go — increase airflow to a compression ignition engine, and it goes faster, and thus increases airflow, and thus goes faster, just had to toss in some engineering nerd talk there).

In conclusion, I think the interesting thing will be the answer to this question: What will be our third focus area? When will we know what it is? I’m just as much in the dark on that as anyone reading this!

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