I have always been fairly thematic in my investment approach. For me, the process starts with identifying big markets that are either 1) emerging (and will therefore be created over the next several years) or 2) undergoing some structural shift that will enable new entrants to grab market share from incumbents. I have seen Companies succeed in both types of markets and so I don’t have a preference for either approach. In 2010, there are a several big themes that I’m tracking which are likely to influence my investment selection during the year.
Everything is a service
For several years I’ve been spouting off about the notion that “everything is turning into a service”. I outlined some detailed thoughts on this trend in a post titled “The future is in services” last June. As I look several years out, I see several big value chains threatened by this trend, creating opportunities for upstarts. For example, I think there will continue to be pockets of attractive investments in SaaS. But where I see big opportunity is in cloud based services and platforms that enable the cloud to become a true utility to the enterprise, small business and even consumers. Transforming computing from a product into a service is a non-trivial shift that will take many years, but the march is on and the direction of the trend is undeniable. Computing, storage, etc. will all primarily be purchased as a service in the not too distant future.
For me, 2010 will be the year of the platform. The notion of open platforms that enable third-party developers to innovate on top of the platform by consuming API is alluring to me. I’ve already put my money where my mouth is on this one as several of my investments have “platform” as a core component of their product and go-to-market strategy. Communications is an areas that has largely been untouched by the platform trend. It seems to me that the time is ripe for the network to begin opening up. I’ve written about this in the past on my firm’s blog; you can find that post here. The post is a bit dated, but I think you will get the point. Location services is another area where I think there are platform plays emerging.
I have an inkling that innovation is finally coming to payments. There have been some big exits in recent months, including BillMeLater and Revolution Money. Neither is particularly reflective of the type of innovation I think is coming in payment, but both show the size/scale of businesses that can be built given the massive size of the payments sector. With PayPal opening up its platform to third-party developers, there is going to be a rash of new payment application development in the coming years. As an investor in IP Commerce, I have a special perch from which to watch this trend. I’m staggered by the diversity of payment applications being developed on top of the IP Commerce platform. Several have already caught my eye as potential new investments and I believe more will do the same in 2010. I’m also tracking some big last cash markets, which I think are finally opening up to electronic payment providers.
Mobile is an area I have tracked closely for several years now. And while some would argue that the market has disappointed, I would counter that we are still in only the early innings of a very long game. I continue to believe firmly in the mobile web, or the web optimized for the display needs and the unique capabilities/properties of mobile phones. I’m less enthusiastic about applications being developed for the iPhone/Android/RIM and other operating systems; or at least less enthusiastic about investing in companies that create those apps. There is just too much OS fragmentation for application developers to manage effectively and it is difficult to make any particular app stand out in the crowd.. As 4G networks begin to roll out, more bandwidth may obviate the need for a downloadable app. In some ways, apps remind me of PointCast; remember that? I’ll continue to track this trend closely, but as it stands, my money is on the web, not the apps in the long-run. Regardless, I’m more interested in the infrastructure and plumbing in mobile than the consumer-facing application side. The fact is that the mobile use case is fundamentally different from the web and it enables usage paradigms that are not relevant on the tethered web. As a result, the capabilities of the plumbing for mobile need to cater to what is unique about the mobile experience, creating an opportunity for new players to stake out a dominant and differentiated position.
I’m likely to make two new investments in 2010. I am more likely to prioritize my review of investments that synch with the themes outlined in this post. I’m also more likely to make investments in these areas than other areas I’m not tracking as closely. Having said that, I think it is critical to marry a thematic (and therefore planful) approach to identifying great investments with an opportunistic approach. So I don’t rule out making investments in other areas in 2010. I know there will be several entrepreneurs with whom I interact who light a spark causing me to dig deep into areas not outlined in this post. Frankly, I look forward to having that spark lit; it is a great part of the process of discovery that the VC business requires.