February 26, 2021

Venture in the “Roaring 20s” -- Or, Looking for the Next Zoom

Spencer Greene

By TSVC General Partner Spencer Greene

Image Source: Forbes

As venture investors, my partners and I are often asked what technologies or markets will be “hot” this year.  Naturally, we read the news like everyone else, and we have opinions like everyone else; but when it comes to our venture-investing day job, a year is way too short a time scale.  If you zoom out far enough, a one-year horizon looks kind of like day trading.  We specialize in seed and pre-seed companies, which makes us the ultimate buy-and-hold investors.  The startups we work with in 2021 may take five years before they’re widely considered hot - in the meantime they’ll be launching and learning and scaling, and each year they’ll cross more people’s radar, but it mostly doesn’t happen overnight.


Take Zoom for example.  Obviously they’ve done tremendous things to keep us all connected during the pandemic, and they’ve grown commensurately.  The company was already hot pre-pandemic, posting one of the biggest tech IPOs of 2019, well before “Zoom school” became a household word.  But to understand the seed investor perspective, you have to rewind all the way back to 2011, when TSVC, as the only institutional fund alongside a group of individual angels, seeded the company.  Put yourself back into that time: the iPhone 4 has just been released; 5 Mbps is considered pretty fast Internet to have at home; and the fraction of US workers who works from home is a bit over 4 percent.  Seed investors like TSVC had to detect signals about how the 2010s would unfold -- and, more importantly, how the founding team would adapt to the unfolding decade.  Great companies, like Zoom, aren’t the ones that correctly predict the future ten years out, but the ones that start off in generally the right direction and react continually to new input.


One of the nice things about investing over such long time horizons is that, on average, fundamentals win.  Benjamin Graham famously said that stock markets in the short term act as a voting machine, measuring what’s popular with investors, but in the long term act as a weighing machine, measuring real value creation.  Betting on “what will be hot this year” is mostly a zero-sum game for traders, one that is subject to the systemic risks of the stock market -- irrational exuberance, meme stocks, the flavor of the month.  Ironically, long-term venture investing is in this sense lower risk than public-market investing, because the returns on an early-stage venture investment are very strongly correlated to the company’s creation of value for its customers.  And value creation, it turns out, is something that can be reasonably well predicted, given a smart enough investor who is willing to do enough homework. 


So, given all that, what themes are we looking at for the 2020s?  

Covid as Meta-Theme

One major area of interest is the lasting knock-on effects of the pandemic on society and the economy.  The pandemic has forced companies, employees, and consumers to find new ways of dealing with everyday tasks.  Some of what we’re forced to do in the current environment, like playing sports matches with empty stadiums, will be happily left behind; but some of it, like spending less time commuting to the office, is in the category of “why didn’t we think of this sooner?”  


For example, TSVC invested recently in myYogaTeacher, a company whose live online yoga sessions, delivered by exceptionally skilled teachers, are changing how people organize their days.  Every category of product evolves from centralized and inconvenient, to decentralized and convenient, ultimately to on-demand and self-service; the pandemic has accelerated this progression for products like myYogaTeacher, Peloton, etc., and once people experience the quality and convenience of remotely-delivered instruction, it’s something they don’t want to live without.

Healthcare Productivity

Over the course of the 2020s, we expect to see significant changes in the healthcare sector. There has been an upsurge of information and data that can inform how treatments are performed and how drugs are discovered. New technologies are coming to market that transform the speed with which new medical products are developed, impacting their efficacy and producing better outcomes - in other words, saving lives and saving money. 


One big opportunity is in healthcare cost reduction through the broad category of productivity improvements.  Most of the energy in healthcare over the last few decades has gone into better treatments at higher costs, with relatively little progress on improvements to productivity.  Looking at recent history, then, it would be easy to believe that healthcare productivity can’t or won’t be improved, but that would be a mistake.  Technologies like EHR and telemedicine have not yet delivered the kinds of dramatic benefits that other industries have enjoyed, partly because it’s taken a few product generations to get them right, and partly because providers have resisted adoption.  But products keep getting better, and on the adoption front, there’s the inevitable demographic march of digital natives into the healthcare profession (and, soon enough, into healthcare administration).  Telemedicine, in particular, got a big boost from the pandemic and will be an ever-increasing part of the healthcare delivery mix from now on.


The US fee-for-service reimbursement model slows progress, but clever entrepreneurs are finding win-win business models that can succeed despite perverse incentives.  Companies like Preveta and Angle Health in the US, and HealthLane in Africa - all recent TSVC seed investments - are among many innovators who will make a dent in this problem.

AI-for-X

All kinds of knowledge work will be transformed over the next decade by increasingly-intelligent Artificial Intelligence and Machine-Learning technologies.  Literally every week we are seeing a new company doing “AI-for-X,” with a product that can automate some kind of human task, often one that requires expensive highly-trained professionals.  Autonomous driving is the highest-profile AI application -- TSVC investments like Quanergy and PlusAI are enablers in this space -- and the same technologies are being applied across a wide swath of other industries.  In fact, when an entrepreneur says “I can build a machine to automate X,” we mostly now believe them without argument; the harder business problem often is “how will you maintain competitive advantage when many other companies automate the same problem?”


It’s exciting to see so many early-stage ventures with technologies that will be so widely felt over the next decade.  The popular press has covered some aspects of the AI revolution, particularly some of the more ethically controversial ones like facial recognition, but many of the forthcoming behind-the-scenes improvements don’t yet get much attention.  Vervoe, has a recruiting-AI product that eliminates demographic bias from candidate-shortlist decisions; their customers are hiring previously overlooked candidates who, it turns out, are measurably outperforming candidates chosen the traditional way.


As the machine learning “gold rush” develops the means to AI-ify so many industries, one area we’re particularly excited about is the “picks and shovels” business to support data scientists and AI engineers.  Brainome, a recent TSVC investment, can accelerate model training by 10x to 100x, which is especially important for the large models used in pharmaceutical development, “you might also like” recommendations, and a host of other applications.


Then there’s the AI-for-X solutions we’re still sanguine about.  Chief among these is AI-for-authenticity.  Whether it’s detecting deepfakes, or controlling political mis- and dis-information, or eliminating product-review sockpuppets, we humans are at ever-increasing risk of being fooled and taken advantage of.  It’s not clear what technological solutions or commercial models will emerge, but we’re keeping our eyes open for innovations in this space - if you’ve got something, please pitch us!

Cross-pollination

While it’s not new to the 2020s, a continuing theme underlying successful companies is cross-pollination between industries and between countries.  Ginkgo Bioworks brings together computer science and biology in novel ways; Lambda School brings a novel, fintech-inspired payment model to education; Citcon brings China’s wildly successful mobile-payments technology to the US market.  Teams that combine industry insiders with experts from other fields often find the most interesting innovations.

The Weighing Machine

I suggested above that early-stage venture investing is less risky than public-market investing.  That seems counterintuitive, but I believe there’s truth to it.  The main reason that venture investing is perceived as risky is that the individual companies we invest in are themselves high-risk.  But it’s worth noting two crucial points.  First, our individual positions are not high-beta; their ultimate value is very sensitive to their individual execution, and much less sensitive to the market as a whole.  Second, a venture fund holds a portfolio of investments.  While there’s no guarantee that any single one will be the next Zoom, or Carta, or Gingko Bioworks, provided the VC is smart enough and willing to do the homework, he or she can pick those world-changing companies with high enough probability to outperform most public-market investors, by a lot.  


Where will we find the next Zoom?  Time will tell.  If you think it might be your company, then please, contact us, we’d love to hear from you!  




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