Airplane Arbitrage is Moneyball for Venture Capital: Geographies/Regions of Personal Interest
I was re-watching the excellent movie “Moneyball” last week which was based on Michael Lewis’ also excellent book. The story of how the Oakland A’s in 2002 were able to win a record 20 games in a row despite having a budget that was a fraction of other Major baseball teams. They did this by finding & investing in overlooked players and playing them in different unorthodox ways. This was widely criticized and seen as heretical by most of baseball at that time. Yet it worked. Ironically this “moneyball” strategy has been now widely adopted by other teams after the Boston Red Sox won the World Series soon after using the exact same tactics.
What does this have to do with Venture Capital? I would posit this is exactly what emerging Venture capital investors must do. Invest in founders and geographies that are overlooked by top tier investors in the crowded ecosystems of Silicon Valley and New York.
I would definitely agree that there are so many excellent investors and founders and startups in a top tier ecosystems like the SF Bay Area. They will continue to be major centers of startup Unicorns (still hate this word) and talent. But this is also where the competition to invest in these amazing startup founders is the highest. Totally fine if you are Founders Fund, Sequoia or any of the top tier branded VCs who can get into most deals. If you are new or emerging, not sure you have much of a chance. Still it’s worth being there to compete and learn.
The real opportunity is going to other geographies or invest in overlooked vertical industry sectors (Gaming or Media come to mind) or founders/demographics. It’s astounding to me (STILL) that the venture capital industry has not invested more money into female founders. This has nothing to do with fairness or equality but just on the pure capitalistic investor view that they are just as good, if not, in many cases, better than guy founders. Some of my best portfolio cos were started & run by female founders. Yet VCs have underfunded them with only 20% of total VC money invested in female founded/co-founded startups. Seems really dumb to me on many fronts.
From the geographical side, this is exactly what Drive Capital and Steve Case’s Rise of the Rest Fund is doing in the mid-West & southern states of the USA.
Me personally, I’ve been super bullish on foreign & immigrant founders. Especially founders from Canada, Australia, Brazil, New Zealand and Europe. Also of note: usually B2B focused as well. Some of the best performing companies in my own portfolio that fit this criteria include ManyChat, AirCall, Pipefy, Shippo, BigFinite, Printify, Cube.js among others.
I’ve detailed the specific reasons in my previous post, “Playing against Rubes” https://hardfork.substack.com/p/play-against-rubes. These days (and last 3–4 years actually ) I’m particularly bullish on startups from Central & Eastern Europe. This is a region full of strong technical talent, super hungry founders who for most part think global from day one yet dramatically underserved by the local venture investment industry. I personally think this is the opportunity I’ll be focusing on for the next few years.
That’s why I use the term “Airplane Arbitrage.” Despite being a long time Silicon Valley guy (21 years as i write this), I’ve always been willing to get on an airplane to fly to new geographies to search for and meet new awesome startups outside of Silicon Valley & the United States. I’m not alone here, as i’m starting to see top tier investors like Bedrock, Lightspeed, Union Square Ventures, Founders Fund and Kleiner Perkins do a lot more European, Australian & Kiwi (New Zealand) deals. The Covid Pandemic has really flattened the world and sped this trend up.
This is great news for founders in all the new emerging tech ecosystems around the world.