January '23: Chance favours the prepared mind

Welcome to the first newsletter of 2023! Hope you’ve all had a good few weeks back and are getting back into the swing of things.

This month we’ve got a deep dive into how we approach developing our thesis, and a book recommendation about the meaning of life. Keeping it light for the start of the year.

Mattias and the Moonfire team

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Chance or deep observation: Our approach to thesis articulation

When an investor decides to back a company, what are they really investing in? At the pre-seed and seed stages, when a start-up may be little more than a big idea, there is rarely the luxury of a robust financial record to guide decisions. Instead, investors must assess a range of considerations, from the capabilities of the founders to the breadth of the market opportunity, the nature of the competition, the scalability of the business plan and the degree of future optionality.

All of these must prove favourable for an embryonic business to succeed, and any one of them might result in its failure. So how does an investor really decide: what do they look for, and which factors do they judge most important? Do those vary according to the maturity of the business, the geography, and the sector it is operating in?

The concept of the prepared mind is not one that is new, dating back to Louis Pasteur’s belief that “chance favours the prepared mind”, but the way investors reach this state of knowledge (via deep observation and analysis) varies greatly. At Moonfire, we believe in the power of the investment thesis to guide that process. Additionally, we believe that during a downturn like the one we are facing right now, deep thesis research and articulation enable us to outperform and not get swayed. Every investor has a thesis of some description, whether unconscious or elaborated in detail. Some will prefer to back founders with a track record of success or who have overcome adversity. Others might be attracted to particular sectors, to outstanding technical founders, or start-ups operating in complete greenfield spaces.

Our bias is to be as systematic and proactive as possible with the dogma that new technology can be commercialised to unlock greater access, efficiency and/or product quality. We start with ideas rather than companies, articulating a thesis for each investment area long before we consider writing any cheques. Every week, on what we call Thesis Thursday, a member of the investment team will present their case for a sector, sub-sector or theme that we should be considering within our four investment categories: Work & Knowledge, Capital & Finance, Health & Wellbeing and Gaming, Community & Leisure. A thesis might, for example, cover the broad category of the modern data stack, a strand within that such as open source solutions, or a particular trend such as the rise of Reverse ETL or dbt. Our Thesis Thursday meetings are useful in a unique way, as we have both engineers and investors around the table at Moonfire, meaning we can deep dive into a thesis both technically and commercially.

In both the initial presentation and subsequent debate, we are trying to understand how an industry is changing due to technology-related undercurrents, the headwinds and tailwinds involved, and the opportunities that are arising as a result. We study the technological advancements closely to understand how platform shifts are improving how things can be done and also our society at large. We analyse companies – right from established giants to unknown start-ups – to understand how greenfield the space is and what strategies have worked well. We even brainstorm potential risk factors and steps to mitigate them to try and get a holistic understanding of how this space will evolve. Ultimately, a good thesis will combine these conceptual threads into something actionable, concluding with a distillation of the traits that we think a successful company within a certain sector, or leveraging a particular theme, will possess. Those might include founder characteristics, particular business models, and metrics we believe will be most important to measure success. And, we meticulously go back to our existing theses over time to identify how things have transpired since our original articulation and what new opportunities can arise. We hope to see these theses survive for years to come as they identify broader shifts that can sometimes take decades to fully form.

Simultaneously, our thesis articulation and focus on building a prepared mind has an impact on founder relationships and company-specific due diligence as well. A well-researched and recent thesis provides a cross-check for our deal analysis as we can quickly grasp whether the young startup has a unique opportunity to utilise technology to create and capture value in an industry. This empowers us as investors to have deeper, more meaningful, and better-informed discussions with emerging founders and to build (or not build) conviction early in our mutual quest to ascertain if we are the right partners.

And to top it all off, Moonfire’s technology-first deal flow process benefits from the thesis-driven investing process as well. The theses feed into the large language models that our engineers use to source leads for our pipeline, helping surface companies likely to exhibit strong thesis fit. Therefore, it helps us uniquely amalgamate our focus on investing and technology.

We invest what others might consider a disproportionate amount of time in thesis development, because it allows us to be proactive. A good thesis will preempt the arrival of a cluster of new companies in a given area, ensuring that we are ready for what we encounter in the market. A good thesis will also empower us to rationalise and understand whatever is the “hottest VC/tech bubble” (it’s Generative AI right now) rather than following the herd. Consequently, no matter the business environment, being prepared and able to envision an opportunity by identifying a fundamental market transformation are two of the most important disciplines driving outsize returns. Thesis articulation is our way of ensuring we bring both to the table in every investment we make.

— Mattias & Akshat 🌓🔥

Gamecraft

Not a particular episode this month, but a new podcast that’s right in our wheelhouse.

Gamecraft is a limited podcast about the history of the video game business, hosted by game industry legend Mitch Lasky and Benchmark Capital’s Blake Robbins.

At the time of writing, the first four (of eight) episodes are out. So far, Mitch and Blake have covered the rise of free-to-play gaming, the development of publishing models, the explosion of mobile gaming and the forever games. We’re particularly looking forward to their discussion of in-game economies and virtual reality over the next couple of weeks.

If you’re after a great thematic tour of the last 30 years of gaming, this is it.

'The Vital Question: Why is life the way it is?' by Nick Lane

In this book, biochemist Nick Lane confronts the black hole at the heart of biology: why is complex life the way it is, and how did life first begin?

The answer, he argues, is energy. Specifically, the energy transduction mechanism – or “proton pumping” – which powers the chemical reactions for all life on Earth. Building on the work of others, he explains how the earliest life owes its thanks to the energy differentials found in hydrothermal vents deep in the ocean. Early cells learnt to harness these energy gradients by funnelling them through their cell membranes, helping to power more complex internal structures and, eventually, all complex life. Less “the spark” of life, and more “the potential energy gradient” of life.

And if life is physically constrained by energy, it suggests that it might develop in the same way, and share traits, everywhere – even on other planets.

It’s probably as close to an attempt at a biological theory of everything since The Selfish Gene or On the Origin of Species. Highly recommended.

Here’s to a great, energetic 2023. Looking forward to sharing it with you.

All the best,

Mattias and the Moonfire team

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