September 3, 2021

How to Create a Thesis for Your Incubation Studio

Posted By:
Sean
Johnson

The decision of whether or not to be "thesis driven" is an important one. This is how we think about incubation theses, and how we approach creating them.

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In the last post on building an incubation practice, we explained the importance of borrowing a page from venture capital, placing a number of bets and running them through a process for validating (or killing) them as quickly and cheaply as possible.

In the next post we'll walk through some of the methodologies and frameworks we use to facilitate ideation. But before that, it's important to discuss the idea of being thesis driven.

To Thesis or Not to Thesis

In traditional venture, there is often a debate about whether to invest according to a specific thesis (for example, "the future of work"). There are staunch advocates on both sides of the table.

The best argument for being thesis driven is it has the power to compound everything you do:

  • You develop pattern recognition faster within a given space.
  • You benefit from talking to the same set of experts, customers, other investors, etc.
  • Potential founders tend to know other founders operating in the same space.

There is a lot to like.

At the same time, it can create tunnel vision. Pattern recognition can often be found by looking at disparate industries or spaces and looking for ways to bring successful ideas from one space into another.

With the incubation practice, we decided to settle somewhere in the middle.

Between Manifold Advisory and Manifold Ventures, we have exposure to a wide variety of industries and organizations. Candidly, we also have a diverse set of interests as an organization, and pigeonholing ourselves was not interesting.

That said, we believe it's much better to explore opportunity spaces deeply for a sustained period of time to maximize the likelihood of finding good opportunities.

Our process focuses on a thesis for an indeterminate amount of time - at least a quarter, and typically much longer. But we allow ourselves the flexibility to adjust our thesis and focus on new opportunity spaces over time.

How we look for opportunity spaces

Opportunity space creation comes from a number of different sources:

Venture:

As anyone in venture will tell you, you tend to see patterns over time in terms of industries or technologies founders are actively exploring. We can use these signals to inform potential opportunity spaces to explore.

It's critical, both ethically and practically, that studio follows a strict rule prohibiting us from pursuing specific ideas that we've seen in deal flow. But we still find great value from venture sharing with us what trends they are seeing at a high level, and within any given space there are hundreds of potential problems to solve for.

Advisory:

Likewise, our Advisory partners are in market talking to enterprise customers about solutions they want to exist in the world. While some of these are obviously built as part of an engagement, there are usually more opportunities than they can realistically pursue from both a financial and political capital perspective.

The trick with opportunities spaces like these is to make sure it's an opportunity with broader applicability than just the single client. While they can likely become the first customer and help you learn more rapidly, it would be a mistake to commit the time and resources to build an entire business in the misguided hope that this one company would lead to a potential exit. And while they can often serve as your initial customer, you need to be sure that any opportunity you build has demand outside of them (not based on what they say, but based on actual customer validation work, a topic we'll discuss in a future post.)

Conferences:

A great place to look for potential opportunity spaces is by looking at conference agendas. In any given industry, conference panels will tend to highlight the critical issues or opportunity areas the big players and industry thought leaders are exploring. They often enjoy talking about emerging or disruptive technology, even if they lag in terms of practical implementation.

Hot spaces:

It's impossible to be in our world without being aware of broad technology trends. We can't help but be exposed to trends like the rise of Micro-SaaS companies, low or no code solutions, the advent of DeFi, the explosion of NFTs, etc.

These trends certainly factor into our thesis creation, as the pool of potential opportunities within them are usually very large with tons of white space. They also have a side benefit of being fascinating to Manifold Advisory clients, so any deep dives we do into those spaces provide value to Advisory as well.

Stagnant spaces:

At the same time, the recent rise of Clubhouse demonstrates a compelling point: spaces most people consider impossible to penetrate are often anything but. A good rule of thumb is to look at areas that had a ton of activity 10 or so years ago, are currently dominated by the major players who emerged from that last boom, and are growing a little long in the tooth.

Niching down:

There are tons of opportunities looking at ways to develop solutions dominated by broad, generic players for a smaller niche audience. This is true for several reasons.

A studio incubation does not necessarily need to have a massive exit to be valuable to our fund. Given that we own 100% of the business (at least at the outset), we are able to pursue opportunities that might be prohibitive to typical venture investors because they don't have what would be considered "venture scale". It's just math - a $20 million outcome for which you own 80% of the company is the same as a $160 million outcome for which you own 10%. There are also typically many more potential acquirers at that stage of business.

(It's important to note that reality is more complicated. Practically speaking you'll be bringing in a "founding" team eventually and need to make sure incentives are aligned. You also want them to spin out of the mothership relatively quickly to avoid putting them on the drip perpetually, which means they have to raise external money. To the degree those investors are other venture funds, TAM suddenly matters again.)

At the same time, the world is full of behemoth companies that started off by focusing on a tightly defined niche. These products are faster to build, easier to market, and often easier to get traction.

By finding niche audiences that have certain characteristics, we can explore opportunities with them as a beachhead market, with the option to expand later if necessary. Some things we look for include:

  • Potential customers in that space tend to be early adopters of new tools.
  • They are relatively easy to find online, which can be helpful in reducing eventual customer acquisition costs.
  • They tend to share ideas with each other, which can driver referral and word of mouth.
  • They are admired by other industries, allowing you to pursue market expansion.

Industry Experts:

In order to adequately understand which niche's have potential, we've found it helpful to do interviews with experts in a given industry. I use the term "expert" fairly loosely - while some of these interviews are with highly visible individuals in a domain, very often you can uncover tremendous insights about trends or problems by simply talking to people who've been in the space a long time, whether they have a large public profile or not.

You could call these "problem interviews" in the sense that we're not asking for feedback about any idea in particular, but are simply trying to learn what they think the future of their domain is, what problems they encounter most often, etc.

In typical Manifold fashion, we try to look for synergies whenever possible. And these insights are incredibly helpful not just in informing thesis creation, but also can inform Venture deal flow, can give Advisory consultants helpful insights to serve clients better, and can potentially surface new business development opportunities.

How we choose which thesis to focus on

Once we find a potential opportunity space to explore, we create a Thesis proposal for review by the incubation board (at the end of this post you can download the template we currently use). A thesis has several components:

  • Broad market trends: what are the drivers that make this a compelling opportunity space to explore?
  • Market segmentation: who are the players in the space? How could those players be categorized and segmented? What are their characteristics?
  • Business models and KPIs: what are the most common ways businesses within this space create revenue? Do they tend to be capital intensive? How do they typically measure themselves? What are the business model characteristics that tend to be attractive to investors?
  • Transactions: is the opportunity space a highly acquisitive one? Who tend to be the biggest acquirers? Why do they acquire companies in this space? What sorts of multiples do you tend to see?
  • Influencers and experts: Who are considered the most cogent thinkers around opportunities in the space? Who are the people everyone else looks up to?

Each quarter, we have a thesis review meeting where we discuss the current thesis and whether we want to continue focusing on it. If not, we surface potential theses to explore.

Before evaluating our theses, we get clear on what we think our principles for evaluation should be. These can evolve over time.

For example, we currently focus on areas that:

  • We believe have quick time to market
  • Have relatively small capital requirements
  • Can leverage our existing team for the most part
  • Can ideally tap into existing audiences (via existing platform ecosystems, etc).

Just because a thesis is passed on in one quarter does not mean we won't explore it again. Since our decision making criteria evolves over time, an opportunity space that seemed a bad fit previously might become very interesting in the future.

We believe this approach allows us to leverage the benefits of strong thesis-driven studios with the inherent advantages of a group like ours with diverse clients and broad industry exposure. We might evolve this approach over the future.

If you're standing up a corporate incubation practice you likely will be focusing on an industry at a minimum. But there are likely dozens of lenses you can explore within your space, focusing on some emerging customer trend or nascent technology that has big potential in your space.

Of course, once you've identified a thesis you need to start exploring ideas. And in order to do that at any sort of scale you need a process and set of tools to facilitate ideation. That's the focus of the next post.

Download our thesis template

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