Invest in themes, not sectors

As startup investors, we’re the early adopters. We bet on emergent trends years before the rest of the world adopts the change. Here’s a framework to spot novel investment opportunities.

Last Monday, Tik Tok announced that they reached 1B monthly active users, just 5 years after its founding, making them the fastest growing social media app. For context, it took Facebook and YouTube 8 years to hit this level of engagement 👀.

This got me thinking about trends and how riding the right trend is critical to a company's success. 

So today, we’re exploring mega-trends. 

Mega-trends are secular in nature. They’re long-term and transcend business cycles to reflect the overall success or decline of an industry. 

Secular growth trends create new dominant companies, like TikTok, while secular declines cause once-dominant companies to fall out of Eastman Kodak, an early photography company 📷  founded in the 1880s.

We’ll sync on types of secular growth, what it looks like in practice, and how you can spot this wave 🌊..

Lets’ dig in!

How to See the Future

To spot areas ripe for technological innovation, you need to predict the future 🔮. 

To predict the future, you need the right tools. This is where I believe the traditional “sector” focussed lens falls short. 

Investors often orientate investment strategies around “sectors” or “markets''. I don’t think this is wrong, but I’d argue that this strategy is too myopic and will hasten your thinking.

The challenge here is that emergent trends may not appear as a large market or investable sector. Sometimes trends fundamentally change sectors or create their own market altogether.

So What is a Mega-Trend?

A mega-trend happens when something fundamental changes within an industry, creating a new wave of demand.

One great example of a mega-trend is the rise of e-commerce. The trend has been steadfast - growing comfortably year-over-year as consumer preferences lean towards a digital commerce experience.

These trends typically embody an S-Curve. The graph below is a good visualization of what a mega-trend adoption curve looks like. Our goal as early investors is to spot it at the "Innovators" or "Early Adopters" stages so we can develop the forethought and insight on the industry to spot where it is going.

Now that you know what a mega-trend is, let's discuss where they come from.

Drivers of mega-trends:

  • Technology-driven: Sometimes, innovations in technology are so impactful that they not only create a new wave of demand, but also a foundation upon which other businesses can grow.

We’ve seen this time and time again throughout history, and the rate of change is only increasing.

Bitcoin and the blockchain embody technology-driven mega-trends perfectly. Many companies will benefit from the development of the blockchain infrastructure. Early winners include companies like Coinbase (Market Cap: $60B), BlockFi (Valuation: $3B), and Bitmain (Valuation: $40B).

  • “Better Mousetrap” (Same Market, Better Product): You don’t always have to invent the market to benefit from its growth. You can “build a better mousetrap” - aka serving the customer in a way that unlocks a new wave of value (e.g better, faster, cheaper), ultimately taking market share from established incumbents. In this scenario, the company is already aware of a market, they just innovate on delivering a better solution.

Tesla is a great example of this type of growth. While electric car demand was nascent back in 2003, the company introduced a superior product and has been the primary beneficiary, as well as the major catalyst, for the market transition.

  • Category Defining (New Market, New product): The last type of mega-trend happens when a startup develops a product within a new market (my favorite). 

This is how new markets are born.

Within this category, a startup is solving a problem that was previously unsolved. This naturally creates a surge of demand as the company benefits from the expansion in this new market.

Google embodies this market type. Before the internet, there was no need for a search engine. The internet opened the door to an ever-growing pool of information; at the time there were limited ways to filter through this information and find information of genuine interest or value, without the need to wade through numerous irrelevant web pages.

Google is now a dominant company controlling at least 88% of the search traffic in the US.

 Great! We’ve decoded mega-trends - how they form and what they might look like. Let's see how top investors are using them to hone their investment strategies.

Thematic Investing In Practice:

Thematic investors have the chance to develop unique stances on how trends will create hot spots or discontinuities in certain sectors and regions where value and risk will be concentrated.

Many funds use thematic investing to hone their investment lens. 

Two Sigma Ventures wrote an article in 2020 discussing 8 different trends that they wanted to explore that year and that they believed would reveal prime investment opportunities.

Some of the trends included the fight against disinformation, the shift to remote work, and the rise of privacy-focused marketing. The transition to the remote work trend is particularly interesting because we can all see how rapidly this is taking off and how the movement is still evolving.

Two Sigma looks at emerging technologies such as Zoom and Google docs that reinforce remote work environments. They also pointed out how enterprises are starting to become completely virtual as opposed to the traditional trend of “everyone under one roof.” There’s no doubt that both of these observations foreshadow new technologies and behaviors.

This investor takes a unique approach in that they focus not only on specific sectors but also on sectors that emerge from all-encompassing social trends. 

NextView Ventures take a humble but necessary approach. In their own words, NextView focuses ”on real problems faced by all consumers and businesses across industries and classes, not luxury, siloed Silicon Valley issues.”

Why is this their focus? Because individual purchases based on necessity (home, food work, etc.) comprise 70% of GDP. That’s a lot.

“Each of these categories represents a market opportunity in excess of $1 trillion, and each of them is ripe for disruption by digital technologies”, says NextView.

This strategy seems to be working...

A case for thematic investing:

Thinking about getting into thematic investing? Here’s how I would do it… 

First, you’ll need to identify the right trends. This step is important! Start by becoming infinitely curious - the perpetual inquirer. Start shifting into this state of mind. 

Let’s say your techie friends (typically the early adopters) are ordering healthcare tests from home using EverlyWell. Start asking questions like:

  • What is EverlyWell? 
  • How does it work? 
  • Who invested in it? 
  • Are other companies building something similar?
  • What’s the overall trend here? 

Based on this research, you might find that the digitization of healthcare is a trend worth exploring. You’d see that numerous companies are receiving venture capital dollars to innovate across the care delivery spectrum.

This confirms that you’ve identified a trend - your nerdy friends are using the product (because it’s better) and risk capital (e.g venture capital and angels) are investing into the early innovators in the space...but the research doesn’t stop there. 

The next step is to think about frameworks. Ask yourself, is this digital healthcare really structural, or is it just a short-term movement? Is it poised to go far into the future and become integral infrastructure in society, or is it just a craze that will fade out in a few months? Do some research to find out if the trend truly has material implications for the evolution of certain sectors or regions. Try using the 3 mega-trend categories we defined above.

Finally, I recommend that you shift your thinking from trends toward themes. Once you’ve sufficiently identified key trends, trace them through to the broader themes that they support.

Bucketing these trends into broader themes will catalyze your thinking. It will provide you with a flexible lens to see how a specific theme may impact other industries or sectors, enabling you to identify possible areas of disruption.

Use these themes to build your portfolio and support a novel perspective of an industry. If you identify the right theme, you’ll see investment opportunities everywhere, and will be heavily rewarded for it.