Thematic vs Thesis Driven Investing

Comments (Archived):

1. Very interesting post. One thing I learned from a smart VC friend who does thesis driven investing: if you have a thesis, you also need to have an anti-thesis. So for example list things in the mobile web that thematic mobile web investors would like but you don’t like. It’s a good discipline to make sure you are really taking a position and not just adopting a theme.

   1. that’s a great point and it is exactly the conversation brad and i had in myoffice. i was talking up the mobile web to one of our LPs and he came in andsaid, “let’s talk about what we wouldn’t invest in the mobile web”

      1. Alastair Mackintosh who taught me most of what I know about strategy in my first two years out of university used to say ‘a good strategy says as much about what you aren’t going to do as what you are’. Most of the funds I know would find thesis based investing tough to execute on precisely because most VC partners value opportunism and hate ruling things out in the way a good strategy/thesis demands. In general I would suspect that greater forethought and discipline must produce better results, provided the thesis is correct, as you say.

         1. Best advice I ever got as a young person when talking to an old professor: Just narrow down your major by what you hate. It worked.It’s because you know what you love inside and you have to give yourself strong reasons for why you want to do it that way.

   2. Nice point Chris. This will probably seem a bit abstract, but your test of authenticity reminds me of people at the Santa Fe Institute and some of the business ideas it gave rise to. They’d tell you, e.g., with reference to where resources should be directed for SFI programs, that things should run (at least partly) along complex systems and/or evolutionary lines, with selection pressure, fitness, etc. The analogous acid test is that in that case (most!) things should go extinct. If the guiding principal is not just something that sounds nice in theory (like “thesis” based investments), show us those things – or at least assure yourself that they exist. I hope that makes some sense 🙂

   3. Funny how the thesis investment model maps into semantic algorithms. Recognizing negative associations is vital to producing meaningful results. Also in art the use of shadows and blank space, in audio the use of silence… the ying and the yang 😉

   4. In an essay, I usually write the thesis last- mostly because I want to see the point/counterpoint. What do you think is best way to develop the thesis/antithesis is?

2. I think you are using the word “theme” where you really mean “trend” or “sector”. When I first started talking about “themes” in 2006, I don’t think I heard the word very much – I remember specifically searching for a word that was different than “sector” since I’d lived through the “big firm sector approach” at Mobius. Now that theme is “trendy”, I hear it all the time, which is kind of a meta-trend (to be a “theme-oriented VC”).Another differentiator – which you point out – is whether each partner (or groups of partners) work on different “themes” (sectors/trends) or if everyone works on the same stuff. The power of a small firm is that everyone can work on the same stuff – I’m always amazed when I run into small VC firms (five people or less) that have partners working on different things and subsequently don’t get the leverage of a small team.At the end of the day I know it’s just semantics since it’s all about the underlying strategy the VC firm has. And – as you know – I like yours a lot!

   1. i used the word thematic because it’s been rattling around in my brain for afew daysbut sector bets or trend chasing is a better way to describe what i call”thematic”words matter so i take your pointand the small firm where everyone works on the same stuff is a powerfulmodel as you and I both know

      1. “Thematic” investing is the exact phrase used by a lot of PMs in the public markets.

3. do you see your thesis as your magic sauce, is it your main competitive advantage?Or would you theoretically be happy it being made public on the basis that having a map doesnt neccessarily mean finding the treasure? (or some other similarly bad metaphor)

   1. i try to make our thesis public every day on this blogthere’s no way i would ever try to keep it a secret since this communityhelps us develop it

      1. I’m amazed each and every time I witness collaborative creation. AVC does it time and time again. Any business can learn from yours, and your firms work in this space.It is by far the most valuable meta-lesson I’ve picked up while reading here. The desire density to create and unleash value here is “the secret sauce”.

      2. Have we shifted the thesis in some way far from the original points when it was developed. I mean., we sit around and play pundit, but the points we raise may push the thesis in interesting directions.I wonder this only because I’m doing my own thesis right now, and this is why they give us critiques and thesis advisers. They hope that the push will shape the thesis and push it left, right, and center, in order to make it stronger.So have we ever forced a major change that in the end made the thesis stronger.

4. it’s like successful film distributors who knows the genre, the audience for that genre , the market, the territories… and even when they will hurt the filmmaker (and their own reputation) by taking on the investment in a project they don’t understand. Question is …when do you turn from a focus or theme? and I wonder how many “new” vc’s do what “new” distributors do and just buy into everything trendy because they have to get a portfolio. I think you (and Brad) have a long history to discover a niche and that your theme/s were correct. “New” investors .. diversification is sometimes a mantra isn’t it? Just wondering…is that just my ridiculously simplified interpretation ? Didn’t your themes originally come from successes in a subjective (although be it small) array of investment? Like I say …just wondering

   1. Its a good analogyWe like to evolve our thesis all the time and gradually instead of all at one

5. In essence thesis investing predicts a picture of the future landscape of an industry or market sector. Sounds dangerous, since in my recent evolutionary engineering readings, the only thing you can count on is the ingenuity of people to do something you never expected.If thesis is more concerned with a gradually unfocused estimate of the future about a direction then I can see the advantage.In system state prediction you can predict the near term slightly better if you knew everything (omniscient). But by recognizing attractors in future system states you can simplify the guessing game. Aka your conditional probability and estimate of states is better than a random guess, so investment will pay off.Very interesting Fred. Look forward to experiencing more investment based model prediction. Go Brad!

   1. The thing is, people like producing in Waves. So people may act in random bits, but those random bits come together in huge chunks. It’s why we are all so wierded out by black swans. The past may not predict the future, but how far off is it? And what tell tale signs about ourselves in our past can tell us about our future. It’s horrible exciting and horribly stressfully and horribly wonderful.In some ways I’m jealous of Fred. I like developing the thesis. Seems like fun.

6. Really like the distinction between theme and thesis and agree that theses have the potential to out-perform themes.But some theses that you hear are so broad that it’s just a cover for opportunistic investing. When an investor’s thesis is exposing information to the web, he can invest in almost any web startup.By the way, if all investors published their theses as publicly as you do, it would save entrepreneurs plenty of time, making the whole process more efficient. There’s a giant pool of money on one side and all sorts of ideas on the other, and the two sides too often grope in the dark toward one another.

   1. That’s the idea. Increase efficiency through transparency

7. It seems like the maturity of the technology or industry might be important as well. When VC’s were dumping money into semiconductor companies 20 years ago, thematic investing made sense because nobody knew exactly where the industry was going and there was perceived opportunity everywhere. If you want to invest in a semiconductor company now you better have a specific thesis and a good reason.Perhaps the thematic approach at Flatiron was prudent (though susceptible to following the crowd) because the web was a lot younger then. It would have been impossible to know exactly where it was going. But at this point you have a much stronger feel on where web apps and mobile and social media will be heading over the next few years. So you can have a specific thesis and execute on it.Just a thought…

   1. I think you have a point about market maturity and the value of thematic investing within it

      1. 1. I think that’s a valid construct. As the market matures, greater specialization and industry knowledge is required to generate an edge – including a view that goes down the road a number of years.2. Can’t help but wonder where we are in that shift in Cleantech. Thematic is likely finished, since everyone and their brother wants a piece, but how much of that vision is required at this point?

8. I would call it rule based investing. Regardless if your rules are based on theme, thesis, predictions or guru-like feelings. If an investment passes all rules then then it’s a go.Perhaps this is over-generic but I think it is applicable at least in mind.

   1. I agree more than 100%. Rules for ourselves are the most important rules we can ever enact — self discipline.

   2. How do you develop the rules though…really.

9. I think making your thesis public in this blog helps set the expectations of the entrepreneurs who read it. I’ve only been reading for a couple of months but I already have a great sense of what UVC is looking for in terms of companies, entrepreneurs & deal-making. All those elements to the firm are clearly informed by the UVC thesis which, in turn, is informed by the AVC. It’s a virtuous circle.

10. i think you are leaving out an important discussion point– the venture capital asset class.how do the returns differ between a top thematic based fund and a top theme based fund? although i am a thesis based investor myself, when it comes to vc, i would argue that a top theme based fund has a much higher statistical expectancy than a second tier thesis based fund.id like to think that even theme based funds have some sort of thesis within each theme. as an lp, i would be pretty nervous if i was invested in a fund that “just runs around filling the themes with deals without much thought to why and how they will work”

    1. I’ve never seen data on this. I’m not even sure its possible to compile it since firms don’t talk about themselves in this way very often

       1. I agree– I’m just speculating. I imagine there has to be a fairly strongcorrelation with the asset class. At the end of the day, if you can’t createa good deal flow, your returns will be sub par no matter what strategy youhave.

11. I imagine in your thesis driven approach that it would be valuable to revisit that thesis on a periodic basis with a critical eye to see if the environment has changed in a way that would impact your thesis, especially with the speeding up of change in the Internet.

    1. Absolutely

12. Fred, does USV map the different potential outcomes for its thesis and assign probabilities of success or do you guys decide on a path and revise every so often?

    1. We are not particularly analytical but we do revisit our theses often

13. What happens if your thesis changes so significantly that some of your portfolio companies become a lot less attractive? Is such a radical shift in the thesis even possible?

    1. It happens. But once we make an investment we try to stick with it as long as it is working

    2. I wish I had answers for this myself.I’m hedging that from what I read here, parts of this thesis can be very radicalizing depending on the company in play. Some of those companies haven’t been developed yet. We’re using fluffy terms to make it sound happy-However, I seriously wonder only because I just scared* a friend of mine based off some ideas that developed from my participation here with an art project I’m running off of Facebook. It implies a lot about the institutions underpinning websites, and what all it means about having an identity here, among other things. If these spaces change, does the thesis change? All sorts of questions I wonder about a little too much…*Sometimes scaring people in art is a good thing. See Jenny Holzer if you don’t believe me.

14. I would love to hear more about how you map out your thesis and what factors are considered in predicting how things evolve 5-10 years down the road.

15. i think investors of all kinds will need to be more cognizant of global markets and how they are correlated, and what could change those correlations.

16. It really is a good thing to establish a certain area of interest, that is of course if you have a particular interest. For those that are interested in raising venture capital you can check out http://www.vcgate.com and you get the largest database of all that you can sort by interest, geographical location or stage investment. You can have a pretty accurate search according to your own preferences and you can save your time and that of the investors’ by contacting only those that are really interested in your activity field.

17. I think the key here is: static vs. dynamic.1) Theme: Snapshot at a point in time, across a wide spectrum2) Thesis: Some specific target longitudinally over time.The Theme approach fails when it’s not updated to reflect a changing marketplace and the Thesis approach fails if it doesn’t have the right target.

    1. I think that’s right

18. Absolute believer that thesis driven investing results in superior results. First, you have superior understanding of the historical and competitive landscapes when evaluating new investments. Second, you are part of the ecosystem and can help make valuable connections for your entrepreneurs. That is what we do at Metamorphic Ventures.

19. Theme or sector driven investing are probably based on more specific domains of expertise that the VC’s have and can deliberately capitalize on. The thesis model drives on more of a conceptual/futurist style of thinking that intuitively identifies where things are heading and why. Its a more artistic approach. Like they say in NYC real estate…follow the artists!

    1. 🙂

    2. Bohemian Capitalism! ’twas ever thus …. 😉

20. Bill Gates I believe said once : ” … people over estimate what can be achieved in a year, and underestimate what can be achieved in ten.”support thesis.

21. There is a distinction too, I think, between being an investor and an operator. While USV aren’t operators per se, you surely are pretty connected your teams and make an impact on their thinking, and vice versa. While I realize that the other VC shops tend to their teams as well, the big difference, to me, between thesis based and thematic based approaches is that thesis based teams aren’t passively noticing and investing in a macro level event (Internet growth, distressed real estate, etc.). Rather, you are aware of that context and are actively trying to execute good solutions within it. Both approaches obviously can and do work and there is a lot to be said for a shotgun approach to anything. Yet I can’t help but feel that the investors that really add value aren’t just investing in macro level events — they are picking spots, even small ones, and making them better and bigger and hopefully more valuable. Thesis types are putting themselves on the line more — THEY have a strategy — and it isn’t just investing in an emerging macro level concept. To me, even if the strategy is wrong from time to time, actively executing a thesis makes the LP’s, VC’s, and the firms all stronger and more valuable over the long haul.

22. We can over-(pseudo)-intellectualize.Let’s not forget good old simple SWOT analysis.

    1. Agree completely. Never let the guy who lists the Ss to list the Ws. The Os, the Ts.Back in the LBO days when acquirers were trying to find the equilibrium level of top management to decapitate, there used to be an exercise which I called the “oh shit” exercise.A person would come into the room indicating that a particular member of the acquired enterprises senior management had gone missing until the entire room said — you guessed, it — “oh shit!”Everybody above the “oh shit” level got canned.

       1. Lol, emotions – the great leveler in life – along with David’s underpants 😉

       2. Damn I could have interviewed for LBO week.

23. One side bit of irony on this topic is that I reached out to a somewhat big-name VC on the topic of thesis-driven investing, and he chimed back that he felt that the secret to their success was that they specifically AREN’T thesis driven.While there are obviously multiple ways to reach a desired outcome, his response struck me as akin to the debate in stock investing – is better to have a macro thesis on the market, who wins, who loses and why…or, simply play the momentum game.

    1. I suspect that there are many ways of organizing one’s thinking — planning — which are not mutually exclusive as it relates to results. As long as you do not take timing into consideration.For all those who worship at Buffet/Munger/Berkshire Hathaway’s altar (cound me amongst them, please), their slide on the way down was just a bad as everybody elses’. A flop sweat kind of hard landing.In a rising market, all boats float. In a falling market, all boats are grounded. It’s that damn ebb tide which is where the outcome is a bit uncertain.In life, timing is everything.

       1. Good point. There is a tendency for any of these approaches to be subject to the tyranny of the ALL or NONE (i.e., I am theme based OR I am thesis based) since binary logic is easier for people to get their heads around than managing nuance and paradox. So much is timing and luck bound, but having a good, coherent plan, and metrics that frame whether than plan is working or not remains key.

24. As I was reading the post and the comments, I was reminded of the famous Fidelity fund manager Peter Lynch, who by coincidence JLM also mentioned here a few days ago.Lynch was famous for holding many more stocks than his peers. The running joke was that it was quicker to ask him which ones he didn’t like. He used to take small positions just to remind himself to keep an eye on certain companies – the way most other people would use post-its.The funny thing is that he didn’t really have a thesis (he was very bottom-up). People analyzed his portfolio, and how it changed over time, and provided him with a variety of ex-post sector and macro based thesi(?).Oddly, he agreed with them, and used them as the chapter headings for his most famous book.I’m not sure how any of this adds to the conversation, but I quite enjoyed writing it.

    1. “I’m not sure how any of this adds to the conversation, but I quite enjoyed writing it.”Hahahahaha, the pleasure seeking musings of a true thinker, a sybarite, a voluptary, a bon vivant, a true hedonist! A man unafraid to walk around in his intellectual underwear! LOLThe world needs more people like you, my friend! I aspire to be such a man myself. LOL

       1. After a quick rendezvous with a dictionary, I can only say I’m humbled by your words – but alas, much as I would like to believe them – who wouldn’t? – they describe a better man than I.Fred is right, JLM, you’re the real deal.

          1. Don’t be so modest, David – however, as a fellow Brit’ I realise it’s a problem with us chaps – I am sure your underpants are up to the accolades!

             1. Hahahaha! All the more so if they are just a bit disreputable.Years ago I used to go to Board meetings at Lower Slaughter in the Cotswolds (coinciding w/ the races at Cheltenham) to an inn whose every room was named after the owner’s misstresses. There were a fair number of rooms at this inn and one had to admire the vigor, to say nothing of the generosity, of the owner.This is the type of genuine sensualist the truth unleashes in every man sufficiently courageous to simply mouth the truth. The first truth which comes into ones mind. Not the pasteurized, homogenized politically correct truth which enslaves our most natural instincts.It’s something I have always admired about the British. Of course, America got all of the real adventurers and quite a few of the criminals.

             2. you know it! always gotta drop the truth.

             3. Class anecdote!The biggest problems facing us in business, life, society … a lack of character, honesty, courage, pride, trust, guts … watching ‘Into the Storm’ re: WInston Churchill just now brings that home more than ever.There are too many weak, selfish, corrupt and pretentious people in government, life, business, the media. We need change – and fast.The March of the Underpants!

             4. I have said before that one of the very best presents I have ever received is a set of Winston Churchill’s speeches. The quality of them is not universally good which serves to increase the sense of authenticity. They are simply awe inspiring. I love them.I listen to them enroute to my lake house which takes 55 minutes to reach — the time of one or two of WC’s best speeches. This is because they sit in a dirty, nasty pick up truck which my wife allows me only to drive to and from the lakehouse, the dump and our house (arriving after dark preferably).Invariably whatever chore I am doing when I arrive, I attack it with some considerably increased vigor while still under Winston’s spell.I have a wonderful black lab — who I like generally more than most people I know for her trustworthiness alone though she is an unrepentant deer chaser — who sits perfectly straight on the seat next to me very, very respectfully while Mr Churchill is speaking and barks immediately whenever the speech ends.I cannot tell whether it is applause, agreement or impatience to hear another.On a very serious note, I often wonder if we are producing any more George Marshalls, DD Eisenhowers or Winston Churchills? They were all that kept evil at bay in the world during their time.Churchill literally talked Hitler out of invading England at the instant of the highest probability of success for the Germans.

             5. well if all the englishmen are comparing underpants here are minehttp://www.2wheels.org.uk/r…

             6. Oh God, *blush*

             7. Tying in a few threads, was is not Churchill who said (of Atlee, I think) “He’s a modest man with much to be modest about” – that’s me alright.That said, I would never have anticipated my petticoats had the potential to inspire such heated debate 🙂

          2. I’m gonna meet JLM this month. Super excited about that

             1. And rightly so. You two are going to have a whale of time!

    2. David, I don’t always agree with you, but you sure are witty, and I’ve learned a lot by reading your stuff/

       1. Thanks Shana, very kind.

25. is it really “web vs the mobile web”? really like web AND the mobile web, where a venture has web focus with extreme mobile outreach. i believe mobile will be the biggest gateway to the whole web.

    1. I do too

26. Another fabulous topic and a wonderful discussion.I suspect that venture capitalists know more about strategy than most business folks and with very few exceptions are the least disciplined strategic executives. VCs simply change the plan. They are, many times, just deal junkies. Not that being a deal junkie with great instincts is going to get in the way of making a ton of money, mind you.I am convinced that the most underappreciated element of business planning today is truly strategic THINKING — not some cook book SWOT MBA exercise designed to reduce real THINKING to a single index card but truly visionary no holds barred THINKING. The kind of thinking that tempts your colleagues to review the laws pertaining to involuntary commitment on psychiatric grounds.Any plan is better than no plan. Any amount of thinking is better than no thinking. The fact that the brilliant folks who people this blog stumble over the meaning of words — which is a good thing because it is prima facie evidence of thinking shows how important it is. Words mean something.Real strategic thinking about investing is to planning what gelato is to ice cream.

    1. JLM, why don’t you blog on that subject. Seriously. About how to really think. I wish I had time to go back to product analysis. It made me happy. You seem to really believe in the subject, and we love your comments. I would read it.

    2. If I might add….as long as one is committed to thinking, it’s probably best to THINK BIG.

    3. One of many reasons I blog is it requires that I think

27. Both “thematic investing” and “thesis driven investing” are overly abstracted strategies. Any effort spent analyzing overarching worldviews is detracting from tactics and execution on the ground.

    1. One of investors I met early in my career used to day ‘get the strategy right and execution is easy’

28. Enlightening! I had been aware of many of the differences but hadn’t thought of it so clearly.Does geopolitical scenario planning factor into thesis driven firms?Not that the Iranian election situation could have been predicted, but surely a scenario that includes political upheaval in a media-restricted state might suggest the role mobile micro-blogging would play.

    1. It doesn’t come into play much in our investing but I sure hope it does within the halls of our government

29. From an LP’s point of view and in my experience, the main difference between thematic and thesis driven strategies is that thematic investing can do quite well at exploiting cycles and cyclical growth while thesis driven investment exploits growth that is more persistent through the cycle be it economic or technology. The counterpoint is that thematic investing can easily fall victim to cycles that are shorter than the life of an investment. It is also vulnerable to crowding out, where too much capital chasing a theme undermines returns. On the whole, I prefer thesis driven investment strategies.

30. great discussion, as always. some additional questions/topics to think about:– are they mutually exclusive? don’t theses usually exist within specific themes? or often across themes?– how many theses should one investor/firm pursue simultaneously?– what’s the best way to mine a thesis for investment opportunities?much to chew on…

    1. Great questions MoIf you are truly thesis driven, you start with one big macros thesis and then let the sub-theses flow from thatI suppose you could create theses for each theme but I don’t like to do it that wayMy answer to the last question is broadcast your theses and be flypaper

31. Both approaches have their merits.It’s ego-driven investing that worries me.

    1. Good point Carl.Proper investment requires total intellectual honesty – perhaps not by coincidence, another Lynch quote.

32. Good stuff both in the post and comments. My immediate reaction was to compare it to financial markets where you have so many various strategies being employed. Many of them work, and it just depends on the goals, timeframes, risk tolerances etc of the manager and investors as to which one you pursue. But the overriding commonality between the comparison is you do what works best for you and what you’re comfortable with.Thematic vs Thesis seems most comparable to Global Macro (secular theme) versus Bottom-up Fundamental (Thesis or company specific) if you were going to shift it to publicly traded companies. Interesting to see these differences drawn across different types of investment (public vs private) though certainly.

33. It’s tough to argue with a well written and thought-out post like this one. At the end of the day, VCs have a list of things they do, and things they don’t do; and in my recent experience speaking with a number of them, these lists go beyond the boundaries of themes and thesis. Any investment has to align with their beliefs- whether these beliefs are right or wrong is subjective, because it’s all based on assumptions.

34. Twitter Should Go For A Netscape-Like IPO http://nxy.in/tjhq1 http://technbiz.blogspot.co…

35. Fred, what are your thoughts on Growth Equity which is typically more thesis driven? What are the most successful theme focused VC’s and do any ever remain successful in the long run?

    1. I think themes work better in growth equity. I don’t really know who is the best at that game

36. Well anyone can do Thesis driven investment and/or other thesis driven developments; the question I would like to ask is what makes you good at it; maybe it’s not possible to answer but following what you are writing about and comparing it to other sources I would probably lean towards a Thematic knowledge approach; get as many buckets you can and fill them with information for later filtering and remixing ending up with thesis thinking to work with? Like filling the white spots on a map lets you get to know the art of map making and then you would know which map makers are good or not..Well, just another comment in the bucket :-

37. the top funds, regardless of investment style have a higher statistical expectancy for a number of reasons. leveraging past successes can help increase unsolicited deal flow (the best deals chase the best funds) and even lower the price of deals which will boost returns. a top tier theme based fund will have a higher long run statistical expectancy than a second or third tier thesis based fund.

38. I don’t think you understand the point I am making.I am talking about venture capital as an asset class.I am sure that there are many excellent second tier firms. They still don’thave the highest statistical expectancy (it is possible that over time theyare able to move into the top tier).

39. Already do. I’ve seen the numbers. The good guys win. Add Foundry to your list