When an investment passes our first-screen at Meritage Funds, the first deep-dive we typically do is on the unit economics of the business. Unit economics are the fundamental financial building blocks of a business. If you can pin down the unit economics, you can determine contribution margins, break-even points and perform ROI calculations all of which can help to determine whether a Company’s economic engine works. Without an understanding of unit economics, predicting whether a business can be profitable in the long-term is all guess-work.
I have to say “No”; alot. In fact, every one of us investor-types says “No” much more than we say yes. How we say “No” matters; alot.
Sometimes, you don’t know you have said “No” well until years after the fact. Today, I had one of those moments. Several weeks ago, Todd Vernon, founder and former CEO of Lijit and now, founder and CEO of VictorOps asked to have lunch. I didn’t ask the topic, because we’ve known Todd for a long time and because I like Todd. We had lunch today.
Today, my Partners and I at Meritage Funds announced that we’ve established a new platform in the data center colocation market. Headquartered in Seattle, WA, Digital Fortress operates nearly 50,000 square feet of data center colocation space, focused on delivering high-power density installations to enterprise customers. A Meritage Funds blog post announcing the investment has much more on our thesis and goals for the investment.
Some businesses are designed – maybe even destined – to be owner operated. Industry parlance often refers to these businesses as lifestyle businesses. Wikipedia has a nice definition. They are typically small, profitable, generate cash and enable their owner-operator to sustain a well-above average lifestyle. In some circumstances, they may even make their owner-operator filthy rich over time.
Some people may think that the term lifestyle business is an insult. I couldn’t disagree more. Being the owner-operator of a lifestyle business should be a source of pride; a badge of honor.
My Partners and I at Meritage have always had an investment mandate with broad stage flexibility. We’ve often described our investment practice as “multi-stage”, ranging from early/venture through later stage opportunities. This is in contrast to our sector preferences which are tightly and highly refined. It should come as no surprise then that we’ve been doing some soul-searching about our stage preferences.
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”.
The lot of a VC is to turn down virtually every business plan we see. The list of reasons I turn down plans is endless; the plan may a) not fit Meritage’s investment focus, b) not fit my investment interests/thesis, c) require too much capital for our firm to participate, d) be too early or too late; or perhaps I just think the investment is doomed to fail. Again, the reasons are myriad and there are too many to list here. There is, however, a small subset of plans that I would put in a unique category; the “turndown with encouragement”.