May 7, 2024 • 1hr 22min

Nico Wittenborn - Finding the Adjacent Possible - [Invest Like the Best, EP.372]

Invest Like the Best with Patrick O'Shaughnessy

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Nico Wittenborn, founder of Adjacent, a venture firm focused on finding the "adjacent possible" for their next investment. Nico has zeroed in on the consumer subscription market, making early investments in companies like Calm, PhotoRoom, and Oura Ring. The conversation explores Nico's investment philosophy, his views on the consumer subscription landscape, and lessons learned from working with founders in this space.

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Key Takeaways

The "adjacent possible" concept describes how the next step of evolution or innovation is usually a combination of possibilities available today, rather than a leap to something completely new
Consumer subscription businesses are an exciting area with potential for enormous companies, enabled by increased willingness to pay for digital products
When launching a consumer subscription product:
- Monetize early to learn from paying customers
- Start with lower pricing initially, then increase over time
- Consider annual subscriptions for cash flow advantages
- Test different pricing and paywalls extensively
Hardware + software combinations can be underrated opportunities, with high retention and potential for subscription models
Great products are often simple, focused on doing a few things extremely well, with attention to detail throughout the user experience
For long-term success, companies need to think beyond their initial product and lay foundations for future expansions and revenue streams
As an investor, doing everything yourself allows you to be closer to finding the truth, rather than relying on others' filtered perspectives
Look for founders who are authentically committed to their vision and passionate about what they're building long-term
The rise of individual investors allocating large amounts of capital is an interesting trend, enabled by massive outcomes in tech
To stand out as an investor, develop a unique perspective by exploring adjacent possibilities others may overlook

Introduction

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Nico Wittenborn, founder of Adjacent, a venture firm focused on finding the "adjacent possible" for their next investment. Nico has zeroed in on the consumer subscription market, making early investments in companies like Calm, PhotoRoom, and Oura Ring. The conversation explores Nico's investment philosophy, his views on the consumer subscription landscape, and lessons learned from working with founders in this space.

Topics Discussed

The Adjacent Possible and Investment Philosophy (4:26)

Nico explains the concept of the "adjacent possible," which comes from evolutionary biology and describes how the next step of evolution is usually a combination of possibilities available today. He applies this idea to technology and investing:

Opportunities often open up at specific moments in time when various factors align
Looking for investments that create categories around these adjacent possibilities
Focusing on areas that may be easy to dismiss initially but have potential for dynamic growth

Nico emphasizes the importance of adapting and evolving his thesis over time, rather than sticking to a rigid framework. He states: "I decided also not to call it consumer subscription ventures, because I think all of those themes really have a half life on them, and it's really hard to know how long they actually endure."

Consumer Subscription Businesses (12:24)

Nico discusses why he's excited about consumer subscription businesses:

Historical context: Rise of smartphones, app stores, and increased willingness to pay for digital products
Business model advantages: High margins, recurring revenue, global scale from day one
Cash flow benefits: Annual subscriptions allow companies to self-fund growth
Evolving landscape: Potential for higher pricing and new monetization strategies over time

He notes: "I think we're still in the early innings. But it just one of the things that happen if you expose yourself to those new trends is that they're very simple to understand and to apply to different types of business models and innovations because of the willingness to pay."

Launching and Pricing Consumer Subscription Products (19:07)

Nico shares insights on effectively launching and pricing consumer subscription products:

Monetize early: Learn from paying customers and their usage patterns
Start lower, increase over time: Begin with lower pricing to gain traction, then raise prices as you prove value
Consider annual subscriptions: Provides cash flow advantages, especially for early-stage companies
Extensive testing: Use tools like Superwall to test different paywalls, pricing, and conversion strategies
Freemium approach: Most successful products have a free tier with 90% of users, monetizing the most engaged users

Nico advises: "I think you want to monetize very early for me. I think you learn so much from people buying a product and then using it."

Hardware + Software Combinations (25:20)

Nico discusses the potential of combining hardware and software in consumer products:

Historically overlooked due to challenges in hardware businesses
Examples like Oura Ring show the power of integrating hardware sensors with software insights
High retention rates make these products well-suited for subscription models
Underrated opportunities due to investor skepticism about hardware

He shares: "I now have two companies per fund. So one ad JNT fund is roughly 20 companies. Two of them are hardware plus subscription. And the hit rate of those companies is very high."

Characteristics of Great Products (34:24)

Nico describes what he's learned about great products after evaluating many:

Simplicity: Focused on doing very few things extremely well
Attention to detail: Thoughtful design throughout the user journey
Quick time-to-value: Users should experience a "wow" factor quickly
Intuitive design: Easy to understand and use without extensive explanation

He notes: "I think a great product reflects a lot about the founders that build it in a way that I actually probably judge a founder more by the product than by the interaction with the founder."

Solo Investing vs. Large Firms (37:33)

Nico explains his preference for doing everything himself as an investor, rather than being part of a large firm:

Allows for a more direct connection to finding the truth, without filters
Enables faster decision-making and a more founder-friendly experience
Provides a complete understanding of all aspects of running a venture firm
Creates a unique, high-touch approach to serving founders

He emphasizes: "I want to control the experience, and I want to make sure that it is the best possible way for the founder. That's why I also don't have an EA, because I don't want that to be a person between me and the founder."

The Rise of Individual Investors (44:44)

Nico discusses the trend of individual investors allocating large amounts of capital:

Enabled by massive outcomes in tech that weren't anticipated by traditional firms
Appeals to founders who prefer working with individuals over large institutions
Allows for more specialized focus and unique perspectives
Creates opportunities for higher returns through smaller, more focused funds

He observes: "I think the rise of these individual firms also serves that super well, because those people have only themselves and so they naturally are drawn into a specific direction and hopefully are focus and not somewhat more generalists."

Evolving Consumer Subscription Businesses (1:08:35)

Nico shares insights on helping consumer subscription businesses evolve beyond their initial product:

Recognize that there's often a natural ceiling for the first product
Plan for expansion to new platforms (e.g., web) and enterprise offerings
Consider API strategies to serve different use cases
Start laying foundations for future expansions early, before hitting growth ceilings

He advises: "You have to overcome ideally all three, but like, you have to work on all of them over time. And so for me, I have a pretty high confidence based on the investments that I've done, that there are s certain benchmarks that if I see them, I know that this is a company that could get to a few hundred million of revenue."

Advice for Aspiring Investors (1:12:42)

Nico offers advice for those looking to develop a unique investment approach:

Understand your passions and unique perspectives
Look for areas that are less understood or overlooked by others
Be willing to take calculated risks and accept uncertainty
Learn through making investments, not just theorizing
Aim for a strategy that can succeed even if you're not 100% correct

He suggests: "I think it's trying to find that intersection of this is something that I think will happen in the future. This is the data points that I can lean on, and then having the confidence to accept some uncertainty around whether it actually turns out to be true or not."

Conclusion

Nico Wittenborn's approach to venture investing, focused on finding the "adjacent possible" in consumer subscription businesses, offers valuable insights for both founders and investors. His emphasis on simplicity, attention to detail, and long-term thinking provides a framework for building successful products and companies. By staying small, maintaining a high-touch approach, and constantly evolving his thesis, Nico has positioned himself to capitalize on emerging opportunities in the rapidly changing landscape of consumer technology.