A New Investment Theme? You Tell Us.

At Foundry Group, we spend a lot of time thinking about our Thematic Investing Approach.  We both rethink our current strategies within existing themes and also talk about what big picture and transformative trends are occurring that may lead to new themes.

Previously, we’ve unearthed themes after we’ve made several initial investments in an area and have spent enough time that we’ve been satisfied that we’ve found an area of opportunity that we can invest in over a ten to twenty year life span.  Prime examples of this were our February 2011 unveiling of our Distribution theme and our April 2011 post about our Adhesive theme, which itself emerged out of our Glue theme.

Recently, we’ve invested in a couple of companies that have caused us to examine whether or not we’ve found an investment area that qualifies as a new theme.  But instead of holding our thought process behind closed doors as we normally do, we’ve decided to try a new experiment:  we are going to unearth our current thinking and solicit your responses.  Consider this “Foundry Group Thinking Out Loud.”

What’s the potential new theme?  For now, let’s call it “Marketplace.”

We’ve been spending a lot of time thinking about marketplaces – particularly in the past year, but really dating back to investments we’ve made over the past decade in companies such as Service Magic (now HomeAdvisor) and Trada.  Specifically, with the success of companies like Airbnb, Uber, and Etsy it appears to us that interesting and valuable companies can continue to be built by bringing transactions that have yet to be thought of as ripe for online disruption, especially if there are some specific scale or operational challenges in doing so that we believe can be solved to create a sustainable competitive advantage.

Not any old marketplace will do, however.  We believe that there must be an inherent suppressed supply as well as a demand – the market needs to work for both participants.  We’re particularly intrigued with markets where the goods or services in question exist already, where full demand has been difficult to obtain on an individual basis. In the case of Airbnb, people had an unfulfilled demand for places to stay outside of the traditional hotel market while others had spare bedrooms and homes to rent.  In the case of Uber, there was a massive supply of unused car service operators while people sat frustrated in cities that did not have enough cabs.  The “inventory” previously existed, but it was nearly impossible to expose it efficiently before nearly ubiquitous connectivity and computation came along.

In both these cases there is also a factor of time – the Uber driver can sell minutes that he is not otherwise working and if they don’t the supply simply goes unfulfilled. Airbnb has the same dynamic. We think of this type of market as “remnant asset monetization.”   When real-time demand and location are important to the equation, mobile is the “killer app” while other types of friction may be best served via more traditional web applications.

One of our first investments in a remnant marketplace was PivotDesk, which is creating a end-to-end marketplace for remnant office space offering leaseholders the ability to connect with small businesses in a way that previous has not existed.

Not all of these marketplaces deal with remnant assets, however.  (Some people have coined this remnant asset monetization as “collaborative consumption”).  For example, as Uber continues to mature, we see many operators buying additional cars to fulfil the demand.  Our recent investment in Sidetour has allowed the company to create a marketplace for people to discover and book unique experiences offered by hosts with specific expertise in their trade.  While to some extent this is fulfilling unmet demand, like Uber, Sidetour is seeing hosts come up with new ideas for experience that leverage their expertise which is akin to buying new cars to fulfill demand.

What we are focused on are large markets, with known supply and demand dynamics, that have some sort of friction that previously disintermediated buyers and sellers.  Additionally, we are not focused on regulated markets.  For instance, there is much inefficiency in the medical space, but the spectre of regulations makes this marketplace uninteresting to us.

So is this a new theme for us?  We don’t know yet.  We know that we are very interested in the dynamics here and have looked at a lot more companies than we’ve funded, but there feels like there is something “more” here than just a few one off investments.

Let us know what you think.  Even better, if you are an entrepreneur building a business like this, reach out to us.  We would love to learn from you.