July 30, 2012
A big part of successful investing is understanding the trend. “The trend is your friend” is an old trader’s adage that seems always to hold true, and many a trader has been buried who has not heeded this advice.
How does this look in the Startup/Venture Creation world? It is about being able to look 24 to 36 months out and position your investment to be on the trend at that time. You need to be in a position to be exiting when a sector is trending up and already be investing in the next sector that will be trending up.
I want to be very clear at this point, investing at the right point in a company that is positioned well for where money is flowing next is smart. Investing in a company that looks to be well positioned to take advantage of the trend, but is not creating value, is irresponsible.
One of the most common mistakes startup investors make is investing too early. So how do you know if you are too early? If identifiable money is flowing into a particular sector you are probably not too early. If no money is flowing into the sector and the startup has no competition or good comparable you are probably too early.
At the point that the trend is unfolding, the question really becomes a matter of the management team and their ability to execute on a plan that includes seeing traction in less than 6 months with a paying customer in some form. I so strongly believe in focusing on a customer adoption metric that I have start to develop investment models for my startup investing that provide valuation increases or decreases that are based on customer adoption and customer development milestones instead of liquidity events.
So what does this look like right now? For reference, the team I work on focuses on technology within industries, sectors and trends. We specialize in startups in those industries or sectors that are based on disruptive technologies. We build our investment and trend thesis on broad flows of money in industries or sectors but stay focused on the disruptive technology opportunities only.
We have been investing and building in Internet Technology with a consumer focus for the past three years and will continue to do so for another year but then get more selective and pick our spots carefully after that. Internet Consumer Technology and Real Estate the last few years have (from our view) seen net inflows of money and in the case of Internet Consumer Technology we are seeing the formation of lots of new technology based funds. To us this is a signal of, conservatively, about two years before we start to see net outflows from the sector. This does not mean that investing in that sector is necessarily bad it just means that more likely than not the sector will not be trending up at that time.
We are next looking to put resources and capital to work in the traditional Energy Services Sector. Our view here is that exploration technologies have made the notion of Peak Oil, at least for now, inconsequential. That being the case now the name of the game is extracting the resource in question for the lowest possible cost while keeping a very strong environmental vigil. Technologies that can enhance recovery and ultimately reduce costs while being better for the environment are going to, in our view, garner stronger valuations than average and attract a broad range of investors. The other factor at play here seems to be a shift in the Oil and Gas sector to be more open to adopting newer technologies and to try new things. We believe that this has been due largely to the success of companies like Packers Plus and recognition of the benefits of technology adoption on the service side by the industry as a whole.