Discover more from Lateral Thinking
Investing in "Confusion"
A key principle I’ve picked up from Jim Breyer over the years is to “invest in confusion.”
Massive confusion in growing markets represents an enormous arbitrage opportunity.
Confusion in this context can refer to a newly available technology, or to changes in the economics of supply, production and/or distribution of a good or service. It can also be driven by regulatory changes, changes in a competitive landscape and so much more.
While confusion manifests itself in different ways, it’s clear that not only are these the moments in time that are uniquely positive for emerging businesses, they are the cornerstone of my most successful investments.
This holds true across sectors. Consider:
Databricks successfully commercializing Apache Spark in the face of legacy vendors with larger sales forces and larger spark investments (IBM)
The ballooning impact of Facebook, Pinterest, Twitter, Reddit, et. al on our communities in contrast to Yahoo’s inability to move into social networks
Netflix and Hulu’s clear victory delivering a streaming offering that captures, serves and delights subscribers before legacy media got there
I could share a list of 100 more examples, but you get the point. Massive confusion of legacy players often renders them unable to compete, and paves the way for a new set of enduring companies.
Often, the only option for these established businesses is to buy into the market, but they rarely pioneer a market when confusion runs high. This is partly why the NYSE did not build Coinbase, Schwinn did not build Peloton, and Splunk did not build Confluent.
For investors, confusion presents an added benefit of making it less likely that the market is appropriately pricing related investments. Often, it is because these companies don’t fold into a simple existing total addressable market definition, and/or have elements (including business models) that not many have underwritten in the past.
The best way I’ve been able to navigate this is to (1) dig deep into the platform shift by speaking with every participant (customers, competitors, industry analysts, founders and operators) (2) actually listen intently - with "Dumbo Ears!" and (3) force yourself to tune out the crowd. I can’t tell you how many times I heard “No one makes money in media,” “Crypto is a fad,” or “Hardware is hard; it doesn’t scale” before backing teams proving folks wrong.
Do you believe there are certain shifts happening that established market leaders are confused about? Get in touch. I'd love to talk with you about it.