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Within the world of venture investing, there are many investing approaches. Some act opportunistically or event-driven, others follow a set of theses or fixed beliefs. While the latter group has shown to be more vocal (a natural outcome of its doctrine-esque approach, I suppose), success happens across the board. Regardless, it is about time to classify investment methodologies a bit. I have therefore tried to come up with a meaningful ontology of approaches.

Types of venture investing

One important addition: I deliberately do not call those approaches investment “strategies”. I see the overall strategies of most venture funds as somewhat similar, focusing on venture-stage equity investments. It is rather the underlying doctrine or thinking that is of interest here, driving which company (and not which broader asset class or stage) an investor will be considering.

1. Opportunistic investing

Opportunistic investors act event-driven and without a fixed set of beliefs that would limit their activities. While each and any investor will always use a healthy dose of opportunism, the main reason to list them separately here is that they, by definition, will not stick to a set of topics or theories. It is therefore best to define them in a negative way: they invest in the absence of an underlying belief. They will go for all industries, all companies, all business models given that return expectations are large enough.

2. Thematic or topical investing

Thematic investing might be the most common form of venture investing. Investors will focus on “e-commerce” or “SaaS” or “mobile” or “advertising technology” or ”Asia”, i.e. they operate within a chosen industry or geographic domain. To be fair, most venture investing is thematic in some way as almost all VCs have picked the broader theme of “technology” as their playing field. Nevertheless, the pure thematic investor will attempt to cover a sub-industry from a rather broad angle. He will closely examine potential investments and go for the most suitable combination of team, competitive scenario and geographical scope. The pure thematic investor will stop here, while many of the more thesis-driven investors use the ‘topic’ as a starting point for further intellectual refinement.

3. Thesis investing

Thesis investing means that the investor has an overarching intellectual foundation around the investment activity. This will shape the type of investment within a certain theme (be it the grander “tech” theme or a specific subset). I would differentiate between inductive, deductive and combinatorial approaches (or better: components) of a thesis. They all share the characteristic of a strong doctrine that underpins the choice of investments and that has been formed in the conviction of greater returns over time. While themes are the macro level, theses are micro.

Inductive theses

Inductive thesis investing starts with the company itself. Investors have an idealized concept of the enterprise and will pick accordingly. Examples could be margin requirements, business model types, user experience or the type of management team. These tend to be present, or near-future, characteristics of a company which define the choice of investment within a theme. Inductive theses have been formed around a conviction of superiority in scaling up the company or in withstanding competitive threats over time. I would argue that most venture investors have some form of inductive thesis, yet they might not officially postulate it as core factor of investment decision-making.

Deductive theses

Deductive thesis investing starts with a vision of the future. The investor will formulate a narrative of a target industry’s development and map out the individual elements that will be needed to spur that narrative. Each potential investment is then measured against these elements. Examples for such theses are the belief in “networks” or “the cloud economy” or “a broadband-enabled future of TV”. Each thesis can be dissected into individual components, and there is some overlap to inductive approaches (e.g. when you talk about “software is eating the world”, you inherently assume “software” as your preferred business model). Yet, the deductive thesis investor will always use his thesis as the basis of all thinking around investing.

Combinatorial approaches

Combinatorial thesis investing combines both types of theses. Deductive parts can be complemented by an inductive qualification. A prime example would be the decision to invest into “mobile networks” (deductive) that are “defensible” or have a “differentiated user experience” (inductive). To me, and to Earlybird, this makes most sense as both elements go hand-in-hand anyways. Quite evidently, inductive elements are most often the individual parts of a larger vision of the future.

All concepts have achieved considerable success in the past and one can observe a good amount of mixing and mingling of approaches within funds. A typological delineation is therefore largely an intellectual exercise. As for the European venture landscape, there certainly is a gradual shift to more thesis-driven investing under way, which I generally welcome.

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