vc investment thesis

VC investment thesis: Deep Space Ventures

This is the Deep Space Ventures investment thesis by Stephen Hays, Managing Partner.

He wrote a post on Medium wherein he shared his thoughts. This is clearly not a formal thesis, one would post on their website, but rather a series of thoughts.

Deep Space Ventures invests in seed and series-A stage startups primarily in the Esports and B2B spaces.

The investment focus is primarily on markets where incredible innovation is taking place, the cost to operate a business is relatively low, and there is a lack of seed capital available relative to the early stage opportunities that exist. Some people call these markets “flyover cities” or “tier 2 and tier 3” startup ecosystems. We consider them to be the capital efficient markets where our capital and strategic value can go a long way to help a founding team achieve their goals.

Deep Space Ventures investment thesis

Our First Thesis

B2B Enterprise Software and Services

When I first started seed investing in late 2015, I sought direction, even if it was fabricated or maybe even not the perfect direction. My intent was to avoid drowning in a sea of opportunities. Combining my investment banking experience (working with large cap public companies) and my location (I’m in Texas, home to the 2nd most Fortune 500 Companies in America, second only to NY and that gap is miniscule — 55 versus 54), I rationalized that investing in startups that sell B2B software and services could make a lot of sense.

Fortune 500 Companies by State in 2015 (https://www.geolounge.com/fortune-500-list-by-state-for-2015/)

When you consider the cost of living in Texas (lower burn rate), the proximity to corporate B2B customers, and the vast amount of talent in the area that knows how to sell into these companies, it seemed reasonable that investing in capital efficient, local B2B startups made sense. Our B2B focus has expanded outside of the region lately, but our access to local large cap customers as a value-add for our portfolio companies remains, regardless of where the startups are located. In fact, often times, during diligence I like to make an introduction to a potential large B2B customer, and then get their feedback on the startup.

There you have it, our first thesis. Is that how everyone else comes up with their investment focus? I couldn’t tell you. At the end of the day, I learn by trial and error. I’m alright with running in a direction, the wrong direction sometimes, and banging my head against a wall to find out I need to go the other direction. That’s how I learn. That’s how I find my way in the world. People with more intellectual horsepower probably avoid doing it that way, but those people aren’t me.

I’m not sure if that was the right formula to start investing with or not, but I’ll let you know when the feedback loop closes in about 6 more years (or longer). We recently added our second “thesis” or “focus area” which is Esports. Seems kind of random when you consider we started off as a B2B SaaS investor — I’m thinking the explanation below will be helpful for some new early stage investors.

Our Second Thesis

Esports

In September 2016, I attended the Tech Crunch Disrupt conference. I had only been an early stage investor for half a year at this time. Conferences like this give me (and other new investors) a great opportunity to gain market awareness. Often as a micro-VC living in a “flyover city” you have blind spots in terms of market awareness. Going to conferences helps with that issue as it gives you in-roads to other ecosystems where you can learn about the problems those founders are solving and maintain more situational awareness.

I met the founders of Mobalytics mid-way through the conference and really loved their business. They ended up winning the Disrupt Battlefield pitch competition. After the conference, I called one of the founders, not sure if they would even remember me after they had Founders Fund, General Catalyst, GGV Capital, Almaz Capital and others lined up to invest.

That phone call went great. In fact, I later asked the founders why we even got into the deal (considering how strong the cap table is with top tier investors), and he told me that it was a genuine approach and a sense of hustle, as well as a personal connection that made him go back to his partners and ask for us to get an allocation. That right there, is how new early stage investors (micro-VCs), can get into the best deals. Hustle alongside founders, be authentic and let them know you that empathize with their hustle because you too, are a startup trying to get traction.

Time to step away from the Xbox man!

Back to the Esports thesis: I grew up playing video games, and being told by my parents to not play too much or my eyes would be permanently damaged (I would stay up playing Zelda, and Kung Fu on NES at all hours of the night). While I’ve never been a great gamer, I do love gaming and use it as a way to decompress after a long day.

On top of my personal interest in the space, I realized really quickly how big this market is (more people watch League of Legends world finals than the NBA Finals), how early we are in the evolution of the market, how fast it is growing, and how intensely passionate the individuals who comprise this market are about playing, improving, and following the space. This drives a level of engagement with the end user, that I can’t find in most other markets. The ability to play the game, be in the game, watch others, and play against anyone in the world, at any time, is unlike any other hobby, sport or pastime. I don’t think anyone will argue about the market dynamics from an early stage investment point of view, so the focus now is on where exactly to put money to work within the sector. This is a chicken or the egg situation, so our approach, is to put money to work, then find our way and put more money to work.

The level of insight gained from being invested in a business in this space, was far greater than if I had just done some reading on the space, asked an intern to research the sector, or taken another investor at their word about Esports. This was the birth of a thesis. An observation born out of personal experience, personal interests, and visibility into the inner workings of one of the hottest startups in one of the largest, fastest growing markets out there. As I said in the intro, I invested my way into this space, and the requisite knowledge to build a thesis around Esports came as a dependent variable in that equation.

Couple of major takeaways here for aspiring early stage investors:

  1. Learn by doing — try, fail, and change directions. Don’t be paralyzed by over analyzing and slow decision making processes. Avoid analysis paralysis. You’re going to make some bad investments, so go make them, and start learning from them. Go explore, invest, learn and see what happens.
  2. Hustle your ass off — you want founders to say things to you like “you really get us and what we are going through” when they see how you operate. That’s what will get you into great deals.
  3. Do it differently — for so many reasons, do not copy the way someone else does it (unless your fund strategy is to just invest alongside other successful investors, in which case, have at it), rather go find your own way and don’t let anyone tell you you’re doing this wrong, because even the most successful investors have more losers than winners.
  4. Focus on learning and meeting people. Those are the most important things you can do every day. It’s similar to Thermodynamics, in that the more you know, the more you know (the faster you go the faster you go — increase airflow to a compression ignition engine, and it goes faster, and thus increases airflow, and thus goes faster, just had to toss in some engineering nerd talk there).

Further detail on the thesis

As previously discussed in The Birth of a Venture Capital Investment Thesis, we are passionate about investing in early stage esports startups.

When I tell people about this focus area (family, friends, other investors, etc.), I usually get a pretty tight shot-group of questions about esports. Often the questions are accompanied by a look that conveys what I call “nerd shaming.” You know that look, when people feel sorry for you because you are just not cool –  oh wait, maybe you don’t.

Video games aren’t just for nerds in their parents’ basements. These competitions often take place in arenas such as the one shown here, full of 50,000+ fans, just like a professional sports event you may be more familiar with already.

While there are a number of investors who have and will invest in the space, we are one of few actively deploying capital into esports startups pre-Series A. I’ve prepared another blog post outlining who I’ve identified as the most active investors in the space: [link here].

Here are the questions people keep asking me who are new to the space:

“What is Esports?”
Esports — a multiplayer video game played competitively for spectators, typically by professional gamers.  Some people draw a distinction between the video game market, and the “esports” market, which I don’t disagree with.  However, I believe that anyone playing a game against anyone else, is part of the esports market.  You don’t have to be a professional basketball player to play a pickup game on Saturdays, so same goes for esports.

“Are you saying there are ‘professional’ video game players?”
Yes, that’s exactly what I’m saying. I’m surprised that people don’t know this (considering the size of the viewership market), just as people are surprised at the answer I give. These players make money from sponsorship, streaming (subscriptions to their streams), and by competing in and winning high level tournaments.

There is a professional organization, Major League Gaming (that was acquired by Activision), hosting professional competitions as well as championship matches hosted by the game-makers (Riot GamesBlizzard Entertainment, etc.), and numerous other competiitive outlets such as tournament platforms, smaller competitions, etc.

“People pay, to watch others play video games online?”
Yes, in fact, according to an industry report by NewZoo (which I will reference a few times in this note), the market for streaming is huge.

Fun factoid: More people watched the world finals of League of Legends in 2016, than watched the NBA Finals game 7 that year. 43 million viewers watched the LoL finals while 31 million tuned in for Game 7 of the 2016 NBA finals according to Nielson (with an average across all 7 games of closer to 20 million).

This is the main page of Twitch on a random Monday night around 6 PM PST

This is the main page of Twitch on a random Monday night around 6 PM PST

If you were to log in to Twitch (a streaming site acquired by Amazon for nearly $1 billion, where gamers can stream their video game play) at any time (literally try it on a Tuesday at 11 AM) there will be millions of people online watching others play. Login at midnight on a Friday night and you’ll see what I’m getting at here.

“Do non-gamers actually watch video game streams online?”
42% of people watching streaming video game play, aren’t playing the game themselves — So it’s not just nerds like me who want to get better at game play, this space is turning into a legitimate entertainment market. Here is some game specific data on this topic by NewZoo that can give you more context with respect to three of the biggest games in the world (based on playing and viewing data):

Source: NewZoo (link to source here)

Source: NewZoo (link to source here)

“How can it be fun to just watch other people play a game online?”
Just give it a try, go watch a few highly followed streamers, Dr. DisrespectJosh OGTSMVissSummit1G (yes, I’m biased to PUBG streamers) or any others. Players such as Dr. Disrespect have tens of thousands of viewers at any given time and have had tens of millions of unique views. I call him the shock jock of esports. You will enjoy seeing this guy play a few games.

When you view a stream on Twitch, you get to watch a picture-in-picture image of the player, overlaid on top of the same view he has on his screen while he plays.  At the same time, there is a chat room for the viewers, and the interaction between viewers and the gamer is constant.  The players comment while playing and often the commentary is worth watching for. Dr. Disrespect is hilarious, go check him out for a half hour one day. Often I have this on in the background now while I’m working instead of ESPN or CNBC.

“WHY INVEST IN ESPORTS?”

Huge market — The video games market is just over a $100 billion market in 2016 (source: NewZoo 2017 Gaming Market Report) and esports specifically, is a large and growing niche within that gaming space. A recent industry report shows that there are over 385 million people on this planet that either play or watch video games – that is a mind boggling market size.  In 2017 the market size for esports is expected to be $696 million. (source: NewZoo 2017 Esports Market Report).

Unparalleled growth — in the last year the esports market has grown over 43% year over year. By 2020, the market is expected to be over $1.5 billion per year while the broader gaming space will be over $128 billion by 2020 (source: NewZoo reports listed above). Those are conservative estimates; this report references a projection for a $5 billion esports market by 2020 (Tech Crunch Esports Article). Any way you slice it, this is a high growth market.

Extremely high user engagement — The number of people spending multiple hours per day playing and / or watching video games is staggering. Here is an article citing a survey result showing that the average gamer spends over 6 hours per week engaged with a game. This is an impressive average and indicates there are a lot of extremely engaged users, more so than many other markets (professional sports fans, etc.).

Under monetized users— According to this article in Venture Beat (which references this other report by NewZoo), “ Traditional sports leagues such as basketball monetize fans at about $15 per person. Esports right now is monetizing at $2.83 per person.” This screams opportunity to me.

Global audience — There are no borders, or boundaries or stadium restrictions. Anyone with an internet connection can be the best player in the world in any game and connect with and play with anyone. The potential of the market is understated in these reports I’ve linked throughout this blog due to the global nature of the market.

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