What I find funny about the noise about the series A crunch and the difficulties of consumer applications is that it was predicted and reasonably explained 1-year ago by Mike Maples in this outstanding blog post.
My partners and I have been pretty open that we think it’s foolish to jump in and out of sectors in a whim. What we DO think makes sense is to have a POV on MEGA TRENDS and to have a sense of where we are in the greater arc of innovation and progress. These are NOT examples of megatrends
- Consumer web is overheated
- Consumerization of IT is hot
- Beware the series A crunch
- Quantified self
- Big data is… BIG
The megatrend that Mike Maples and others have discussed is fairly similar to where I think we sit today at the cusp of 2013. My perspective on this is that we sit in a pretty interesting time – the intersection of two innovation waves. Or, more precisely, the tail end of one wave and the early/middle end of the second. This graphic below is a simple representation of this idea:
So when we at NextView look at investments, we tend to bucket companies into one of these two innovation cycles, and we are excited about specific sub-sectors in each.
Opportunities In the First Wave: High Friction Categories
As the first wave of the internet has come into some level of maturity, we’ve seen that most of the opportunities that have gotten us excited have been in “High Friction Categories.” These are areas that have historically seen much slower adoption of technology and much less leverage from the internet. But over the last 15 years, many of the conditions that have prevented innovation in these categories no longer exist. These conditions may have been technology limitations, market limitations, or just resistance to technology adoption by buyers and end users. We see these as some very very big categories that now enjoy the right environment for entrepreneurs to pursue.
To break this down one more level, here are some sub-categories that fit into this profile.
- High Consideration and Experiential Commerce: My Partner Dave wrote a post about our thesis here about a year ago. Because of where we are in the current innovation cycle, we think that consumer categories with very high price points or experiential buying processes have the most room for innovation. This is why ecommerce fashion and design (eg: Fab and Pinterest) have emerged now vs. earlier. In our own portfolio, we’ve made a few investments here. Custommade takes the difficult process of finding an artisan to craft a custom product and brings it to life on the web. Prices are actually quite competitive with retail, and the friction of the experience has been brought down to the point that it’s enjoyable and highly satisfying for buyers. Our investment in Plastiq is also in the high-consideration theme, as the company enables payments for relatively large purchase categories – from tuition, to real estate, to auto, and others.
- B2B and especially SMB SaaS: We see B2B and especially SMB software to be a large and attractive category. Historically, small businesses have been pretty slow technology adopters, and the cost of customer acquisition has been too high relative to the LTV of these customers. Some of these dynamics are changing, and many of the disruptive and valueable software categories that large enterprises have found benefit from for years are making its way to the SMBs. Our investment in Insight Squared is right along these lines as the company seeks to bring highly actionable business intelligence to smaller businesses that haven’t had access to these tools in a user-friendly way in the past.
- Regulated and Forgotten Markets: This is obviously a broad catch-all category, but I think it encapsulates other areas at the tail end of the internet innovation wave that still have major opportunities. This is why education has gotten so interesting recently, as investors, end users, administrators, and instructors are getting increasingly motivated to bring their practice to the modern era. Healthcare IT is another historically difficult category for early stage investors that I think might present more opportunities now than in the past. And some verticals like farming and agriculture have just been ignored or overlooked by internet entrepreneurs until quite recently. Our investments in Boundless and Farmeron are ones that I’d put in this category of regulated or forgotten economies.
Opportunities In the Second Wave:
Simultanous to the maturation of the first internet innovation wave has been the rise of the next.
Most catch phrases fail to really capture the promise of this new era, so instead, I like to think of it in terms of the core infrastructure that it will be built on. I’ve blogged about some of these building blocks before, but in short, we see it as being comprised of 4 (maybe 5) things:
- Open and connected identities. The social graph, but not just what we see on the mega services. There is a huge amount of information being created about individuals in more targeted communities, and that information is more accessible and interconnected than before. Think about places like Github, Behance, GrabCAD, and others.
- Ubiquitous computing. Including internet connected device in everyone’s pockets, and increasingly, all around our home and work life.
- Seamless data. In addition to mobile phones, we are seeing a proliferation of other devices that capture, process, and transmit data and can be accessed in real-time. Everything from fitbits and Nike plus devices, to sensors in retail stores, to chips implanted into cows.
- Natural computing. We are quickly evolving from a machine-interaction paradigm of the keyboard to touch, swipe, voice and gesture. No matter what some people think about Siri and Apple Maps, it is a sign of things to come, as Apple is training a whole generation to speak to their phones in the car and in other environments.
- Bonus: Convergence of physical and digital. I’m not completely sure if this is part of this same wave, if it’s something orthogonal, or if it’s actually too early. But there is another major force around the engineering of physical products becoming much more software-like. Part of it is the rise of 3D printing and the falling costs of such devices enabling broader applications. Part of it is the consumerization of 3D modeling software. My thinking here isn’t quite fully formed, but I’m throwing it in here for now.
So, the question we ask ourselves when evaluating opportunities in the second wave is whether the company and founders are building something with the assumption that these 4 forces will exist and continue to accelerate in importance. We ask whether founders have identified gaps and problems that this new infrastructure presents that needs solving, or whether there are applications that will be buildable that we haven’t been able to build before without this new foundation. This area is a bit more broad, but our investments in Lookout Gaming, Cloze and Directr hint a bit at what we are excited about in this realm.
So, it’s with a lot of enthusiasm and optimism that we enter into 2013 after what for us was a pretty successful 2012. We’re excited about where we sit in the broad strokes of technological evolution. In fact, it’s been a long time since times have been better to start a company with world-changing ambitions. Forget about the series A crunch or other short term FUD. Our goal as investors and the goal of the founders we back go way beyond raising capital to building large, disruptive, and highly durable businesses that will be around through many economic cycles to come.