A little more than one year ago, Marc Andreessen wrote a seminal piece which has defined venture investing and entrepreneurship since. The global trend for software powered innovations to permanently impacting every part of our lives and every part of our work is unstoppable and just at the beginning. Three generations into the birth of information technology, we are at the global inflection point – while it might not seem like it today, a hundred years from now it would be obvious and self-evident. Since Marc’s prognostication, what has become increasingly clear is that the next 20 years of venture investing and entrepreneurship will also become a different animal than the last 20 years. Instead of funding or founding enterprise software companies – these new startups are increasingly hybrids. From the outside, they are vertically integrated challengers to decades if not hundred-years old incumbents. Not content to simply sell incumbents software, these companies merge domain expertise with software native DNA to attack incumbent head on. Instead of aiming for hundreds of millions of dollars in software licensing revenue – they want to conquer existing industries and aim for tens of billions of dollars in widget revenues. Yes, the stakes are much higher this time. It is good time to get into the game from either side of the table. Software is eating industries.
For the last 20 years consulting firms like Accenture, PWC, Deloitte have made hundreds of billions trying to teach incumbent companies from every single industry how to use software as a competitive and strategic advantage. Some, like Charles Schwab, have made the transition so seamlessly that they left little room for true disruption. While others, like Blockbuster, are already distant memories. Some had once argued that software is not a competitive advantage – that all the old dogs will learn new tricks and there will be little left for valley entrepreneurs and VC’s to pick over. Turns out, for whatever reason – cultural, business model, leadership, even bad luck – many incumbents have yet to figure out what to do with software, always on connectivity, and technology. 20 years since Mosaic, if they haven’t figured it out – they probably will never figure it out. The list of industries where the marketshare leader still haven’t learned how to use software to accelerate their customer acquisition, improve their customer retention, increase their customer satisfaction, lower their manufacturing cost, shorten their supply chain etc, etc is long and impressive. In fact they tend to be B2B rather than B2C companies – while the popular bet these days in B2B for many is in “enterprise software” – maybe the better bet is in betting on these software native challengers.
There are many examples already of this trend – Uber, Silvercar, Surfair, (interesting that we all piled into the transportation sector). There is, in fact, an entire technology category that fits this thesis perfectly – etail or commonly referred to as e-commerce. Instead of trying to sell e-commerce software to Barnes and Noble, Bezos decided to sell books instead. Hundreds of billions of dollars later, Amazon is one of the most valuable companies in the world. Smaller companies like Warby Parker are taking on branded incumbents in eyewear by re-inventing and collapsing distribution and manufacturing channels. E-commerce is the canary in the coal mine. Most market research analysts have e-commerce penetration into retailing at 8%-11%, yet billions in value has already been created and reaped by entrepreneurs and venture capitalists. Retail is first industry to be nibbled by software – there are hundreds more that have yet to even feel the bite. If the rest of the bowling pins begin to fall, we are in for multiple tidal waves of value creation (and destructions).
Of course this changing new venture landscape will also require different type of entrepreneurs – one that merges a software mindset with industry specific knowledge, network, and experience. These entrepreneurs were impossible to find just ten years ago – those who were born “software native” but have spent enough time in the target industry to move beyond consultant level understanding of the motivations of different actors in the business. They are early thirty-years old up and coming executives in old and un-sexy industries looking to change the world. Ironically, they are most likely not the Ivy League or Stanford grads that Silicon Valley VC’s love to back. And they are most likely not living in the Bay Area drinking the usual coolaid. These entrepreneurs and companies are just as likely to be found on University Ave in Palo Alto as they are in mid-market industrial towns like Columbus, Pittsburg, Chicago, and even Los Angeles. (yes, outside of media, LA is really a blue collar town). There will be a huge leveling of playing field for entrepreneurs and venture capitalists – that incumbents will also need to adjust and learn the new mindset. Valley VC’s and entrepreneurs will not have a monopoly in software eating industries.
For a long time, software was viewed as an enabler and accelerant for competitive differentiation for incumbents. And certainly many software companies were born and many many billions were made based on this concise thesis. But as horizontal infrastructure opportunities in software become less evident and new startup software companies focus on vertical specific applications, the opportunities for outsized returns in running a pure software company have also become more scarce. However, entrepreneurs are beginning to discover a whole new class of opportunity in combining proprietary software with new business models and processes to build companies to take on these incumbents head on. These “silicon valley-style” challengers will shower incumbents with hyper-competition, common in the technology and venture ecosystem, they have never seen in their lifetime. Venture capitalists and entrepreneurs as we know them are moving beyond the comparably tiny addressable market opportunity in “information technology” to attack every single industry in the world. As Marc would say, “Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.”