A sneak peek into Point Nine's investment thesis

Over the last couple of weeks and months we spent some time putting our investment thesis on paper. The purpose of this exercise was to challenge and discuss our implicit assumptions and to get everyone on our team aligned on what kind of investments we seek.

One of the things that being very clear about our investment focus helps with is getting to “no” faster. If that sounds pessimistic, remember that we see thousands of potential investments every year but can only do 10-15 of them. Just like it’s crucial for sales teams to have clear qualification and disqualification criteria, it’s important for us to focus our time on “higher probability deals”. That means we’ll have to be able to quickly pass on a large number of deals that are likely not a good fit for us. Our “filter” is of course not perfect, so we’ll inevitably pass on lots of great companies, some of which will end up in our growing anti-portfolio – but there aren’t enough hours in the day to take a close look at each company that we see.

A fast decision process is also important for founders. As we’ve learned from this survey, being left in the dark is the single most important reason why fundraising often sucks for founders. We will obviously never be able to make decisions based on a simple algorithm, if only for the fact that the founding team remains the most important of all criteria. But anything that helps us streamline our decision making process is welcome.

Once the document is in a publishable form we will post it. Bear with us for a little while as we’re polishing the document a bit to make it more self-explanatory and to remove the worst typos. ;-) In the meantime, here’s a sneak preview.

We will continue to focus on two business models: SaaS and marketplaces

SaaS

• We use a broad definition of SaaS. Usually the first “S” stands for “software”, but sometimes it stands for “something”, e.g. a combination of software and hardware or software and data.
• We’re interested in horizontal and vertical SaaS. What counts is that the startup is aiming to solve a big enough problem for a large enough number of potential customers in order to build a big business. As a rule of thumb, we’re looking for markets that consist of at least 3,000 whales ($1M ACV), 30,000 elephants ($100k ACV), 300,000 deer ($10k ACV) or 3M rabbits ($1k ACV). ¹
• We’re equally interested in companies targeting SMBs (AKA rabbit and deer hunters) and companies targeting enterprises (AKA elephant and whale hunters). What’s important is the right founder/market fit. For companies targeting very small businesses (AKA mice and rabbit hunters) we want to see the potential for viral distribution.
• We’re looking for companies that we think can build a 10x better product and/or drive a paradigm shift in the industry. ²
• We want to invest in companies that can eventually build moat e.g. by becoming a system of record or a “system of intelligence”; by building a large data set that in combination with machine learning translates into a superior product; by building a platform; or by becoming a SaaS-enabled marketplace.
• With very few exceptions in areas like accounting, we’re looking for companies that have the potential to win the US market.
• We’re looking for SaaS companies that have the potential to get to $100M in ARR within 7-8 years and to $250-300M ARR within another 2-3 years.

Marketplaces

• Like in the case of SaaS, we use a broad definition for marketplaces. For us, a marketplace is a digital platform that brings two or more parties together and enables them to “transact”. The object of the transaction can be a physical product, a digital product, a service, or in some cases a piece of information or knowledge.
• We look for startups that leverage marketplace dynamics to create unique user experiences in fragmented markets, with the potential to develop a moat through network effects.
• We believe that marketplace platforms will continue to emerge in the most unexpected of places and in the most unexpected of forms. They will continue to transform entire industries.
• We are open to all of C2C, B2C, B2BC and other types of marketplaces. We are particularly excited about B2B marketplaces and “SaaS enabled marketplaces”.
• We are trying to identify platforms able to become international leaders. Thus, we will typically look for early proof of ability to operate in more than one country or globally.
• We are looking for early signs of liquidity. ³
• We look for founding teams with strong commercial sense.
• We think that blockchain technologies have the the potential to disrupt many marketplace models as we know them today; we will be exploring them in depth.
• We look for marketplaces that can become truly significant. In monetary terms, this means the potential to ultimately generate hundreds of millions of dollars in annual net revenues and billions in GMV.

Thanks for contributing this section, Pawel. Expect a follow-up post with more details from Pawel (who’s leading most of our marketplace investments) soon.

We will continue to invest in new areas and technologies that we like to dub “Frontier Tech”

• While we’re focused on two business models – SaaS and marketplaces – we’ll continue to keep our eyes wide open with respect to new technologies.
• We’re extremely interested in new opportunities in areas such as AI/ML, blockchain and cryptocurrencies, IoT and hardware-as-a-service, drones, or AR/VR. We have already made investments in most of these areas and will continue to do so.
• In many of these cases there are complex tech problems that must be solved. We’re happy take a certain level of technology risk, but at the same time we’re looking for founders who find ways to bring a product to the market quickly and cheaply.
• While a superior technology will usually be key to entering the market and have some early wins, most technologies will eventually be commoditized. Therefore we’re looking for additional sources of long-term defensibility such as high switching costs and large data sets (see the section on SaaS above) or network effects (see the section on marketplaces above).

Thanks to Mr. Frontier Tech Rodrigo for your help with this section, and looking forward to your follow-up post as well.

We will continue to focus on early-stage investments

• We’ll continue to focus on seed investments, investing anything from a few hundred thousand dollars up to around $2M in “seed” and “late seed” rounds, typically in companies that have strong indications of Product/Market Fit and promising early traction.
• We will continue to make what we call „founder bets“: Idea-stage investments into proven entrepreneurs from our close network. In these cases most of our „rules“ don’t apply. When people like Doreen Huber, Fabian Siegel, Iñigo Juantegui, Pan Katsukis, Sebastian Diemer or Stefan Smalla start something new, we want to be part of it. ⁴

We will continue to invest internationally

• Europe is our home market – we’ve made investments in most European countries and we’ll continue to invest all over Europe.
• Especially in SaaS we will continue to invest outside of Europe as well – e.g. in the US, Canada, Australia, New Zealand and other countries.
• In SaaS, our assumption is that you can start almost anywhere but you have to win globally (which requires winning the US). In marketplaces we want to find companies that can win several large markets.

We continue to aspire to be a “Good VC”

• We don’t pretend to be the right investor for every startup. But our aspiration is that if we do invest in a company, we’re the absolute best partner the founders can dream of and that we’ll play a significant role in helping the company get to the next stages.
• We’re optimizing for the long run in everything we do. You “always meet twice in life”, as the German saying goes.

_________________________

¹ Check out this post if you have no idea what I’m talking about. Then, get your poster.
² See Sarah Tavel’s post about “10x better and cheaper products” for a similar concept from the consumer Internet world.
³ Defining liquidity is tricky – a topic for another post!
⁴ True story – these are all guys who we backed or worked with closely before and who subsequently founded Lemoncat, Marley Spoon, OnTruck, Remerge, Finiata and Westwing, respectively.

Uber's Wonderlamp

Uber's uber large funding round has been the talk of the day in the tech community in the last week. And it should be, since it doesn't happen very often that a four year old company raises $1.2B at a $17B valuation. In fact, according to this Bloomberg story, Uber's new valuation sets a record for investments into privately-held tech startups.

When I first heard about Uber a few years ago, I didn't quite get it in the beginning. The traditional taxi system works quite well in Germany, and I thought that the advantage of using an app to order a cab as opposed to making a quick call wasn't such a big deal. Also, the expensive "private limo" service, which Uber started with in the beginning, didn't appeal to me.

After using mytaxi in Germany, I started to like the idea, but it was the launch of UberX and my recent two-months stay in San Francisco which turned me into a huge Uber fan. What is it that makes Uber so compelling? It's a number of smaller and bigger factors, which, combined with a slick mobile app, make Uber a highly habit-forming service:

• Speed: In San Francisco, Uber has such a large number of drivers that no matter where you are in the city, it rarely takes more than 5-10 minutes until your car arrives. It happened to me several times that "my" Uber arrived in less than a minute because a driver was just around the corner, which gives you an Aladdin's wonderlamp feeling: You hit the order button on your phone, and almost instantly a car shows up to pick you up. 
• Transparency: You get an ETA and you can watch your car on the map as it's getting closer to you, so you know pretty exactly when your car will arrive.
• Price: The company's budget option, UberX, is cheaper than normal taxis.
• Convenience: The fact that you only have to enter your credit card once makes the payment process extremely convenient and saves you a lot of time every time you arrive at your destination. Related to that, Uber has constructed its business model in such a way that the drivers aren't allowed to take tips, so you don't have to think about how much tip to give. That leads to another almost magical experience – you arrive at your destination and off you go. No waiting for your credit card to be processed or for the driver to look for change. You don't have to worry about getting a receipt neither, since a receipt is emailed to you after the ride. The driver stops and 5 seconds later you're out of the car. Brilliant.

Last but not least, virtually all of the drivers I drove with were very friendly and courteous. Maybe that was just professional friendliness in some cases, but my feeling was that almost all of them were very happy working for Uber and were genuinely trying to provide a great service (besides making sure that they maintain a great rating).

So Uber is great for riders, and based on what I know, it's good for the drivers, too. But is it also a great business? I think so. If a company delivers so much value to both sides of a marketplace, it can take a significant cut and acquire buyers and sellers profitably. I also think that although driver and rider loyalty might not be huge in principal (as this WSJ piece suggests), Uber will be able to create significant moat around its business through network effects and the building of its brand.

If Uber manages to sign up more and more drivers in an area (something which I don't doubt they'll be able to do), those magical moments which I described above – where your car arrives almost instantly – will occur more and more frequently. Competitors with less driver density won't be able to deliver the same level of uber user experience. In theory, an extremely well-funded competitor might be able to attack one of Uber's markets by offering both drivers and riders a much better deal. In practice that will be very, very difficult given Uber's lead and the quality of its execution. And the fact that Uber has now more than a billion dollars in its war chest won't make it easier.

Is Uber worth $17B? I don't know enough about the company to judge that, but what's clear is that Uber has a very realistic chance to revolutionize the worldwide taxi industry. What's more, Uber's long-term vision is much bigger. As Travis Kalanick puts it, they want to make "car ownership a thing of the  past", and my guess is they'll try to disrupt a few other industries (such as last-mile delivery) along the way. Huge congrats to Bill Gurley and his partners at Benchmark for betting on Uber early!

Unscalable hacks

Recently I stumbled on the term "unscalable hack", in a blog post by Chris Dixon. This really struck a chord with me because it's a very important concept for many startups but I didn't have a term for it until I read Chris' post.

What exactly is an "unscalable hack"? Google doesn't return a lot of useful results and neither does Quora, so let me try to explain it. In the context of programming, using an unscalable hack means programming something in such a way that it works under very specific, limiting conditions (e.g. with very few concurrent users) but won't work with a larger number of users. The advantage of a solution like this is that it doesn't take a lot of time to develop so it saves you money and time, but the disadvantage is that it, well, doesn't scale and that you're accumulating technical debt.

In a business context, unscalable hacks are actions that you use to dramatically decrease time-to-market, solve chicken-egg-problems or overtake competitors, all the while knowing that you can't operate like this forever. In some cases the success of these hacks can be a make-or-break factor for a startup.

Marketplaces and social networks are particularly prone to these tactics since these types of businesses require you to reach a certain critical mass in order to be successful. Take an auction site as an example: As long as there aren't many buyers on the site, it's not attractive for sellers to list their items on it. And as long as there aren't many sellers, the site is not very useful for buyers. It's a classic chicken-egg-problem, and unscalable hacks can help you solve it.

Here are some examples of unscalable hacks that I'm aware of:

• In the early days of PayPal, PayPal reportedly listed lots of products on eBay and made PayPal the only accepted payment option for these products. I don't know if it's a true story, but either way it's brilliant. :-)
• AirBnB offers people who want to list their apartment on the site professional photo shootings of their apartment for free (maybe this actually isn't unscalable, I don't know).
• Lead generation marketplaces which send free leads to the supply side in the beginning and generally invest a disproportionate amount of money and time into acquiring the first providers.
• Mobile app creators who hope to start a virtuous circle by buying their way into the app store top listings.
• In SaaS, a good unscalable hack is to spend huge amounts of time with your early users to turn them into happy users and evangelists.

Solving the chicken-egg problem that is inherent to marketplace-like models is so mission critical that it sometimes leads to unscalable hacks that are ethically highly questionable, for example dating sites that use faked profiles to attract people to their sites.
The oldest well-known unscalable hack, or maybe a close relative of it, is maybe to give away oil lamps and make money by selling the oil. :-) If you know any good ones from the more recent past I'd love to hear them!