I’ve been thinking a lot about investment theses and their development and use over these last few months. As I observe some of the theses that I’m investing against now, I find that investment theses move through a cycle similar to Geoffrey Moore’s Crossing the Chasm technology adoption life cycle model:

Source: Powerpoint-Templates on Slideshare
The earlier we develop a thesis, the further left on the graph we are. Thus, we truly are “Early Adopters” of this thesis because practically no one else has spotted yet, or very few. As we invest, we approach the chasm. This is where we find out if our thesis is right or not; if we are wrong, the thesis hits the chasm and falls to a brutal market death (taking our investment dollars along with it). Internet startups in this phase tackle the broad market since it is wide open with almost no competitors.
However if some of our investments start to do well, they gain market notice. Now other investors start jumping on the bandwagon. They too start to fund those startups which fit the thesis. Other (less imaginative) entrepreneurs start to see that startups got funded in a certain category before them, and they join in building startups too seeing that the investor community is beginning to favor these startups and raising money for them is easier. For internet startups, this begins the explosion of startups who start niche-ifying the early companies who tackled the broad market and try to do better by attacking a smaller segment more effectively than someone who is trying to satisfy the broad market. Series A investment rounds start populating the early startups who are still operating. This phase is the “Early Majority.”
Now the early startups have survived and gained a lot of traction and are making money and/or generating excitement by their growing size. Later stage VCs start funding series B and beyond, infusing large amounts of growth capital to companies whose traction has largely been proven. Still, entrepreneurs begin companies that tackle the space; for internet startups, this means not only further niche-ifying but also additional feature development for those things we wish the giants would do but do not have time to build.
At the end of the cycle come the laggards. This can mean simply that there are those who believe that they can still find some startup that can survive the existence of heavy competition that can grow to great heights. It can also mean that the next phase is IPO, as the largest of the companies drive towards the public markets and the stock market takes hold, which usually means there is significant traction and revenue generated. But paradoxically, once companies become big, history has shown that they stop innovating and then it can be a great opportunity for new investment theses to develop in areas where opportunity was disappearing not too long ago.
When I applied this to the theses I had been using up until now, I realized that two of my theses were racing along the graph now. And that was when I also realized that one of my theses was quickly moving beyond us.
What do I mean by that? As an early stage investor, we need certain parameters to fall into place for us to execute a meaningful strategy in selecting investments. One of these is the fact that startups we select must have market conditions maximized for their success. In the case of one of my theses, and when I applied this chasm graph to it, I realized that the market had definitely jumped the chasm a year or so ago and we were racing up through Early Majority and into Late Majority. When this happens, it means that there is still a market opportunity but just that this opportunity is not as viable for us at early stage as it was before. Mostly, this is because companies who emerge in this thesis category require a ton of capital to survive the market dynamics of fast, easy competition and a consumer attention problem of enormous proportions. You essentially need a lot of capital simply to go out and buy users to accelerate the customer acquisition process or else your chances of surviving by utilizing free methods of acquisition are too slow. At early stage, we simply cannot do things to move the odds in our favor any more; these investments become the province of those with a lot more capital than us.
Can you guess which of my theses I refer to?
Developing investment theses has been a fascinating exercise for me. However, now that I had developed some, it is even more fascinating to watch how I apply them to my investment strategy, see them evolve through years (sometimes months now), and then go through the mental and emotional exercise of dropping them when they are not valid for us any more.

Richard White CEO of Uservoice posted a great read entitled Revenue could be fatal: 3 reasons your startup should consider waiting. Check out the comments and see a snapshot of the emotions that are stewing around the net right now (see more on Hacker News). All of this is on the heels of Instagram being purchased for $1 billion by Facebook. How is that fair? How can that be? A startup making no money being purchased for $1 billion! That sucks right?
I feel for you. Some of you are truly toiling away at a startup that makes real money. Some of you are trying to build “Instagram, the Sequel”. Some of you get a lot of VC love and are showered with money while others can’t get a dime. It’s not fair, right?
Let’s not forget investors. So many are quietly or noisily looking for the next Instagram now. Many are bemoaning the fact that they missed that investment and now they shift to go looking for the next one. Darn it, my previous investment strategy made perfect sense – how crazy is it to see that lucky set of investors make off like a bandit on a bullshit company that doesn’t make any money!?! Life blows!
Well, here is some perspective. First, read this post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy. It was at that Startup2Startup that I had that first AHA! moment about how the broader market can affect an entrepreneur’s strategy on creating a company.
Then I met James Robinson at RRE Ventures who has been investing WAY LONGER than I have and through many market cycles. This prompted this post, Time Diversification: Strategy for Investors and it showed how important it was for investors to watch the market and adjust investing strategy accordingly.
So put the two together and you have a marketplace for startups and investors that can vary widely over the years.
It makes sense that you should just build a company with real revenue. In fact, in the hyper-risky world of startups, this is the conservative approach. Find a great idea, build it, make money, we all get rich. That works fine every time.
But the markets can be really nutty. There can appear times in the markets where it makes sense to build a company for other reasons, potentially not for revenue. As Mark Fletcher had noted, there were times in the past when it made sense to build for acquisition. Pre-2008 most of us were investing in startups whose goal was to get a million users before their money ran out and raise the series A; this seemed to be the norm amongst startups at that time. Thus, a bunch of my startups that raised money right before 2008 and whose money ran out in late 2008/early 2009 were sunk. The economic crisis of 2008 hit and it was nearly impossible to raise money unless you had revenue. A bunch of my startups died during those years which totally sucked. Now the markets have changed again.
As Instagram has shown, tremendous value has been created in a company that makes virtually no money but then became a threat to another company and thus got bought for an exorbitant amount of money. There have to be buyers with the appropriate resources and reasons, competitive conditions which drive those purchases to be made, and sometimes a lot of luck to be an employee or investor in the acquired company. Market conditions were right for this happen; they may have had this fact in mind, or maybe they just fell into it when Instagram took off.
Try this in 2008-09 and you probably would have failed to get funding. Could Instagram have survived through those few tough years? Maybe they could have; maybe they would have died.
So now I’ve been hearing word that investors are out looking for Instagram-ish investments. Doesn’t make those companies raising money with real revenue feel any better when they don’t fit the “momentum play” mold. I would, however, say that feeling hatred and jealousy is natural but it’s time to let go and learn from this.
You need to watch the markets like a hawk. Like Mark Fletcher, he adjusted his startup building and fund raising strategy according to what the markets were like at that time. You go out and try to raise for one type of startup when the markets are looking for another type, right or wrong, and that means your chances of raising a round could actually be much less! (We pesky investors just love to follow the herd and be ultra-risky.) So much luck is bound in this business that the timing could just shift on you and you’re dead in the water – or you just hit the jackpot by raising at a momentum level valuation.
For us investors, we need to also watch the macro conditions and decide how we’re going to invest. Some investors will look at their strategies and available funds and go for what is hot now. Others will stick to their guns and be more conservative. Higher risk = higher potential return…or higher loss. Losing all your money in bad investments is bad enough when it’s your own money; it’s career ending when you lose your LPs’ money. Or you could be one of the investors in Instagram and now you’re a hero. Which one will you go for?
But for each of us, getting cranky, jealous and hateful isn’t productive. For me, this is whole ecosystem is fascinating and why I enjoy being an investor. It is a huge challenge to me to play in this topsy-turvy, ever-shifting world. Will I be right? Will I make the right decisions? Or will I lose everything? How can I be smarter and better than everyone else? Will I be lucky? Have I created enough luck? By the way, these decisions I make today may not have results, good or bad, for months, maybe even years. Timing is nearly impossible. Never hating, always learning and improving.
The pace of change is incredibly fast now. Launch Capital’s research into the megatrends revealed that the speed of these changes is only going get faster. It can be bewildering to think that investing in revenue generating startups was in vogue only 2-3 years ago and now people are chasing startups that have momentum in users, revenue or no. It could be mere months when the next big shift happens.
I, for one, am enjoying the ride on this rollercoaster and patting those on the back who manage to make money no matter what the market conditions are at that time.