Continuing with our experiments in radical transparency, today we are publishing a draft of @earnestcapital's long and near-term investment thesis with the hopes of continuing to get great suggestions and critiques. It's a >10k word doozy so will tweetstorm some highlights here👇
The investment memo starts at a high level view of big changes happening in the market for software and software-enabled entrepreneurship and drills down successively into key drivers and our specific strategy to capitalize on these trends and work with great founders.
The high level starts with a piece by @ganeumann that first put the pieces together for me on the key changes happening in tech that are powering the tremendous response we've seen to @earnestcapital. The transition to the Deployment Phase of software.
There's much to it, but the upshot is the software market is transitioning to a phase of technology adoption with fewer huge risky winner-take-all outcomes and more deploying technology gains to all areas of the economy.
The Deployment Phase has myriad implications, but the one I focus on is that is typically requires a new form of better aligned capital. VC was the force behind the 1st phase of software but now most software companies should look to something new tylertringas.com/a-new-default-…
I call the specific drivers of the Deployment Phase, The Peace Dividend of the SaaS wars. A bunch of great stuff built for the software industry over the last 2 decades that enables lower risk startups to tackle niche markets 
The Peace Dividend means two things:
1/ It makes economic sense to target smaller niche markets b/c you can build and launch with very little investor capital
2/ Entrepreneurs can bootstrap to a much less risky business with a live product and paying customers 💪
1/ It makes economic sense to target smaller niche markets b/c you can build and launch with very little investor capital
2/ Entrepreneurs can bootstrap to a much less risky business with a live product and paying customers 💪
These dynamics converge with another trend that software is eating entrepreneurship. The New American Dream is to build a profitable sustainable remote software business that can be run from anywhere, scales nicely and prints money.
But until now there has still been no form of aligned capital with building this kind of business. The risk profile is closer to small business loans than venture capital, but lack of collateral locks them out of most bank products early on
Actual entrepreneurship is on a multi-decade decline and I believe an aligned source of capital funding entrepreneurs, motivated by the New American Dream and using these tailwinds could unlock a *huge* amount of new startups.
These businesses are phenomenal businesses with recurring revenue, excellent margins, calm remote teams and excellent product-market-fit. Most are privately held so it's hard prove this in data, but we have some strong indicators
So we started pulling the thread on how to build a fund aligned with these entrepreneurs and the first insight was to create a new form of funding called the Shared Earnings Agreement. The response to it has been amazing earnestcapital.com/shared-earning…
Next, I was immensely fortunate to have an incredible group of bootstrappers come on board to help these founders with skin in the game by both investing in the fund and committing time to mentor the portfolio. This sums it up 🙏
The second pillar of @earnestcapital is a (some would argue heretical) investing strategy that doesn't buy in to the theory that 90% of startups fail so you must get a unicorn to make up for it. We seek to maximize the number of startups that succeed in our portfolio.
We believe that by filtering for founders building lower risk Earnest businesses, providing coaching and aligning incentives toward calm sustainable growth, we can break the law of startup physics around a high failure rate. This is the bet at the heart of Earnest.
How can we still invest early stage but get a risk profile that looks more like later stage private equity where total failure still happens but is much rarer? Early Stage Value Investing
That's all the high level theory. The rest of the post gets into the nitty gritty of how it's gone and where we are taking things with @earnestcapital so feel free to dive in and look out for a few announcements toward the end earnestcapital.com/investment-mem…
