The Makings Of A Third Haystack Fund

When I started my first fund, a long-time VC I respect asked me a question which still remains unanswered: “What’s your view of the world?”

Damnit. That question really stumped me. Still does. Partly, I wanted to have a good answer to respond to this person’s question. Mostly, as the years have gone on, I still think about the question and yet don’t have a great answer.

More likely, it seems, I feel like the Joker in The Dark Knight, a dog chasing cars — I wouldn’t know what do with one if I caught one. Jokes aside, it’s a discord I’ve struggled with — it appears from the outside that investors have to picture a future world and find investments that fit within that lens. But, what do I know? I don’t know how the world will unfold. I can understand how concepts can shift over time, how we may move toward decentralized networks after years of centralization, or how our economy may shift from consumption-based to sharing networks, and so on.

Many investors over the past few years have invested in these concepts — myself included. While I don’t know how the future will unfold, what I do know is that I don’t know. I have no idea. The best I can do is (1) survey the current landscape and (2) find markets which I believe will open in dynamic ways over the next 3-5 years and then, (3) put my money where my beliefs are.

Like the dog chasing cars, I find that while I can be seduced by concepts, I do like momentum, I do like to spot things that have their own organic kinetic energy — those things could be people, it could be markets, or it could be an approach to a type of product or service. When everyone has a startup, momentum may turn out to be a good differentiator. Put this way, my role could be reduced to trying to find these pools and pockets of organic kinetic energy before other people, and helping those technologists and teams to harness and focus it to create even more value over time.

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So, as 2015 comes to end…

I find myself thinking about all of this again. At the end of year here, I try to identify a startup which has truly broken out into the mainstream or large enterprise value. The past few years those companies have been Stripe, Snapchat, Slack, and for this year, one could argue the likes of Zenefits, among others, but I’ve been struck by another phenomena: That the very best big, public technology companies are operating and executing at breakneck speed. They’re growing, and they’re already big to begin with.

Consider that the following companies — Microsoft, Apple, Amazon, Google and Facebook — are all at or near all-time highs in the public markets. Massive new networks like Airbnb and Uber lurk in the private markets, all but public companies themselves, save for a few years, and surely they will reach even greater heights at network operators with limited overhead and no inventory on the books. Of the seven companies, most are still founder-led and most CEOs here are quite young, relatively speaking. Each of the seven companies possess some kind of current (or future potential for a) network effect, which if they hold true, could compound their growth in the future. It used to be that asking a startup “What if Big Company X does this?” wasn’t a fair question because startups could fundamentally attack incumbents — but now, asking “What if Facebook or Uber does this?” is a very fair and real question for investors to ponder. These companies have tremendous resources and talent, and they know how to execute.

My thinking here solidified over time as I read more posts from people I respect. In NYC, Arnold Waldstein wrote on his blog: “

The big platforms have a soft lock on our behaviors, a hard lock on our data and as creatures of habit, a solid spot in the premium brand positions on our phones….How often do you change your messaging, commerce, social, transportation, financial and entertainment apps on the first few screens on your phone? Mine are locked in…If this is idea is true (and I think it is), if the innovation pipeline has shifted its access point and the consumer their propensity to adopt new brands, we are definitely in a brand new world…Can they get us to install another app tied to our credit card when everyone already has Uber installed? Can they be that much better to give them a spot on our front screen in transportation row?…How does this dynamic change the core promise of the web that it is indeed possible for an individual to change the world?

Next up, Sarah Tavel writes on Medium, “Going After Dollars vs Minutes”:

Hunter Walk reminded me that in a zero-sum world of only so many minutes in a day, blank spaces to absorb those minutes must come from cannibalizing other minutes, either from online or offline. When the smartphone was new, it was a lot easier to steal offline minutes and bring them online. Now, these opportunities are harder to find. Of course, there is a constant flow minutes from one app to the next, but FBs/YouTubes continue to increase their share of the ever expanding pool of smartphone minutes.

Fred Wilson recently wrote on his blog about the winner-take-all dynamic in network effect businesses:

This is an issue for society to ponder. As I have spent time in Europe this past month, it’s easy to see that the search engine they use here is Google, the social graph they use is Facebook, and so on and so forth. If the US produces the networks that win most of the market, that’s an issue for the rest of the world. The Chinese have dealt with that issue by protecting their market. The rest of the world (mostly) has not.

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So, here I am, with 2015 coming to an end…

I’ve started investing out of my third fund, and with each fund, I try to again be that hungry dog searching for cars. Again, while I have no monopoly on knowing what the future will bring, I am ultimately judged, in part, years later about how well I pick today. Since I don’t have a view of the world or a crystal ball, the best I can do here is survey the current landscape and pick markets that (1) I believe will be open, in a big way, over the next 3-5 years and (2) markets that I have a personal, genuine, intellectual interest in — #1 is important because if I pick the right markets, the gravitational effect of those markets can lift up great teams to new heights; #2 is important because founders intuitively sense when they meet an investor who is genuinely interested in their sector, has an informed point of view, and can demonstrate the ability to invest fueled by conviction for the long-term.

The net result of all of this thinking — a glimpse into my brain works and refries itself — is that I have, for the first time in my short investing career, identified a few key markets I want to invest in for my Fund 3. I’m excited about this because I’ve never come to this level of focus before. I wanted to write it down to broadcast to the founders out there who are in these sectors, but also because I wanted it to cement in my brain, because I know investors are like baseball hitters in that they can go through slumps. Just this past summer, I lamented to a friend that I felt like I lost my ability to pick. Fast-forward to today, I feel much more confident about what I’m looking for and why. Those areas are:

One, The Industrial Internet Of Things: There are a few flavors of startup I’m investing here in this category. Some are defined by building low-cost, low-power distributed sensor networks which help heavy industry capture, analyze, and act on new data; the revenue models here could be thought of as monthly “hardware as a service” (e.g. Filament). Some startups in the Industrial IoT sell design, collaboration, or machine OS software to help with new areas in 3-D printing (e.g. Tempo Automation, Material), surveillance (e.g. BetterView), vertical-specific solutions (e.g. Compology), security monitoring (e.g. AquaCloud), and more to come.

I got more excited by this space because (1) it combined some trends I am interested in (distributed networks, sensor intelligence, cloud computing, data moats); (2) the founders it attracted were not only whip-smart, but educated in an interdisciplinary manner across engineering and design; and (3) with over two-thirds of the world’s parts and infrastructure not connected to the Internet, it struck me as a potentially massive market with a customer base who is most-certainly willing to pay for the right solutions.

If you’re a founder or early-to-mid-stage VC/investor interested in this space, please contact me ASAP.

Two, Enterprise SaaS: This is the bread-and-butter of traditional VC, and who am I to buck convention here? When so much money is being pumped into moving atoms in the real world and out-executing the competition that goes 5-6 deep, investing in pure B2B software seems like a good idea. But, it’s too easy to say “I invest in SaaS” because, deep down, everyone does. How does one go deeper?

I go deeper by adding very specific filters. I am looking for SaaS teams who are creating new categories (e.g. Tesorio), who can build their own data moats (e.g. SecondMeasure), who bring machine intelligence to their offerings (e.g. OneConcern), who are not afraid of going after big enterprise or the low-hanging fruit inside governments (e.g. AquaCloud). If you’re a founder building a new SaaS product and fit into one of these buckets, I definitely want to meet you ASAP.

Three, New Consumer Technologies: Like any balanced portfolio, I cannot forget about consumer entirely. But, given what I’ve written above, given the strength and operational abilities of the incumbents, and given the shift from minutes to dollars, I have to focus my consumer tech investing a bit more. To that end, I am looking for startups that can (1) siphon off, intercept, or help redirect consumer spending on healthcare (e.g. Remedy); (2) bring technologies to mobile messenger platforms, which are major containers of mobile consumer activity worldwide; (3) build critical infrastructure for emergent consumer behaviors around virtual reality (e.g. AltspaceVR); and (4) simply bring together teams and designers who are talented and have a strong point of view of how they’d like to change (or challenge) consumer behavior.

I am happy and willing to take more risks here. I don’t want the fund to be an entire cookie-cutter of startups, and as the dog who chases cars, I won’t know well enough to know how something will turn out. As a result, I look for specific concepts or teams or people or ideas or whatever works. Lucky for me, being an early stage fund now that’s a bit bigger with some experience, but not asking for big ownership, I can build a more diverse portfolio based on a mix of what I see out in the market and what comes my way. I may be quicker to say “no” as I evolve my filters and focus, but it also means that when I say “yes,” I can put a little bit more meaning behind it, and hopefully, one day, have a better answer for that nagging question: “What’s your view of the world?’

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus