Early Investing

Follow the Startup, Not the Sector

Follow the Startup, Not the Sector
By Andy Gordon
Date September 25, 2019

I was on the phone with Hermie this morning. Hermie is the vice president of finance for a cannabis company. And he asked me how interested Early Investing is in the healthcare and medtech industries. I told him that healthcare and medtech will generate a dizzying number of technological breakthroughs in the coming years. So we’re very interested.

Healthcare is just one sector we’re interested in. There are several other sectors we’re watching that are ripe for disruption. But, in truth, sectors don’t dictate our choices. We’re “sector agnostic.” We don’t chase particular sectors. And unlike many public stock investors, we don’t seek out diversification. Because experience has taught us that we don’t have to.

Here’s the thing: The fastest-growing and most prime-for-disruption sectors tend to naturally attract a lot of startups. And that gives us an opportunity to explore those sectors and invest in the best of those startups.

Our First Stage Investor Startup Portfolio, which is roughly 3 years old and has 44 startups, demonstrates this. So I’m going to walk you through how some of the hottest sectors we’re watching are represented in our portfolio… because we’ve been focusing on the companies – not the sectors.

Portfolio Breakdown

Thirteen percent of our holdings are devoted to our biggest category – healthcare. We’re backing up our interest in health with recommendations of companies that are developing some of the most exciting technologies out there… in gene therapy, cancer detection and treatment, microbiome, and hip and joint replacement surgery. We’re also just as interested in advances in healthcare delivery, which, after decades of stagnancy, is finally undergoing significant improvements, with much more to come. We have two companies in this area. One delivers your medications the same day and for free. The other is making it easy to take blood tests at home and get highly accurate results within minutes.

Our next biggest category is food and beverages, where tastes and preferences rapidly evolve. Our beverage picks slightly outnumber our food companies, but both represent a rich vein for startups to offer new and different products. Interestingly, this is also another area where we see access and delivery attracting new customers and companies using subscription models to customize their product offerings.

The third-biggest category is made up of social media-related companies. This is not so surprising. Social media is huge and, importantly, continues to evolve in interesting and unpredictable ways. Startups are looking to take advantage of the growing disenchantment with Facebook, concerns over privacy, and the increasing ability of algorithms to understand our needs and personal preferences.

Beyond these three categories, our portfolio covers a wide range of markets, including 3D printing, artificial intelligence, SaaS (software as a service), energy savings and the environment, apparel and direct-to-consumer retail, real estate, and more. There are just a couple of major categories that are missing. Robotics and transportation are two obvious ones. We’ve looked at a couple of dozen startups in those sectors, but none have met our high standards… yet. And we’re not going to lower those standards just to add a sector to our portfolio.

You should do the same. Keep your focus on the startup and don’t compromise on your standards to get into a particular sector. The company is the most important factor. If you’re investing in a large enough number of startups, you’ll likely end up investing in some of those hot sectors anyway.

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