Tuesday, February 27, 2007

Putting together an Investment Thesis

A typical question asked in a VC interview is about one's investment thesis. A basic methodology to follow when putting together an investment thesis is:
( Note that this is an exhaustive way of doing this, one does not necessarily need to go through all these hoops to have an opinion on a sector)
There are four basic steps:
A. Create an Ecosystem Map
B. Use the ecosystem to come up with an exhaustive taxonomical analysis
C. Identify opportunities
D. Identify startups targeting those opportunities

1. Create an Ecosystem Map - Research and create a map for the technology ecosystem enabled around the sector of choice. This is facilitated through three methods:
1. An analysis of current investment trends
2. Market research of the evolution of the sector
3. Discussions with industry leaders and Venture Capitalists investing in this field

2. Create a taxonomical analysis - Use the ecosystem to come up with an exhaustive taxonomy of the sector. For instance, when looking at the mobile services sector, one can go through the following analysis:
• Business: Going beyond VoIP phones to unified messaging, web conferencing, enterprise IM, access to enterprise data from any device.
• Lifestyle: Media convergence (e.g. IP TV), mobile blogging, mobile audio/video, gaming and mobile payments

or slice it another way:
For ex: Mobile Services Taxonomy - eCommerce, Security, Content Management, Enterprise Content, Device Management, Location Based services, Operations Management.

3. Opportunity Identification - Based on the aforementioned analysis, one should be able to answer the following questions. What is the ecosystem (infrastructure to applications) created by this taxonomy? What new applications does it enable? Who are the incumbents & entrants?

4. Key Startups in the area - Finally, round off the analysis with a survey of key startups in this area. Identify those which recently got funding and those in the market that are still looking. Nothing gets a VC's attention more than a potential deal.

In General, the following frameworks will be useful here:
(My classmate, Prasanna Krishnan came up with this list for a joint project)

a) Scenario planning - If it is a disruptive technology, then past trends are not good indicators of the future. In addition, there is a high degree of uncertainty around the apps & players that are likely to succeed. Hence scenario planning is a particularly useful tool.

b) Technology Speciation - In addition, the key to disruptive technologies in any sector is having killer applications and many of these applications are likely to be in unexpected new domains. Technology Speciation is a useful tool to study this phenomenon.

c) Technology strategy in lumpy market landscapes - Useful in identifying latent market needs & hence determining what applications are likely to succeed in an undefined market.

All in all, this is a good template to write up an investment thesis paper. Or just cruise through it to create an on-the-run investment idea for your next interview.
Talking about interviews, anyone know of any good Silicon Valley VC opportunities?

Sunday, February 18, 2007

Preparing for a VC interview (and then waiting around for months)

Woke up on sunday morning and thought I should write a post today detailing the checklist of items to prepare before heading into a Venture Capital Interview. This proves that I am in snowy Philly with nothing better to think of that this amazing field of Venture capital. So here goes:

1. Fund Profile - Look at the commited capital, past performance, news articles related to the fund, and buzz in the market. Do you diligence on the fund as if you were doing diligence on a potential investment for the fund. After all, it is an investment into your career.

2. Partner Backgrounds - Read the bios closely. Note down points of convergence in your backgrounds and interests with theirs. If you find nothing, do not panic but if you find something be sure to bring it up in your interviews. Also, look out for red herrings. If you are interviewing with a ex-banker for a growth stage fund, you might get many more financial engineering questions than regular investment thesis questions.

3. Know thy Resume - It is amazing how few people get this in its entirity. When one heads into an interview, expect discussions on everything under the sun. If you had a gig in EDA (Electronic Design Automation for the uninitiated), you should expect a question about the industry in general, growth prospects, and investment ideas even though this may not be something you have worked much on, or thought a lot about.

4. Think about your Investment Philosophy - Mine is "Team, Problem, Solution (Plan B), Economics, Exit". Obviously, there is a lot more to it than just those five words however it is good to have a succint way of putting across your investment philosophy. Back it up with ideas, good VC practices, and practical insights. This is the question one gets asked a lot so we need to ensure that we can provide answers beyond mere cliches.

5. Read up those VC Bulk Packs - If you are at Wharton, then go buy the Venture Capital and Financial Innovation textbook or bulkpack, and read it from cover to cover. Be sure you understand how term sheets are structured. Be exposed to the various VC financial and legal jargon. Not knowing what a cap table is might not be the end of it but will definitely hamper your chances.

6. Venture related Extra-curriculars - If you have done any study project for a local VC, worked on any deals on a part-time basis, internships etc, then be sure to highlight them, read up on them, and talk about them in your interview. Nothing builds more credibility in front of a Venture Capitalist than prior VC experience.

7. Investment Thesis - This is probably the make or break part of your interview. Line up atleast 3-5 different investment ideas in the areas you are positioning yourselves in. For ex:
I position myself as a Semi/Wireless/Mobile Services guy, hence I have investment theses in:
a. Mobile Ads
b. Mobile Video
c. Mobile DIY
d. Semiconductor (Chips and chip technology)
e. Broadband Wireless Technologies
f. Mobile Computing
g. Others (a big bucket for the various other ideas that I have in spaces as diverse as Network Storage to Internet Services)

When thinking about an investment thesis, concentrate on three aspects:
- Idea
- Viability (Market, Competition, etc)
- Existing Startups in that space
- Any new startups that have not gotten funding yet.

After all, nothing gets a VC's attention more than a funding idea.

If you do all this and more, then you can sit around for months waiting for that elusive call. And the Kafkaesque search will start.

Tuesday, February 06, 2007

Google: Searching for Success (and getting it)

Everyone talks about Google. Currently, it looks like one of those demigods that can do nothing wrong. But what actually goes on inside that factory of creativity? Are they really all that they are made out to be?
Recently, I was at the Mountain View site and met with a lot of folks running various Google blockbusters like Search, Google Docs, GMail etc. It was an interesting experience meeting them and talking about the various aspects of Google strategy going forward. (Everything below is my opinion and not theirs', so no breach of NDA and all that!) I felt a post discussing where the search giant stands currently and what challenges it faces might be interesting.

Google Strategy Going Forward
The future initiatives of Google will probably be built around four somewhat complementary aims.

Increased ContentExamples:Book search, Google Earth. Though Google's Book search has got embroiled in various legal difficulties, it still is indicative of the future direction Google intends to take. That of facilitating (controlling?) all the information in the world.

Easier ComputingExamples: Muni Wifi, Google Pack, Google docs and spreadsheets. Again, Muni Wifi is stuck in the pipelines in SF battling against other contenders (though I have used the Mountain View Wifi and it is pretty good). Google is going the Intel way by attempting to create an ecosystem to facilitate the usage of its products.

It's all youExamples: Implicit search, personalized home, Gadgets, API, Syndicate, Google Notebook, Custom search engine.This is in line with the overall trend of customization and personalization sweeping the tech industry. It is here that in combination with the various mobile services that it intends to provide, that Google might have the most immediate traction.

Search Search and Search - Though there are no real examples to talk off here, I am sure Google is working pretty hard on atleast three fronts:
1. Making Search work better in non-US contexts so that they compete better with Chinese and soon-to-come Indian search engines.
2. Making Search contextual in an intuitive user-friendly way. Why should I think of whether I should go to image search, video search, regular search or some other search? An interesting initiative in this direction is SearchMash. Incidently, if one reads the privacy notes, it is backed by Google.
3. Making video search better so that it relies less on tags and more on the content in the videos.

There are other areas like Mobile services that are probably getting more attention within Google but the various initiatives in that division (Personalization, Location-based services, and different applications for different geographies) could be linked to aforementioned four main areas of thrust.

Meanwhile what should it be worried about?
Here is a laundry list of challenges in front of Google (in no particular order)

• Governmental interference in controlling/regulating search results (Case in point - China-Google Saga)
• AOL supplies 12% of the google ad revenues. That is significant buyer power
• Government regulations mandating access to search records. This could severely undermine Google's "Do No Evil" policy
• Video Copyright issues with the proliferation of Video based sites like YouTube, Google Video
• Google has not had a great track record with effective integration of its past acquisitions (Blogger). However, there are signs that this is changing
• Integrating a 2.1B acquisition with its own strong culture (Youtube) might be quite a challenge
• IP Rights issues especially in the arena of Book search
• Activities like Phishing and Click Fraud

Regardless of all the challenges, the impact of Google (now and in the future) cannot be underestimated. The startup has become a monolith, the food is still very good (Oddly enough, I never understood what the hype around free food was, it's good, but its just free food guys!), the people are amazingly creative and brilliant.
Google is growing at a massive rate and will probably continue to in the near future. How this impacts its culture, creativity, and its ability to churn out products at the rate that it does, is probably going to be its biggest challenge.