How to ‘predict’ the future: Thesis-driven investing

Avalon Ventures doggedly sticks to its three-pronged investment strategy, and we’ve had repeated success with it. While some have referred to this success as prescience, it’s more sophisticated (and more interesting) than looking into a crystal ball. What this “hunch” boils down to is recognizing patterns.

We have the privilege of seeing hundreds of businesses every quarter, and from that vantage point, and at that volume, we are able to observe emerging trends in the markets in which we invest. We then distill these trends into patterns, and patterns transform into theses. These theses then guide our investment decision process, helping us to see what companies will be successful and which ones will not.

For example, the idea for one of our investments, Cloudant (acquired by IBM), originated with three MIT physicists who were frustrated by the tools available for managing and analyzing large amounts of data. They built a distributed, fault-tolerant, globally scalable data layer on top of Apache CouchDB. The vision for Cloudant fit neatly within our thesis that cloud computing represents a major shift in computing infrastructure and increasingly will be the preferred delivery method for software and systems.

There are three reasons thesis-driven investing helps to “predict the future” of a successful investment:

1. We know which companies will be successful (sometimes before they do).

If we have a working thesis about the way a particular market is going, we look for companies whose unorthodox problem-solving aligns with that underlying assumption. In some cases, we even find those companies before they come to us. Take Skycatch, for example. Friends and fellow investors knew that the Unmanned Aerial Vehicles (UAVs) space was on my radar. When they told me about Skycatch, I called founder Christian Sanz and it didn’t take long for us to figure out that we were a mutual fit. Sanz’s positioning on drones as a data business, combined with the drone’s autonomy (unmanned, able to swap out their own batteries and data cards) aligns with our assumptions about the importance of real-time imaging and allowing drones to go where no person could safely go before.

2. We know this will be a successful partnership.  

A well-known investment rule across any type of investment (be that public or private) is that people matter. We’ve certainly found that to be the case. When you invest in a company, you commit to three, five, sometimes even 10 years of sharing part of your life with that person. When we find a founder who shares underlying assumptions about the market, it can be like finding an old friend. It informs an aligned confidence, a powerful ally when trying times come (and they will). An aligned thesis also provides coveted common ground. Because of our different roles, investors and founders can sometimes find themselves at odds if they do not share the same conviction about the company’s purpose and trajectory. Thesis-driven investing enables a successful partnership that endures even through a company’s inevitable evolution.

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3. We can successfully move very, very fast.

The hard truth is that your idea is not as important as your ability to execute. Confidence in common ground gives birth to a fast pace of execution. When you have the necessary components in place, you will move at breakneck pace with a road map for navigating the difficulties ahead. Specifically:

• You can confidently let the founder own decision-making.
• You advise at strategic points, not at every opportunity.
• When big problems surface, we tackle it from a common place.

Thesis-driving investing is sophisticated and far more exciting than reading a fortune cookie. By looking for patterns, you target waves of innovation that are both large and timely. If you follow this successful strategy, you can enjoy the excitement of backing incredible entrepreneurs and ideas with successful returns.

Rich Levandov is a partner at Avalon Ventures. He has over 25 years of experience as an entrepreneur, operator, angel investor, and venture capitalist involving a variety of cutting-edge, high growth, early-stage technology companies. It was after he cofounded Phoenix Technologies (PTEC), a company that helped launch the PC revolution, and served as an early Vice President at America Online, Inc. that he started his venture capital career.