Welcome to Venture Desktop, a new weekly audio(ish) thing I am trying out where I look back at all the stuff I worked on over the last week and try to pull out some learnings from what I am picking on the ground as I think about, invest in, and work with companies that are building the future of work, wellness, media, cities, and industry.
It is not long form, but it is a deep dive and if you are interested in or work in the areas mentioned above, I think you will find it valuable. Below the video, you can find all of the links I went through in the recording.
This week, I dive deep on Spotify, the exploding audio market, and a concept called Business Model Leverage.
Spotify, the audio market, and business model leverage
9 key ways the world of the wellness-driven consumer is evolving.
We are living through a transformational cultural unbundling of consumer preferences driven by the rise of the wellness-driven consumer. The wellness-driven consumer is more informed and more principled than ever before and is increasingly seeking to engage with products and activities that integrate and elevate the experiences of work, health, and community.
This shift has — and will continue to have — a profound shift on the global economy and on the way early stage companies are built and funded.
It is also such a dynamic, organic space crossing so many different industries and demographic boundaries that trying to understand it from a top down perspective with too many preconceived categorizations is nearly impossible.
Instead, I’ve tried to take more of a bottoms us “trend following” approach…deeply understanding a few key catalysts (people, behaviors, companies, etc.) that are driving an outsize change around how, what, and where consumers are engaging with wellness-centered lifestyles and hoping that those guide me towards more interesting people to work with and companies to invest in.
Here are 9 of the major waves I’ve been following closely.
1. Wellness Education at Scale
A day before Lambda School announced its large Series B funding round, I wrote about building the “Lambda School for Personal Wellness”, based on the idea that improved wellness has a strong impact on one’s long term earnings potential. While the tie between better health and career success is clear, I believe the impact of quality education and behavioral change at scale would blow us away in terms of it ability to drive increased collective productivity and, as a result, collective quality of life.
Within the wellness world, there are many forms an educator at scale could take but my guess is that companies will find success by bundling the product elements that have made so many digital fitness and wellness communities sticky and successful with an aligned business model that allows for scale beyond the 1% to close the massive impact gap that exists in the market today.
2. The Digitally Native Holding Company
Companies that own the relationship with their audiences by developing effective “audience loops” — scalable ways to engage customers via direct conversation and real-time demand identification that drives nimble distribution — have the potential to grow faster than ever from single product companies to Digitally Native Holding Companies capable of delivering a wide range of products and experiences to a core set of customers.
This is true for both digital and physical product companies and my expectation is that we will see a faster pace of new product development and vertical integration from early stage companies that find product market fit with a targeted customer segment as they prioritize selling new products to that core segment over scaling a single product to new consumer groups.
3. BIG Subscription
While the section above is mainly about startups expanding their product suites early in the company lifecycle to capture a bigger share of wallet, Lululemon seems to be taking a similar approach — going deeper with its core customers through a subscription model test after years of outward expansion to capture a broader set of demographic segments.
howardlindzon made the very interesting prediction that Lululemon or Nikewill buy Peloton during 2019.
2019 prediction – $lulu or $nke buys peloton. I hate peloton storefronts btw…i think they are a fail in current configuration
I think that is entirely possible but believe that the M&A aggressiveness Lululemon shows will be largely dependent on the success (or failure) of their subscription experiment as they roll it out to a broader audience.
If the subscription model has legs, it will be a strong indication that Lululemon’s ownership of the customer is strong enough that they can push through the product they want on their terms — without having to resort to an 11-figure M&A deal — and may even spur them to build out their own digital products.
If the subscription model is less successful, they’ll be forced into a more defensive position as it will indicate less of a stranglehold on the customer wallet.
Companies like Nike, Adidas, and others across the apparel, equipment, and wellness facility markets will take a similar approach…test out new business models and customer engagement strategies, then resort to aggressive M&A if those don’t work to buy direct customer interaction points if (more likely when) those fail.
On the other hand, many wellness-related influencers have done an incredible job of “leveraging followers as low-cost distribution to launch their own products and services” (as Brianne Kimmel put it in our Twitter discussion). People like Kayla Itsines (Sweat With Kayla) and Andy Puddicome (Headspace) are examples at the high end of the market.
Good stuff, I'm short 'influencers' who get paid per post and let brands dictate their work and long 'creators' who leverage followers as low-cost distribution to launch their own products and services.
There is also an exciting long-tail, micro-influencer opportunity to help coaches, instructors, and trainers “scale their time” by providing them tools to engage, grow, and monetize their client-base and gain control over their business and the impact of companies building in this space will continue to grow in 2019.
5. Boutique Fitness 2.0
The boutique fitness segment has experienced massive growth over the last decade and with the maturity of the market we are starting to see significant consolidation — both with the studios themselves being rolled up by players like Xponential Fitness and the increasing speed of M&A on the “picks and shovels” side of the market with the recent Mindbody acquisition by Vista and ABC Financial’s acquisition of Brazilian market leader Evolution W12.
There are a ton of directions in-person fitness experiences could go — Outdoor is one angle I’ve seen pick up pace, “Talent Platforms” not focused on any one activity type are another. Experiences that stretch beyond the four walls of a facility — wellness-driven travel, for example — is another exciting area. The multi-functional trend which incorporates wellness with work and social life (We Work, The Wing, etc.) should also spawn vertical focused entrants capable of picking off new adjacent segments over time.
Life Time Fitness’ CEO Bahram Akradi recently participated in an interesting interview with Tech Crunch which indicates that forward-thinking incumbents won’t cede ground and may have some built in advantages when it comes to building spaces that allow customers to live a more fully integrated life centered around wellness.
6. Legacy Experience Embedding
While Life Time Fitness, which occupies a slightly higher end of the market, has remained profitable over the years and is still experiencing double digit top line growth, the middle of the gym operator market has fallen out.
The gym operator market has very direct parallels to the retail market where discussion about the implications of Amazon and accelerating Ecommerce growth have been ongoing for at least a decade.
In the same way we have massively overbuilt retail space in the United States, we also have far too many underutilized gym and wellness spaces and there is an opportunity for taste-makers and community builders to scale their impact outside of city centers and into suburban and rural areas seeking in person community that is sorely lacking.
The model here would be similar to what b8ta has done with Lowe’s or…given that the instructors themselves are often the product that gets customers hooked and keeps them coming back, maybe there are some learnings to be drawn from the way a company like Faire has scaled its impact on Main St. America in such a short period of time.
7 . Internationalization
In my recent post about “Investing in Bien-Être”, I wrote that global distribution platforms, converging consumer tastes, more efficient business models, and emerging technologies are breaking down many of the geographic barriers to building passionate communities and as a result companies are being built and scaled around the world to capture value from this dynamic market.
This is a trend that will surely continue with content-related companies support different languages or cultures from the outset and a new group of companies springing up to support companies looking to go global with physical products or digital experiences.
Given my role as an investor based in Paris aiming to help companies make the Europe to USA jump (and vice versa), I’m particularly interested in this trend and will be following closely.
8. Stress and Sleep
Two books — Why We Sleep and The Upside of Stress — seemed to capture the attention of many influential technologists over the past year, which has driven a lot of conversation (within a niche community of investors and founders) around the opportunity for companies to improve our relationship to sleep and stress. I’m fascinated by the interaction of all of these core behaviors — sleep, exercise, proper nutrition, mental health, etc. — and am always trying to figure out (for myself and at scale) which are most impactful as a starting point for better health.
On that topic, my friend David Vandegrift made a great point…
I think it's easy for high achievers to identify lack of sleep as a global problem, but isn't obesity like the top of cause of premature death in the U.S. now?
Today, 64% of Americans want to lower healthcare costs but 80% don’t meet minimum exercise requirements. This inactivity costs the US economy nearly $30b per year in medical expenses and lost productivity. Globally, the figure is a staggering $70b. Similar figures can be pulled for nutrition, sleep, and other parts of the wellness puzzle.
It is clear that the traditional health care system is inadequate…that’s not a controversial insight to anyone.
This inadequacy is starting to be met more and more by entrepreneurs building “digital practices” that, while often still loosely tied to the existing system, are building experiences that will allow them to scale their impact beyond the limitations of the current paradigm.
Mental health seems to be the place many founders are starting but I’m also very interested in digital practices that leverage other behaviors or solutions (maybe around nutrition, fitness, relationships) as their keystone pivot point and grow from there.
Those are 9 of the major things I’ll be following closely over the coming months and believe will make significant impact on the way wellness-driven consumers live their lives…there are many more I’ve missed here to be sure.
If there is anything you’re working on or seeing that aligns with these 9 areas or that I missed and should be keeping an eye on, let me know on Twitter, in the comments, or via email (brett [at] technexus.com).
Venture capital in its traditional form is an amazing product for the right companies (and a great career path for the right investors). This is proven out in the data, as the industry’s impact punches above its weight relative to how much capital is deployed in the sector. A 2015 Stanford study found that VC-backed companies were responsible for 57% of the market capitalization of all US companies founded since 1979.
Over the last decade, institutional investors and corporations deploying capital have looked to the technology sector for growth that they’ve struggled to find elsewhere and at the same time, as the common trope goes, every company new and old is now a tech company.
This expansion of interest from investors that back VC funds and the seemingly consensus perception of an increasing market into which VC dollars can be deployed has led to the record influx of capital into VC firms that anyone reading is likely aware of.
But venture capital can be a very blunt force tool and one element of the “every company is a tech company” market expansion that many LPs, VC, and founders under-indexed on for a long time was the idea that some of the technology and technology-enabled startups being built would be better served with more targeted financing arrangements more suited to the markets they operate in, the products they are building, and the goals of the founding team — especially at the early stages since the decisions made at the outset around whether to jump on the venture track or not have an outsize impact on the long term arc of a business.
The ecosystem’s need for more aligned capital options is starting to be met by a new wave of firms, investing what I will call Precision Capital.
Before jumping into Precision Capital, I’ll quickly comment on the notion of 3rd Wave referenced in the title. Essentially, I see Precision Capital as an evolution of the early stage venture model building off of the Partner-Driven model pioneered by firms like SV Angel and Floodgate and then off of the Platform model brought to life by First Round and others. I defined those two categories in a Twitter thread on the topic and believe there is a ton of innovation happening within those two segments of the market as well.
Classic seed stage venture model pioneered by the likes of Uncorked Capital & Floodgate. Individuals/small groups of full stack investors that excel at Sourcing, Sorting, and Shepherding (h/t @jeremysliew) & have intentionally stayed small to deliver that core service.
Firms aiming to scale their impact for either underserved founder groups or underserved elements of the founder experience. First Round is, of course, the pioneer here and there has been a lot of innovation in various directions over the past few years.
The idea that early stage ventures can and should pursue other forms of financing beyond typical VC is not new.
As CoVenture’s Ali Hamed noted in his recent post about Equity Efficient companies, SaaS loans and venture debt have long been a piece of the capital stack and are becoming more and more prevalent with the growth of SaaS Capital, Lighter Capital, and Clearbanc among others.
These firms are early players in the Precision Capital segment of the market, where firms bring to bear a holistic capital stack tailored to the specific needs of companies in a certain industry or with a certain business model and intend to become a one-stop shop for most or all of a given venture’s capital needs — if not forever, then at least until the company reaches a scale where traditional late stage or public market financing options are available and applicable.
The idea is to give companies the option to get off the VC track or avoid it in the first place while still seeking high growth and global scale (have your cake and eat it too, I guess).
The long term commitment to a specific vertical or type of company in need of new capital solutions allows these firms to establish a unique data set and deep operational capabilities with companies in the space and, over time, pull more and more promising ventures away from the pure-play VC track and into their sphere.
By offering alternative financial products (non dilutive capital, revenue agreements, etc.), the model also has the potential to shift the risk/return curve for LPs looking to access growth in industries where technology is playing a bigger role but who are not interested in the power law dice roll of traditional venture capital or unable to get into top tier firms in the previous categories.
The combination of these elements is what distinguishes Precision Capital from vertical focused venture funds or “quant” oriented VC-track efforts that are actually (very interesting and needed) evolutions of Partner-Driven or Platform Capital models.
To be clear, a lot of this will still look like venture capital in the near term and not all the firms will run the exact same playbook (just like in more traditional VC).
This is because proving out a successful Precision Capital strategy will require firms to first show they possess a traditional VC skillset — sourcing, selecting and supporting great companies — that is supported by a unique structural edge. They will also need to exhibit patience and a repeatable framework to build a long-term data asset that can be used to underpin new financial products.
One exciting example of the Precision Capital model comes from Urban.us, a great firm focused on backing early stage urban technology companies. True to Precision Capital form, Urban.us started off with a small seed stage venture fund before expanding to run an accelerator with Mini, the automaker. The success of these two efforts have given Urban.us the credibility within the markets that matter to them to start branching out and playing a larger role in the non-equity pieces of the capital stack for the companies they work with.
Exploring the growing universe of non-equity options for startups ways by providing non-dilutive funding to operate fleets of EVs and residential batteries or to find funding for co-living projects. We see a growing list of emerging city assets that could be financed without requiring founders to sell more of their companies.
Other examples include Circle Up (Ryan Caldbeck), a firm whose quantitative approach to CPG investing has already helped a large number of companies take a different approach to growth, and Indie.vc, whose equity model is less dependent on chasing large follow on rounds and generating billion dollar exits.
In addition to these firms and others like them, I believe there are interesting ways for family offices and corporations to run the Precision Capital playbook and will write more about that down the road.
Challenges of Precision Capital
As with any new innovation, Precision Capital has a ton of drawbacks and is worse in a lot of ways relative to more traditional VC funding models.
Even an investor like Bryce Roberts of the aforementioned Indie.vc, a pioneer with an outstanding track record in seed stage investing, lost 80% of his LP base when when he “stuck his neck out” to focus his investing on Indie.vc.
A few major challenges I see:
Infrastructural Inertia — Every few months, I come across a Twitter thread or article lamenting the 2 and 20 VC model…how it can create counterproductive behavior from VCs (grow AUM, collect fees), is a function of lazy thinking from LPs, etc.
What is more likely happening is a process that starts with career risk aversion and lack of incentives to change at the LP level — don’t want to rock the boat too much for one of the smaller asset classes by allocation percentage — and filters down to VCs dependent on that institutional capital deciding to focus their “differentiation” story on how they will deploy the capital instead of fighting battles to change the culture and incentive structure at the LP level.
This creates challenges up and down the capital stack for firms wanting to employ a different model and requires them to do more work both in finding the right LPs and in telling their story once they gain an audience.
Opportunity Size — I recently read two very insightful pieces of writing — one from Ezra Galston of Starting Line VC in his quarterly LP letter (h/t Dave Ambrose) and one from Fred Wilson — that use the frameworks of other top investors to make points about the importance of being able to gain conviction around market opportunities that don’t yet exist — but could and should.
The analogy is trying to hammer a piece of metal into a block of wood. If the metal is large and flat, you can’t do it. But if it is narrow and thin, you can. And, of course, once you get the narrow point of the wedge into the block of wood, you can hammer it all the way in.
Some of the best companies have been built in markets that looked small initially to investors and employees that may have passed on getting involved — there were no predecessors from whom to accurately gauge the size of the opportunity and many missed these opportunities as a result.
Similar blind spots — from both LPs and potential employees needed to build out the Precision Capital — will prove challenging for some early firms to overcome, especially if they are trying to come to market before they have fully proved out their ability to execute on a less complex VC strategy.
Today, it is unclear how many verticals, business models, or industries there are that are:
Meaningfully underserved by the VC model and
Present a large enough financial opportunity for this model to grow beyond just a handful of niche-focused boutique firms and attract real institutional capital.
Operational Complexity — This goes for how the firm is run and for what impact the capital will have on the ventures receiving it.
In addition to building out a team that can operate many elements of the traditional venture model at a high level — again, the idea with Precision Capital is generally that firms are still aiming to back high growth, global scale companies — these firms must attract and retain individuals capable of evaluating new types of risk and deploying capital into that. The uncertainty around what type of profile will best fit in with these firms may may make recruitment a taller task.
Firms must also consider the long term implications of the capital they are providing to ventures and ensure that they are not layering on too much complexity to companies at too early of a stage.
Data will also be crucial in capitalizing on the opportunity, creating another element of complexity that firms need to solve for over time to execute effectively.
Time — I’ve pointed this out a number of times already, but in order to execute this model effectively, firms must “ladder up” over many years, building a reputation with others in the ecosystem and gain trust that they can execute effectively with an new, unproven model.
Urban.us has had to prove their seed stage investment chops in urban tech for the last half decade, Bryce Roberts of Indie.vc has almost a 20 year track record of early stage success, and CircleUp is sitting on heaps of data that had to be meticulously gathered and analyzed over the years to make their algorithmic models what they are today.
So another characteristic of successful managers under this model will likely be patience around firm growth, as many strategies will be quite capital constrained thanks to vertical focus areas & time needed to fully capture datasets to allow for useful new capital solutions.
The last true risk premium is time. All else has been arb’d away.
To twist the famous words of Andy Grove, “only the patient survive” in the early stage investing market and those providing Precision Capital are in the exact same boat.
Get in Touch!
I am an early stage venture investor based in Paris with a passion for working with companies that elevate human well-being, performance, experience, and opportunity. For the last 3 years, I have been on the team at TechNexus, a Chicago-based firm that invests at the intersection of the venture and enterprise ecosystems.
You can email me at brett [at] technexus.com or find me on Twitter.
One of the many echo chambers my Twitter account seems to be a part of is the Lambda School echo chamber. I see multiple retweets every week from people I follow about the impact the company is having on its students and, by extension, their families and in some cases entire communities.
Lambda School is a 30 week, immersive program that gives students the tools and training needed to launch a new career from the comfort of their own home. Today, they focus on areas like software development, data science, and UX design and provide their student with:
Live classes from anywhere
World-class instructional staff
No cost until the student has completed the program and is employed
Pretty straightforward and at first glance, it is easy to bucket the company as another coding bootcamp with an income share agreement attached.
But the company’s community, scope of content, level of instruction, and reputation among employers, coupled with their unique business model that allows them to scale their impact to traditionally underserved groups in an aligned fashion have combined to create a virtuous cycle that has helped them attract strong backers and drive real outcomes that (based on my limited knowledge of competitive offerings) seem quite impressive.
Some stats for you:
The average increase in annual income from before to after Lambda School for a hired grad is $47,796.67/yr.
The median increase in annual income is $50,500/yr.
Grads hired in September alone increased their collective income by more than $750,000
While it is clear that more professions could benefit from having a Lambda School-esque company (or Lambda School itself) helping to build up the next generation of talent, I started thinking about other non-job skill pursuits in life that have a material impact on long term financial outcomes and could benefit from “Lambda School for X”.
Essentially, the goal would be to target areas can you help a large number of people build new skills and behaviors that are economically valuable by bundling community, content, and personalized instruction over an extended period of time and layer on a business model that allows you to impact people across the economic spectrum by generating revenue in a way that is aligned with the student’s success.
The first place my mind went is an area I spend a lot of time thinking about — Personal Wellness.
There are a number of studies that indicate the impact more exercise, better sleep, proper nutrition, and better mental health have on an individual’s long term earning potential and my anecdotal experience suggests that I am contributing most towards my own long term economic impact when I am healthiest and most active. I’d assume this is the case for most people.
From the findings presented, the evidence for positive labor market effects of sports and exercise is very strong, especially for earnings. Earnings effects range from about 4% to 17%. There is also strong evidence that the positive effects of sports and exercise on human capital begin with children and adolescents, as measured by their cognitive and non-cognitive skills. These additional skills reap returns later in life.
This is just for fitness and physical activity. If you were able to sample individuals “performing” well through proactive behavioral alterations across a broader set of pursuits that fall under personal wellness (relationships, nutrition, mental health, etc.) I’d imagine the impact on long-term earnings would be even greater. Certainly not $50k income increase after 30 weeks like with Lambda School but potentially impactful nonetheless.
There are a ton of challenges to making this a reality…one of which is the reason I put “performing” inside quotations in the paragraph above. It is hard enough to determine what success looks like for an individual’s wellness journey and tying that to potential success in a work environment is even more challenging.
The bearing of one’s ability to run a fast 5k on their ability to make a sale or write marketing copy is nowhere near as straight as the line a potential employer can draw between a person’s ability to create an iOS app during a program like Lambda School and the likelihood that they will be able to do the same at a company.
This is also an issue as it relates to the perception individual equity/revenue share agreements have amongst the general population. It is easier to get over that perception if you can clearly point to a large salary increase 6 months down the line through the acquisition of a skill that is well understood (both by the public and by employers) to be highly valuable, like software development.
On top of all of this, direct health data would be a total no-go (as it should be) for any decisions made on one’s employment by potential or current employers.
Significant challenges, certainly. But not total roadblocks, especially when considering the massive impact gap that exists for wellness-driven consumers and data suggesting that closing that impact gap could have six or seven figure impact on long-term earnings for a huge segment of the population.
The impact gap for the wellness-driven consumer.
💊 64% want to lower healthcare costs
🏋️♀️ 80% don't meet minimum exercise reqs
🏥 This costs the US $28b, $70b globally
👩💻 61% of employees are burned out
🤕 123m Europeans experienced activity-limiting pain in last week.
As with any “this for that” company idea, copying another model wholesale is likely less impactful than starting from the ground truth principles that have enabled that model’s success and reasoning to a place that will allow you to be most impactful to your target user given the constraints you face.
In the case of Lambda School, the core edge they now possess is the Brand they have built as a result of the virtuous cycle I mentioned above. That virtuous cycle starts with outstanding instructors creating compelling content and matches that with motivated individuals that can use that content and the community formed around it to level up meaningfully. This attracts employers, which in turn attracts more compelling candidates and keeps the flywheel spinning.
The idea of brand association as a major influencing factor of long term success is well understood — Harvard and Stanford in education, Google and YCombinator in technology, GE at the height of the Jack Welch era.
If “brand is the distribution of likely outcomes that you can expect from a person”, being associated with Lambda School suggests that the odds of individual’s ability to contribute positively to a technology company is higher than if they had gone to a competing institution.
Brand: Distribution of likely outcomes that you can expect from any company or person.
This then suggests that creating the optimal distribution of outcomes for the “Lambda School for Personal Wellness” would entail the following elements:
A data driven, empirical story around the influence of improved wellness on earnings (to attract students) and on workplace impact (to attract employers)
Instructor-driven content and digital tools focused on education and community that combine an intensive and personalized program (similar to Lambda School’s 30 week courses) with an ongoing, possibly life-long, program that ensures “brand maintenance”
A business model that aligns you with not only consumers who can already afford gym memberships, digital subscriptions, and Whole Foods trips but with the mass market of consumers that have never been given the tools and frameworks to meaningfully incorporate wellness into their lives.
One interesting concept that could be a step in the right direction is the idea of a personal board of directors.
I wonder if ppl will have personal boards of directors, where they formally seek mentorship/connections in exchange for an opp to invest in their next co or small % of income.
This happens informally for the highly networked, but this construct could increase mentorship broadly.
Applying the personal board of directors construct to the proposed model I’ve discussed, each student could find themselves interacting in a highly personalized program with multiple coaches empowered with more effective tools to engage the students at scale and over time across multiple disciplines (again, areas like fitness, mental health, nutrition, learning frameworks, relationships, etc.).
As relationships build, coaches and other community members (who would have hopefully leveraged the program to find personal and professional success) would join an individual’s personal board of directors and gain a formal share of future earnings with some kind of vesting or performance-based caveats baked in.
This community of empowered, intentional, and long-term oriented individuals that go on to make demonstrable impacts on the places they work and the communities they serve would become the core asset upon which the flywheel would spin, attracting all of the other pieces at an accelerating rate.
I’ll admit that it seems far less of a slam dunk business model and sellable ROI to students, instructors, and employers than what Lambda School has done…and this whole post is the result of a couple days of brainstorming 🙂
The reality, however, is that we face a massive impact gap between the types of tools, information, and technologies that exist and the number of people able to harness them to to improve their health and wellness in ways that drive long term improvement in the lives of them and those around them.
While closing that impact gap may come with uncomfortable criticisms rooted in perception of things like income share agreements (which are often rightly criticized) and a leap of faith to move away from well-understood business models that have been so effective for so many companies in the wellness market, the amount of value waiting to be unlocked is massive.
Get in Touch!
As an investor focused on companies that elevate human well-being performance, experience, and opportunity, I’d love to work with more companies closing the health and wellness impact gap…whether it looks like the model described above or not. If you’re building a company in the space, you can get in touch with me via email (brett [at] technexus.com) or on Twitter.
This new era — centered around the wellness-driven consumer is fundamentally reshaping and expanding addressable markets, creating massive opportunities for emerging companies building communities and experiences that improve human health, happiness, and opportunity by reshaping the way we live, make, move, and improve.
The wellness-driven consumer is more informed, more principled, and in search of more lifestyle control than ever before and the impact this is having on the global economy is already well underway.
Wellness-related spend now accounts for over 5% of global economic activity and is growing at almost 2x the rate of the broader economy.
Americans spent $19bn on gym memberships last year — and a further $33bn on sports equipment.
90% of Americans place a priority on buying things that reflect their values.
Over half of Millennial women are working on some sort of side hustle.
The list of stats confirming the scope and scale of this shift could go on forever and touches people across age groups, geographies, and socioeconomic lines.
With global distribution platforms, converging consumer tastes, more efficient business models, and emerging technologies breaking down many of the geographic barriers to building passionate communities, companies are being built and scaled around the world to capture value from this dynamic market.
But things are just getting started and there remains a massive impact gap despite increasing consumer spend and a mind-bending amount capital that has gone into companies in this space.
64% of Americans want to lower healthcare costs but 80% don’t meet minimum exercise requirements.
This inactivity cost the US economy $28b in medical expenses and lost productivity. Globally, the figure is a staggering $70b.
61% of employees are burned out on the job thanks to a variety of factors.
163m Europeans experienced activity-limiting musculoskeletal pain in the last week.
Again, the stats indicating how far we have to go could stretch for pages.
The audience that is the wellness-driven consumer is growing in influence and impact across almost every axis imaginable and is changing the way every industry thinks about the way it serves customers and employees.
Like Homebrew’s Hunter Walk says, “your thesis is your portfolio page” and I’ve been lucky over the last couple of years to work with a number of founders, practitioners, investors, corporate executives, and many others who have a passion for the wellness-driven consumer and look forward to doing the same for many years to come.
Behavioral economics has seen its mindshare grow significantly in the investing world over the last decade as more and more people have used it as a primary lens for how to think about decision making.
In 2000, well after people like Daniel Kahneman and Amos Tversky began making their contributions but before the concepts wrapped inside the field made their way into every corner of the business world, investor Richard Fuller published a paper titled “Behavioral Finance and the Sources of Alpha” that framed the way competitive advantage is gained in investing and identified 3 primary sources of potential market outperformance:
Informational — Proprietary access to superior information
Analytical — The ability to process information more effectively
Behavioral — The ability to take advantage of behavioral biases and mental mistakes by other market participants
Since that time, highly regarded investors, analysts, and operators across the spectrum (like Howard Marks, Michael Mauboussin, and Tim Ferriss) have latched on to the framework and implemented it into their own process.
While the three sources of alpha laid out by Fuller are quite comprehensive in the world of S-1s and 10-ks, they fail to fully encompass the way that alpha is created in the much more opaque and jagged early stage venture market.
Public Markets vs. Venture Capital
For a multitude of reasons, early stage venture capital remains a completely different beast than public market investing.
Despite a playing field that is leveling over time (thanks to Angellist and the like), informational edges are still major drivers of long term success as strength of networks play a key role in which investors see which deals. Additionally, the lack of well understood first party operational performance data for startups and industry-wide benchmarks has provided an opportunity for firms like Social Capital (via its Analytics tool) to aggregate and exploit proprietary data in unique ways.
And while the venture markets and public markets are full of smart people competing away many analytical edges, moving earlier into the private markets offers more opportunities to be “right and non-consensus” by building deep expertise in emerging sectors and technologies that are poorly understood or overlooked.
On the behavioral side of things, both public and private markets (and any other market on earth) will be ripe for taking advantage as long as humans are key actors. If you need more convincing on how often smart people make bad decisions, I encourage you to spend some time digesting Charlie Munger’s thoughts on the psychology of human misjudgement.
As noted above, while these factors largely encompass the forms of potential competitive advantage in the public markets, they do not entirely cover the path to outperformance for early stage venture investors.
The Fourth Edge
Because the start conditions and early trajectory of a business plays such a major role in where it ultimately ends up and since the right relationship with a single hire, customer or commercial partner can have an outside impact on emerging companies that are desperately seeking product-market fit, there exists a fourth key source of alpha in the world of venture capital that investors have long sought to exploit: Strategic
This started with the Kleiner Perkins “Kieretsu” and evolved to today’s platform and services models pioneered by the likes of First Round Capital and Andreessen Horowitz. Other firms have taken more focused approaches to delivering strategic value to their portfolio companies and, by extension improved investment performance to their LPs. SignalFire’s technology-enabled hiring platform is a good example of this.
At TechNexus, our twist on strategic advantage rests in deep relationships with leading corporate partners across the industrial world who serve as both capital and commercialization partners for the early stage companies we back.
This is true whether we are talking with pre-launch companies looking for the right market to take their technology to or companies further down the path who need to prove value in an adjacent space in order to get in position for a strong Series A round.
Prior to even writing a check, we spend a significant amount of time with each founding team building a clear business case and execution plan for the proposed strategic relationship and leverage a tight feedback loop with the technology and business teams inside our corporate partners to validate the plan. In every case, and before taking an investment from us, we want the teams we back to have a clear, measurable understanding of the value we plan to deliver and a process for keeping everyone at the table (the corporate, the venture, TechNexus) accountable and engaged over the course of the relationship.
This strategic-first approach is our specific edge that allows us to be proactively helpful to the founders we backand the execution team we have built to scope and implement these plans gives us the operational bandwidth to make an impact on each startup we work with.
A Unique Strategic Advantage
As with any source of business advantage, competition (some credible, some less so) eventually moves in looking to stake a claim. This is no different than what has happened in the world of venture capital, which is why “value add investor” has entered the realm of overused, vapid business jargon alongside time tested favorites like “double click” and “win win”.
While firms like First Round and Andreessen Horowitz undoubtedly execute at a higher level than most, many other firms talk a good game despite a structural inability to perform on a similar level and deliver real value across an entire portfolio.
Most firms active in the pre Series A market — especially emerging firms — lack the financial and operational bandwidth as well as a specific strategic edge to take a proactive approach to supporting (and driving real value for) companies during the search for product/market fit.
Put slightly differently, it is tough to build a “platform” with $400k/year in management fees.
Instead, these firms fall into what I’ve previously called the trap of the Steph Curry Fallacy, which is to say that they copy the obvious things about what makes the First Rounds and A16Zs of the world successful without doing the work to dive deeper and develop what could become their own unique strategic edge.
For a long time, investors talking in broad strokes about being “value add” got a free pass, but the runway on that seems to be running out. Today’s founders have learned to see that messaging for the noise that it is and have become more savvy about getting to the signal of what makes a firm or specific investor unique as they determine who they want to work with over the long term.
The Footnote is a series of audio annotations on some of the interesting things I’ve come across recently on a wide range of topics — from decision-making and investing to technology and the impact it has on the way we work and live.
These episodes are a semi-dive deep into something I’ve written, a topic I want to write about, an interesting article or piece of research, or a recent idea I’ve been kicking around. In each installment, we’ll aim to pull on different threads and explore new angles to help better understand the concepts presented and more thoroughly develop our thinking on the subject at hand.
In the first episode of The Footnote Podcast, I thought it would be useful to talk a bit about what I have learned in my first year on the investor side of the table after spending most of my career on the other side — helping build startups in various business and product roles — and explore the quick framework that I’ve developed around how to operate as an early stage investor.
This framework, which I call thinking slow, deciding fast informs the way I approach two of the more important aspects of my job — building conviction on a company as I am thinking about whether or not we should invest and building a relationship with the founding team during that period where we are coming to a decision.
In a lot of ways, this phrase — think slow, decide fast — is like a mediation mantra…those mantras help recenter you when you find yourself slipping and losing focus. This is essentially the same thing. If I find myself thinking or behaving in a way that contradicts this framework, I try to recenter and approach the situation from a different angle.
Second Level Thinking
The phrase that I’ve mentioned…again, thinking slow and deciding fast, likely calls to mind the book by Daniel Kahneman called Thinking, Fast and Slow. It is a great read and definitely informs the approach I have taken. The central thesis in the book is around the dichotomy between two modes of thought: “System 1” is fast, instinctive and emotional…basically lizard brain type of thought; “System 2” is slower, more deliberative, and more logical.
Another person who has latched onto the “two modes of thinking” concept is Howard Marks — an investor at a firm called Oaktree Capital. Howard has become well-known for both his outsize investment returns as well as his well-constructed investor letters…similar in a lot of ways to Warren Buffett
And, the way these two people — Kahneman and Marks — have laid out their beliefs has been very helpful for me in framing my investment strategy.
Thinking slow, the first part of the phrase, is all about building conviction on investment opportunities, which seems to be one of the toughest things about being new to investing. In my case, I went from the startup side of the equation where you are literally desperate for any opportunity that comes your way to the investor side, where I may look at 300 companies before our firms makes a single investment. So because you are drinking from this kind of fire hose early on in your investment career, people tend to fall back on these very surface level indicators to make decisions:
Oh, Bla Bla Bla Capital is investing, they are really smart so I can’t miss out on this deal
Oh, the team went to some prestigious school so I should be impressed by them by default
Or, oh this is the hot new technology area that everyone is talking about, we have to be active in this space
Of course, these are all important elements of making an investment decision — you want to work with a team who has the chops to pull off what they say they are going to do, you want to have other smart, committed partners in the business, and you want to be investing in technology areas or markets where there is significant opportunity.
But thinking slow is about not taking these things simply at face value. It means:
Employing something like the Toyota Five Whys framework — a series of 5 questions, each building off the last and delving further into the problem.
Or, as Marks notes, exercising caution if you are operating in a space that everyone else likes…a “hot” area so to speak…if tons of capital has already poured into a segment of the market, it is possible that it is already thoroughly mined and that prices/valuations likely reflect the “hotness” of the vertical.
And finally, understanding the incentives of your potential partners — just because some super smart investment firm is involved in a deal doesn’t mean you should be by default…their portfolio is constructed differently, their strategy is different, they may be more or less sensitive to valuations, etc.
So that has been my approach on the actual investment decision side of things, on how I build conviction on an investment opportunity.
Another important piece of my work as an investor is on building and maintaining strong relationships with the founders and teams we are working with. And this is where the “deciding fast” part of the phrase comes in…it doesn’t really have much to do with the Kahneman and Marks System I / System II stuff but it helps make the title sound more interesting.
A friend of mine who is also an early stage VC said over dinner the other day that by the time they get to the point where they want to build a financial model or do some kind of in depth returns analysis on an individual deal, it is a strong signal that they want to invest…at the seed stage, and even in some cases at the A stage, there is a limited amount of quantitative work you can do. So in most cases, they just make the decision then and there. And that is exactly what this idea gets at.
Having been on the other side of the table for most of my career, I know that startups don’t have much leverage in any of the conversations they have — customers can squeeze them on pricing, potential job candidates have offers from other companies with better compensation, and investors often have a bit more leverage in negotiations…in many cases, decisions get made wholly on the investor’s time table.
There was a survey done a couple of years ago by Point Nine Capital’s Christoph Janz that found the #1 most frustrating thing for founders about fundraising was not knowing where they stood in the process.
So one of the big things I try to do is make sure that whenever I make a decision or get some type of “news” on a company — whether it is a decision to move them forward in the process, to say no, to present what they are doing to the broader team, or if thereis some kind of delay — is make sure I communicate that clearly and in a timely fashion to the founders.
So there you have it…my 1-year in framework for trying to do my job as a venture investor well:
Build conviction by trying to think deeply about the levers that truly have an impact, know when you have enough information, make your decision, and clearly communicate that to the people you are dealing with.
Sounds simple but in my experience has been anything but.