Thoughts on Twitch

Why the hell would I want to watch a stranger play a video game??

I distinctly remember thinking this when I first encountered Twitch around the time of its launch in late 2011. Afterwards, I put that thought and the company out of my mind for 2+ years until the other day, when I read that YouTube (Google) is buying Twitch for around $1 billion.

An important piece of successful investing is learning the art of triage. Spending hours researching every idea you have is inefficient and cumbersome. One important aspect of investing is honing a sense for which ideas are worth the time they require to properly explore. On one hand, developing this intuition helps weed out most of the bad ideas. On the other hand, however, some good ideas will get unfairly tossed away.

I should clarify that I never had an opportunity to invest in Twitch; I’m not a VC, and the company was never traded publicly. I’m not writing this to rue missed chance at making millions; rather, I’m recollecting my first thoughts on Twitch, and recognizing that they completely missed the mark.

There exists a widespread sentiment amongst value-oriented investors that you should only invest in what you know, an area also referred to as a circle of competence. This concept exists to prevent overeager investors from buying shares in companies that they don’t really understand. One of the side-effects, however, is that it can prevent investors from exploring an industry they don’t know much about.More specifically, strict adherence to this principle would prohibit exploration beyond the triage stage for any company in an unfamiliar industry.

Looking back at Twitch, I immediately discounted the idea behind it because it offered a service that didn’t appeal to me. To this day, I have little interest in broadcasting my adventures on Skyrim, nor do I really care to watch others doing the same. What we (and in this situation, I) often forget is how important it is to think beyond our own interests and personal preferences. Twitch wasn’t targeted at me; Twitch was created for the group of hardcore gamers that had been using Justin.tv to broadcast/watch gameplay. And it has been this group that drove Twitch to such amazingly high usage and its impending buyout.

So, congratulations to the team behind Twitch. They did an awesome job of finding their niche, developing their product, and controlling their market. I hope it will serve as a reminder that great investments can come from areas that don’t appeal to us at first glance. It’s important to remember that is fine, so long as there is a sufficiently large group of people for whom the product holds appeal.

Lastly, I like the move for the acquirer. Unlike some of their recent acquisitions, Google’s purchase of Twitch makes a good deal of sense for both parties, as Twitch dominates an area that YouTube has been trying to enter lately. Now I’d love to see Apple do the same with Spotify…

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