VC Cliche of the Week

I am going to take advantage of Brad Feld's post on the world play for this week's cliche.

I am not sure it is technically a cliche but it's a phrase you hear all the time in the venture business.

People will say, "we need an RSS play"

Or "VideoSense is our video advertising play"

Entrepreneurs will blurt out during a pitch, "think of us a play on the intersection of wifi and mutiplayer gaming".

This terminology is a sympton of a disease that the venture business suffers from. That is the disease of always needing to be invested in the latest and greatest big thing.

There are some investors who subscribe to the theory that you need exposure to all the big investment themes. These investors tend to be very transaction oriented and build and manage (I am using that word generously in this case) large portfolios.

We don't subscribe to that theory at Union Square Ventures.

We subscribe to the theory that you need a well thought out and sound investment thesis and you need to find a small set of interesting companies that should benefit if your thesis turns out to be directionally correct. We believe that small is better and that active management of a small portfolio is the best way to generate exceptional returns.

We most likely won't have a China play in our portfolio even though China is possibly the most interesting investment theme right now.

We most likely won't have an energy play in our portflio even though energy is a very investable area right now.

Frankly we don't want any plays in our portfolio.

We'll take a few really smart entrepreneurs who we can help build great management teams and great businesses.

That's our only play.

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Posted August 31, 2005 in Venture Capital and Technology

Comments

Another great cliché.

I find the whole concept of thesis based investing fascinating. Gotta see how it's gonna play out *sorry ;-) lol

But seriously, thesis based investing is an innovation (?) in the venture business- and one at odds with plain vanilla portfolio management at that.

It's good to see someone go against the grain. Very entrepreneurial of you Fred.

*respect*

I must confess that I'm still a skeptic. Like everyone, I'm thinking of rounds A and B as being investments in call options and would think of buying the whole market as the way to go.

I would really want to see persistence in supernormal returns from thesis based investing. Here I go being all risk averse. Then again, if demand rules, thesis focused vc's r-o-c-k. For example, we wouldn't want anybody else touching our company. Too bad there aren't enough thesis focused financiers.

What about other entrepreneurs?

Posted by: Daniel Nerezov | Aug 31, 2005 11:05:12 AM

funny, I had always thought of play as being a simple synonim to tactic, it never occured to me that it has something to do with hype et all. :)

Posted by: Dragos | Sep 1, 2005 5:02:05 AM

I do agree with your general point, Fred, but not necessarily with your examples as Dragos is probably right in saying some people use the term differently than your portrayal.

As an investor, I have a bias towards entrepreneurs who are passionate about building a business that can stand on its own legs and have steered clear from entrepreneurs who think too much of the flip opportunities. Although each tends to come with its own drawbacks, e.g. the former may be too stubborn and inflexible to catch a relevant "play", the latter as you've alluded are only looking for "plays" to ride.

My take is that theme or theses based investing is a comforting idea for investors who do not really wish to or cannot assess risk/return on a micro level that firms like Union Square Ventures or business angels can. Again, this has its drawbacks as we have to admit that we are constrained from investing in areas where we do not know a lot. Research by Gertz and Baptista (1995) showed in a study of 12 industry groupings, some matured some growing, that within each grouping the best performing companies outperformed the average in each grouping. My sense is that even in theme/thesis based investing, you may end up with a lemon. And that you could invest out-of-theme and make spectacular returns just as Fred and I are trying to do.

As far as having a "play" for a relevant opportunity goes, I think much depends on the resource allocation constraints an entrepreneur faces, I would tend to pick the low hanging fruit and ignore the "play" unless the risk/return payoffs make sense.

Posted by: Kevin Foong | Sep 1, 2005 9:34:50 AM

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