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Venture Capitalists (VCs) & Angel Investors share their investing thesis, screening process, value-add, exits, and more. Hosted by Prashant Choubey (@ChoubeySahab)

  • early-stage-investing
  • pre-seed
  • venture-capital
  • angel-investing

7 Meta Themes for Startup Investing by Martin Tobias, Founder of Incisive Ventures

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Martin Tobias, the founder of Incisive Ventures. With over 25 years of investing, he has identified seven meta themes and developed a screening process that has produced superior returns. This process has grown out of the analysis of hundreds of investments and what has been common among the winners in their characteristics and his decision process. He is a serial entrepreneur who has also invested in over 250 companies as an angel, half a dozen as a venture partner at a major VC firm, and he is a limited partner in over a dozen VC funds. He is also the Founder of a leading Angel network, Element8.

We talk about:

  1. Martin’s story and how he started investing?
  2. Advice on how to start investing
  3. 7 meta themes for startup investing
  4. How to spot great founders?
  5. Is capitalism making people lazy?
  6. The VC funnel

Martin’s story and how he started investing?

I've been a guy that loved the intersection of business and technology for a long time. I was a computer science major with a business minor and I always liked solving business problems with technology. And out of school I went to Anderson Consulting in Microsoft, and when I left Microsoft, I was there before the IPO, so I made some money in the IPO and I had some money and I'm like, I think I should start investing. I joined a couple of venture funds.

Luckily the first fund I joined was Silicon Valley Angels Ron Conway's Fund. That was a series A investor in Google. So I have some Google shares that I got in the IPO that I still own and that kind of got me addicted. Kind of an unusual company to have as one of your first investments, the best performing tech company in the history of the world.

But that got me wanting to do more of it. And my last job at Microsoft was also working in electronic software distribution, which at the time, this was before they had digital licensing of Windows. It was a place with a lot of startups and I met a lot of startups and these guys seemed to be having a lot of fun. So I started investing in startups.

Right after I left Microsoft, I started my first software company. I ended up taking that one public, Loudeye Technologies, in March of 2000, as the last company to go public. I made some money there and I did more investing. And I'm a limited partner in 17 venture funds. I've invested in over 200 companies myself and I now run two small venture funds with mostly my own money as an LP.

Advice on how to start investing

Unfortunately, the first thing you have to have is some money, and how you get that money is up to you. If you are just starting out in your career, I recommend that everybody early in your career go to work for a startup that you think is going to be successful. Right out of college I went to a big company which was Anderson Consulting, and they were feeding me this whole long term career path bullshit. And then they sent me as a consultant to Microsoft and Microsoft offered me a job. And then the big company said, no, Microsoft is never going to be anything. We're the big company. And I delayed my thing for a year. Taking the job at Microsoft, delaying that year cost me $20M in stock options.

So my recommendation is go to work for the startup as soon as you can. When you're young, it's easy to change jobs. When you're under 30, go to work for the startup, and even if that one doesn't work, go to work for another startup. And for me, that's how I got the money to start investing, was to work at a startup which was Microsoft before the IPO. And then once you get a little bit of money and frankly, it takes a lot less money to start investing than people think in private companies, I would say that people should start investing in the public markets when you have less money and you're not an accredited investor. And even with a couple of $1,000, in order to start investing in the private markets, you need to be accredited, which in America means you have to have a million dollars.

To start angel investing, I would recommend that people start on something like Angel List where you've got syndicates and you can write smaller checks of $1,000 because frankly, the direct angel check beginning is $25,000. And I would not recommend that people start with writing $25,000 checks. That's what I did. And frankly, when I went back and looked at those first sort of $50-25,000 checks, I shouldn't have written all of those.

The very next thing that I recommend anybody do when they're starting investing, whether it's in the private markets or the public markets, is you have to come up with a thesis. You have to come up with an idea of what you believe is an unfair advantage or what I call a counterintuitive thesis that you happen to be right about.

I had a bet in 2000 against a friend of mine. I just bought some Amazon shares and he was going long on Walmart. And I said, you're an idiot. Walmart's a shitty company and I'm going to make more money than you. And he said, you're an idiot. Walmart is 100 times bigger than Amazon. It's profitable, blah, blah, blah, blah, blah. And I go, Fine, let's put our money where our mouth is. We both bought $10,000 worth of stock in Walmart and Amazon.

20 years later, I had 100 times more money than him. But my bet was, I believe that the value of one click ordering extra selection ecommerce is going to drive greater growth rate. And it turns out over those 20 years, amazon grew at roughly 15% to 20% a year, while Walmart grew roughly the equivalent of the population at 3% a year. And that's why Amazon was worth a lot more. I had what he believed at the time was a counterintuitive thesis. I said, I believe that these trends that I see happening are going to continue and are going to generate more investor value.

So every investor, whether you're investing in public or private markets, have to come up with these themes, these things that you believe in, about how the world is going to evolve over the next five to ten years. And hopefully some of those things are things that lots of other people don't believe because otherwise, if everybody believes them, they'll all be priced into the value of the assets you're buying. 

7 meta themes for startup investing

  1. Software eats everything
  2. Great founders figure shit out
  3. Destructive innovation creates new markets
  4. Platforms win.
  5. Laziness wins.
  6. Invest only when I can be helpful to the company.
  7. Invest alongside other very smart, committed people.

When the Pandemic started, I was running a company in Los Angeles and the company was shut down by the Pandemic. So I had a lot of time on my hands, like a lot of people did, and I said, what am I going to do?

Well, I sat down and spent three months analyzing all 150 companies up to that point in time that I had invested in, and all the themes and what I thought I knew at the time when I wrote the check, how they turned out, what was I right about, what was I wrong about, and where was I actually any good at making investment decisions?

It was a really exciting exercise to go through because most people don't ever sit down and look at their prior decisions and analyze what was correlated to a good outcome. And what I found was that those seven themes, when those seven themes were present in an investment that I was considering, I was getting basically a 3 times better return than when they weren't present. And I had invested in lots of different themes over the 150.

Like I said in the beginning when I started investing, I was doing the any good deal shotgun approach. Oh, so and so. You're a great guy. Fine, here's $25,000. Good luck. But what I realized is that many people start investing that way. Many people do what I call over index on the Coinvestor signal. So if you're looking at an angel investment and Sequoia is leading around, they write the check. And that gets to my last thing there invest with other committed, smart people. I put the word committed in there because Sequoia Capital doesn't have the same amount of money as you do. A million dollars for them is like $0.05 for you.

So if Sequoia is investing a million dollars, it's not necessarily a positive signal. Sequoia invest in more companies than you do. So does Andreessen Horowitz, so does NEA, so do all the big firms. And they're playing a portfolio approach. So unless you have the capital to play the exact same portfolio approach, you cannot replicate their returns. So you should not over index and overvalue the level of commitment, because their level of commitment is not the same as the relative level of commitment that you're going to make. And they're playing a different game than you are, just like Tiger is playing a different game. That's why that's one of the themes, is that I encourage people to do their own diligence and don't overvalue co-investors.

You should have smart people on your cap table. But I had one company I looked at and he was saying, Peter Thiel's investing. Peter Thiel's Investing. And I'm like, Well, Peter's a smart guy. How much is he investing? $250,000. I go, you know what? I bet you Peter doesn't even fucking know he wrote that check. I bet somebody else at his organization wrote that check. And I dug into it. It turns out that it wasn't Peter Thiel, it was an investment company that was owned by an investment company that was owned by Peter Thiel. And the chances are Peter Thiel had no idea that check had been written, is not on the board, and doesn't even know the name of the CEO. And yet the CEO was saying, Peter Thiel is my best friend. That is a mistake. And that happens all the time. And investors need to dig in and see who this investors really are. 

How to spot great founders?

I'm a pre-seed & seed investor. At that stage, it's all about two things the founders and the ability to get product market fit. That's all that matters. Nothing else matters. And so when I say great founders, when I was looking at my investments, there is a huge order of magnitude difference in how the companies perform between great founders and okay or average founders. I've talked to over probably 20,000 founders, and within ten minutes, I can tell if the person I'm talking to now is in the top 5% of all founders I've ever talked to or not. And that's what I mean by great founders. Now, it's pretty hard to put some specific rules around that.

Frankly. I have my own way of doing it, and it's really just pattern matching. I look for some specific things, and it has absolutely nothing to do where the founder went to school, what their prior job was. It has a lot more to do with how they are at problem solving. Are they resilient what happened the last time they failed? How do they learn? What did they learn, and what's their communication style?

For example, one of the questions I asked founders is, send me your last investor update, and I want to see how you write, how you communicate. If they say I don't do investor updates, I'm immediately a hard pass. If their investor updates are terrible, I'm like, this guy doesn't know how to communicate.

So there's a couple of things I look at, but there's literally an order of magnitude difference between great founders and average founders. I mean, look at Elon Musk, who is one of the greatest founders in history of the world, and other electric car CEOs. It's just not even close, right?

Is capitalism making people lazy?

Certainly there are downsides to this. For example, you look at the health benefits. People don't just drive to Starbucks to get an Americano, which has five calories. They drive there to get Amoka, which has like 280 calories. So the healthiness of this convenience comes at a huge cost. I don't know if you saw the movie Super Size Me. McDonald's is a great business. I would never invest in it.

I think it's an evil business that's destroying the world, but it's a great business. Like, as far as financially, if that's what you care about. I think investors should overlay their personal values and what they want to change in the world on top of the good business. There are plenty of good businesses I would not invest in because I think they're evil, like McDonald's, despite them being good business.

I invested in a company called Trip, which is doing meditation software and VR, and people need better ways to de-stress rather than drinking alcohol. And I think that as people get less stressed out if they're using this technology, they're better able to interface with their neighbors and the world and everything else.

The growth of meditation apps like Headspace and Calm has been great. They're good businesses and they free up people's cognitive space. So I tend to invest in things that will free up people's time so hopefully they can go do what they're really meant to do in the world. I invest in this company called Catalyst Fitness, which is an electromuscular stimulation suit. It replaces an hour and a half of weight training and a 20 minutes workout. So what are you going to do with that extra hour and ten minutes a day? Whatever you want. I think that's great. 

The VC funnel

As a VC, I get tons of inbound and I get them from three or four sources. Venture capitalists that I work with send me things that are a little early for them. Founders and CEOs who I've funded before send me their new deals or friends that are starting companies. And then I do a lot of research projects on the specific verticals where I think there is a lot of friction. I spent four months last year figuring out continuous glucose monitors and reading all the 20 companies that are in the space. I ended up investing in three of them. And then I do go to a few incubators, but not that many.

That generates for me about 200 companies a month that I have to look at. Plus I also get a bunch of cold inbound from Twitter and things like that. And the first thing I do is just look at it compared to my 7 meta themes. And for example, software eats the world. I do not invest in hardware, I do not invest in biotech, I do not invest in crypto. So there are certain categories that I just don't do. Not because they're not good categories, but because I'm not the right investor.

So frankly, about 70% of the companies fall out for just that high level. Do they fit the thesis? Are they reducing friction? Are they software? Are they disrupting something which could potentially be a big market, or are they incremental? Most companies fail because they're in a category that I don't invest in or they are an incremental thing and that it could not potentially be a platform or that they're not software. So about 70% fallout for that.

Then I read the decks and try to decide if I want to have a meeting with the CEO. And another about 50% fall out after reading the deck because the deck is poorly communicated. They might be too early. Maybe they're at the ideation phase and I don't invest until you have a product, or maybe they're too late in that they are raising a Series A, which I don't invest in.

So the second category, usually people fall out for stage or poor communication in the deck. And then when I take meetings with people, which is about 15 or 20% of the funnel during the month, it starts with that team thing. And literally within ten or 15 minutes of a call, I can tell whether this is a team that's in the top 5% that I've ever met. In my life or not. Usually they're not because 95% or not. So out of 200 companies that I see that I get inbound in a month, I will make one investment usually. 


Pitch Martin: https://incisive.vc/

Read Martin's blogs: https://incisive.vc/insight/

Follow Martin on Twitter: https://twitter.com/MartinGTobias

Hosted by: https://twitter.com/ChoubeySahab

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