Thematic vs Thesis Driven Investing
As the venture business has grown and matured, many firms have developed specific areas of focus. Our firm, Union Square Ventures, for example only invests in web services. I believe this is a good thing for both the investors in venture funds, called LPs, and the entrepreneurs.
But there are a number of ways that firms can execute their focus on a particular area. Two of the most popular are "thematic investing" and "thesis driven investing".
They are very different.
Thematic investing involves identifying big themes and going after them. Examples from the world of web services would be "social networking", "online video", "ad networks", "social media", "real time", "mobile". I know many VCs who go about it this way. They identify the themes and then get busy filling out their portfolio with companies that fit those themes.
Thesis driven investing involves drawing a picture of where your particular area of focus is going. I like to take a five to ten year view. And once you have mapped out that picture, it becomes your thesis. And you evaluate every investment you make in the context of that thesis.
The two venture firms I've been involved in founding are good examples of these two approaches. Flatiron Partners was largely a thematic oriented firm. We identified the web as a big theme and within it we identified content, commerce, and community. And we made big bets in those themes. It worked out pretty well but we didn't see the web changing at the end of the decade as much as we should have.
Union Square Ventures is a thesis driven firm. I owe that to my founding partner, Brad Burnham, who has the discipline to force everyone to do the work to develop our thesis and the discipline to make sure we put each and every investment through the thesis test.
Just last week, we were meeting with one of our LPs and I was talking about the mobile web in that meeting. Later that afternoon, Brad walked into my office and put our thesis on web vs mobile web on the table and we made sure we were seeing the mobile sector play out the same way. An important factor in thesis driven investing is everyone in the firm needs to buy into the thesis or it won't work.
Thematic investing is good for bigger firms. It allows each partner to pick a couple themes and go after them. Thesis driven investing is good for smaller firms. It requires a tight team that works to keep themselves on the same page executing after a singular vision.
I believe thesis driven investing produces the best returns when the thesis is directionally correct and probably also the worst returns when the thesis is wrong. I believe thematic investing works less well because it can lead to "bucket filling" where the firm just runs around filling the themes with deals without much thought to why and how they will work. It also leads to a lot of "me too" investing which is a scourge that the venture industry can't seem to figure out how to rid itself of.
But both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable investment advantage. I think "generalist" or "opportunistic" investing is likely to underperform domain expert driven investing in all but the most turbulent markets.
It would be good to talk more about how one goes about building a five to ten year map of where an industry is headed. That's a longer conversation than I have time for this morning. But I'll leave you with the thought that this blog is a part of how I build mine.