Swinging for Grand Slams

If we had to sum up our investment approach in one word, it would be non-incremental. Venture capital is a power law game: the vast majority of venture returns come only from a few investments. We believe we have to have the chance to hit a grand slam on every investment we make. Therefore, we look for great teams doing something a little more out there than most. Things like brain-computer interface, or connected fabrics, or creating the future of retail. And we actually think that investing in non-incremental businesses is safer than investing in incremental ones.

Before we get to why, let’s define the difference between incremental and non-incremental.

Incremental companies build for obvious or established markets. They create products and services that are 10% or 50% or even 100% better than what’s on the market now, but they don’t create products that are 10x better. They don’t create products that transform industries and change how consumers interact with the world. And that’s ok! Incremental businesses are important to the progress of the overall ecosystem and see good exits all the time.

Non-incremental companies create products and experiences that are 10x better; those that revolutionize, not merely improve. They establish new markets that are obvious only in hindsight. They create entire ecosystems of companies trying to play in the sandbox they built. It takes a founder with a big vision and a dedicated team to build something non-incremental.

With that distinction in mind, we see three reasons why investing in non-incremental companies is safer than investing in incremental ones:

First, it’s just as hard to create a great non-incremental company as a great incremental company. Either way, the entrepreneur has to convince talented people to take a risk and come work for him or her. The entrepreneur has to retain that talent as other companies come calling with better offers. The entrepreneur has to convince skeptical customers to use his or her new product. The entrepreneur has to persevere through the rollercoaster of survival as a new business. We think that last point is the death knell for most incremental companies: the entrepreneur is beaten into submission and loses interest in the business. It’s easier to stay engaged working on non-incremental ideas than incremental ones.

Second, non-incremental companies tend to have less relative competition than incremental ones. It’s red ocean/blue ocean strategy. Since incremental companies are attacking obvious problems, the market will be full of other businesses trying to solve the same thing. A non-incremental company will have less direct competition because they’re focused on something less obvious. This means that non-incremental markets look smaller than incremental ones at first, but the early non-incremental markets tend to morph into new markets that encompass larger legacy markets over time. Airbnb is an example. Air mattresses on a stranger’s floor is a weird, non-incremental market, but a platform to rent unused housing space competes with the legacy hospitality market.

Third, non-incremental companies tend to develop things that the world needs most. What’s truly valuable about the 5th food delivery company? Or the 10th ride sharing company? Or the 100th photo sharing app? Yes, there are great potential markets there, but they’re obvious markets with lots of competition and, for the most part, undifferentiated technology that creates modest incremental value. We believe that companies tend to get rewarded in proportion to the value they create in the long term. This means that some companies can be overly rewarded in the short term (see many social plays). These short-term wins are harder to predict and are more driven by luck through rapid user adoption than true value creation. Investing in things the world really needs gives us a tangible reason for future reward.

Our downside is still zero when we invest in non-incremental businesses, but the probability of zero is lower for the three reasons mentioned above, and the potential for a unicorn-sized return is greater. Even better, and cliché as it might sound, non-incremental companies are the ones that actually change the world and shape it in our vision of the future. That’s why we swing for grand slams.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

The Future of Retail

It’s no secret that online retail is slowly killing offline retail.  In Q4 2016, 8.3% of total US retail sales were online (about $103 billion), up from 5.1% just five years ago (about $53 billion). Offline sales were 91.7% of the total, about $1.1 trillion. We don’t typically talk about the percentage sales that happen offline, but it’s powerful to see how large that market remains. The longer-term question is: how much of total retail will eventually happen online?  We looked at the breakdown of US retail sales by category excluding gas and restaurant expenditures. Based on our analysis, we believe that 55% of total retail sales will eventually happen online, leaving 45% of retail sales for the offline world. But how will brick & mortar retail defend its territory?

We believe the answer lies largely in a combination of artificial intelligence and robotics.  Where AI and robots are superior to humans in terms of efficiency, logic, and raw productivity, we believe humans will remain superior at creativity, community, and experience. Machine-driven retailers are uniquely qualified for convenience, speed and selection. Human-driven retailers are uniquely qualified to create personalized service based on empathy.

Human retailers are uniquely qualified to create personalized service based on mutual understanding – empathy.

The degree to which retailers are successful in leveraging creativity, community and experiences in their stores is the degree to which they will be successful in defending their businesses against online commerce and automated retail.

Given that backdrop, we see the future of retail delivered in three ways:

  • Online Shopping
  • Automated brick & mortar
  • Empathic offline retail

The Future of Online Shopping. Our analysis of US retail sales by category leads us to believe that 55% of total retail sales will eventually happen online. The consumer benefits of convenience, quick shipping and expansive product selection are too powerful to slow the gains that online shopping is enjoying at traditional retail’s expense. Amazon gets it, and they’re playing the long game, aggressively denying short term gains to establish itself as the owner of the operating system for commerce in the future. But Amazon also gets the fact that not all retail is best suited for the internet, which is why we’ve seen them dabbling in automated brick & mortar concepts. More on this below.

More immersive buying experiences will be a major driver of further gains for online shopping. Specifically, augmented reality and virtual reality will allow shoppers to experience a product in lifelike ways before they purchase it. Test out a new outfit in VR and get feedback from your friends. Show your significant other the new couch in your living room with AR before you order custom furniture. The likelihood of returns goes down, customer satisfaction goes up, and so too does the share of online retail.

The Future of Automated Brick & Mortar. We also expect a portion of retail to move to an automated model with few if any employees.  Stores will be monitored by computer vision systems. Shelves will be stocked by robots. Customers will be helped by service robots that understand natural language.  Checkout may resemble Amazon Go where customers simply walk out with their purchases. We’ll likely see the lines between online shopping and automated brick & mortar blur as some stores become more like warehouses for delivery personnel or delivery robots.

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An Update on Commercial Drones #AUVSI2017

If artificial intelligence is the brains, then robots are the brawn in the future of work.

Earlier this week, we attended the AUVSI XPOENTIAL trade show in Dallas, the largest global gathering of unmanned systems providers, robotic software developers, and industry experts.

We sat down with 13 executives from some of the leading commercial drone companies. Here are the takeaways from our meetings:

  • We’re Still in the Early Innings of Drones. Overall demand for drone hardware, software, and services continues to see strong momentum domestically and internationally. Industry leaders are confident that the market potential in core verticals remains deeply unsaturated. Increasing customer awareness around the efficiencies of drone technology represents a catalyst for accelerating industry growth.
  • Ground Robots and Drones are Complementary. Terrestrial robots and aerial robots (i.e., drones) should not be considered competitive offerings. Some of our favorite strategies in the space couple ground robots with drones for autonomous services.
  • Drone Delivery is Real. Throughout our meetings, robotic delivery of packages was identified as one of the largest untapped markets. Most industry leaders do not expect regular drone delivery to be viable for 5+ years; however, that’s a meaningful uptick from last year, when a similar group did not expect drone delivery to be realistic for 10+ years. Amazon is leading the way in the drone delivery space, but will likely acquire enabling technologies to make it a reality.

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Tesla is the Next Apple

This note was originally published on Business Insider.

Apple is the world’s largest company with a market cap of nearly $770 billion as of this writing. Tesla is one of the world’s largest automakers with a market cap of close to $55 billion, although we think the Tesla story is just getting started.

There are many parallels between Apple about a decade ago and Tesla today, market cap being one of them.  In Q4 2005, Apple’s market cap was close to where Tesla’s is today ($54 billion). A decade from now, we think we’ll look back at Tesla and realize it was the next Apple.

There are five major similarities to Tesla today and Apple in the mid-2000s:

  1. Brand
  2. Visionary leadership
  3. Integrated hardware and software
  4. Halo effect
  5. Reshaping a market

Brand

Tesla’s brand is to the car industry what Apple’s brand is to consumer electronics. Tesla owners love their Teslas.

According to a Consumer Reports survey, 91% of Tesla owners state they would “definitely” buy their cars again, the highest rating of any automaker. The next two closest automakers were Porsche at 84% and Audi at 77%. By comparison, Tim Cook stated on Apple’s Dec-16 earnings call that iPhone had a 97% satisfaction rate.

Beyond tangible customer satisfaction metrics, we believe there is a less tangible cool factor to the Tesla brand, much like Apple in the late 1990s and early 2000s. In many ways, Tesla has the same “think different” attitude that Apple popularized.

Tesla has built a brand around being a different kind of automaker. Not only because its vehicles are powered entirely by electric, but also because they don’t use model year numbers and treat software updates more similar to updating an iPhone app than a car. The company has done this all while squarely placing itself in the conversation with BMW as one of the best-engineered cars in the world. Tesla has established itself as an aspirational brand by taking a new approach to the car market.

Visionary Leader

Elon Musk and Steve Jobs share similarities in that they are visionary entrepreneurs that simultaneously operated multiple groundbreaking companies.  Musk with Tesla and SpaceX and Jobs with Apple and Pixar.  However, both seem to have different guiding lights.

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Building a Business for the Long Term

Vibrant culture driven by shared values separates the best companies from the rest. Without clearly stated values, a “company” is just a temporary group of people, not a sustainable organization. Working together over the past 10 years, we’ve identified a set of four core values that define Loup Ventures:

  • Intelligent Intensity
  • Radical Honesty
  • Intentional Generosity
  • Contrarian Curiosity

Intelligent Intensity

It’s easy to work hard and hard to work smart, but optimal to work hard and smart. Hard work only matters if its focused on the right things. Otherwise it’s just busyness.

We make sure we’re working hard and smart on the right things in three ways:

  • We track metrics important to our success. What gets measured improves. This is not groundbreaking. Even bad businesses track metrics.
  • We track quality in those metrics. This is more unique and measures whether we’re working on the right things. An example is tracking followup meetings with companies as a measure of deal flow quality. In interest of our time and the time of potential investments, we don’t have follow up just for the sake of follow up. If you only track measurements of output, not quality, beware the true value of that output. The hardest part of tracking quality is finding the correct metrics beyond subjective measures that can easily fall to human misjudgment.
  • We measure our metrics by value/time. This is the crux of working smart. What is our output, as measured by the quantity and quality metrics, in how much time? The higher this number, the smarter we’re working.

We strive to be 80% right in 20% of the time. No decision, estimate, or conclusion can ever be 100% right because, in the time it would take to be certain of something, the world would change and alter the correctness of the decision. Intelligent intensity combines focused hard work and speed with a rejection of commitment bias, which means we’re comfortable with updating our conclusions on the fly. As the saying goes, when the facts change, we change our minds.

Radical Honesty

Since we only have three partners, it’s easy for us to force “disagree and commit” as Jeff Bezos recommended in his most recent Amazon Shareholder’s Letter; however, we do have, and welcome, open disagreement in conjunction with our simple majority rule.

Without disagreement, there is no discussion. Without discussion, there is no strategy. Without strategy, we cannot be successful as a venture firm. We’ve debated and disagreed on everything from our media strategy, to the audience for our content, to how much we should spend on travel and more. We embrace constructive disagreement as a healthy part of running a good company.

When we do disagree, we get over it fast. Holding grudges holds us back as partners. More importantly, when we disagree and the “winning” side ends up being wrong, we all own the decision and get over it fast. Owning mistakes, even when out of your control, leads to learning and improvement.

Another application of radical honesty is that we try to give insightful feedback to entrepreneurs. Like most venture firms, we only invest in 1-2% of potential investments we see, which means we say no a lot. We do our best to give companies that don’t fit our criteria some quick feedback as to why. We hope this feedback helps the companies work through potential issues we perceive, informed by the scores of deals we see every month. It’s hard to hear critical feedback about something you’re passionate about and dedicating your life to building, and that means it can be scary for us to give it. We hurt when investors tell us no, too. But radical honesty in feedback is important because we want to see as many AI, robotics, VR, and AR companies succeed as possible, whether we’re involved or not. Feedback makes us all better, no matter how hard it is to hear.

Intentional Generosity

We believe in the power of generosity — the ability of one person to unexpectedly delight another. Our work is too often performed in a context where generosity isn’t practiced. And when this value is missing, companies, and the experiences they create for their customers, often fail to unexpectedly delight.

Generosity can be an incredibly powerful business tool. Internally, it generates a virtuous cycle of colleagues supporting each other, which yields better work through true collaboration. A simple example: our team plays a running game of who can pay for lunch before the others pull out their credit cards. But this extends to delegating tasks, getting work done, and even compensation. Externally, the value of generosity impacts how we interact with all our stakeholders, going above and beyond to offer more than is expected.

But this is not generosity for generosity’s sake. Intentional generosity is a tool that should be smartly wielded to the advantage of not just the recipient, but the provider as well. It’s mutually beneficial.

Contrarian Curiosity

If you do things the way everyone else does, expect the same results. We want to achieve uncommon results, which means we need to think for ourselves and see things differently.

We strive to be contrarian when contrarianism is warranted, not just for the sake of being contrarian. When the herd is right, we’re fine to follow, but we always question while we follow. We always make sure to see the other side. When the herd is wrong, we diverge to form our own path, led by curiosity. We try to remain open, fascinated, and optimistic in everything we do.

Some of our views are commonplace, like the importance of AR and AI in the near term, but some of our views aren’t as well accepted. One is our belief in the potential of VR to be the biggest technological development ever, although it will take several decades. Another is our broader inclusion of AR to include devices beyond smartphones and headmounted hardware. We see hearables and even apparel as critical parts of AR. Yet another is our feeling that the majority of American jobs are at risk of automation over the next 30 years, which may be sooner than most.

Living Out Our Values

Language brings culture to life and integrates the values of an organization into the day-to-day. Over the last 10 years, a set of “rules” has emerged that brings the Loup Ventures culture to life. These rules are the vocabulary of our culture. They serve as guides for our behavior. They help make complex concepts easy to communicate. When we invoke a rule, we just get it. Even though these are mostly valuable internally, we thought we’d share:

  • Rule #1: Walk through walls (Never give up)
  • Rule #2: Drive for the gate (Never give up)
  • Rule #3: Get over it (Take ownership of mistakes and move on quickly)
  • Rule #4: Publish or perish (Constantly fuel the brand)
  • Rule #5: Be transparent (Information is free and public)
  • Rule #6: Work quickly (Be 80% right in 20% of the time spent)
  • Rule #7: Revenue/time (Work smart)
  • Rule #8: Skate to where the puck is going (Embrace the future)

Our shared values were, by definition, things that the three of us were doing before we started working with one another. The more time we spent together, the more clearly the values emerged, and our set of rules bring those values to life. Culture, values and language must be an organic outgrowth of the founders of any company, and they should act as guiding principles for how you run your business and who you hire. We want to build Loup Ventures for the long term and our values lay the groundwork for us to do so.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.