How To Build If…It’s Time To Build?

Marc Andreesen wrote an essay last week that has captured the zeitgeist at least in SV, and in the tech community broadly. The “It’s Time to Build” essay is likely to be remembered, discussed, and cited as much as Marc’s last seminal essay “Software is Eating the World.” In fact, Ben Thompson at Stratechery has already published good analysis and comparison between the two, and discussed some salient points related to shifting from building software-only businesses to those that build our physical infrastructure.

Marc emphasizes in his essay not only the need for building what we lack, such as better physical infrastructure, healthcare system, transportation, housing, energy use, etc…but that we must also want to build it. That want has to come not only from inventors, founders, and investors, but also from society at large.

In the past few days every time I have brought up Marc’s essay, and its call to action, some people have responded with: “Oh, but VCs don’t want to invest in hardware companies.” And “Didn’t Marc and A16Z tell the world that we should only invest in software businesses?” I am not here to defend A16Z on their earlier essay, or this latest one. Though judging by A16Z’s own portfolio, they have not just invested in software businesses, but have perhaps meant they believe software enables a whole new way for businesses to create value, even when hardware is a critical component of it.

I like to think Lux Capital is one of a few large VC firms that has routinely invested behind deep technologies and in complex hardware/software companies . These companies are founded by entrepreneurs who imagine a better tomorrow, and then dedicate their lives to making their vision possible. I name a few of our deep tech portfolio companies below just to showcase the kinds of BIG ideas entrepreneurs (and some investors) are not scared to pursue:

• DesktopMetal: Industrial 3D Printing. Helping democratize design and manufacturing
• Saildrone: Building an autonomous infrastructure to map, measure, and monitor our oceans; and improving science, commerce, and national security
• Zoox: Building fully autonomous cars, and transportation network
• AirMap: Enabling autonomous aerial drone operations globally
• Evolv: Contactless human security. Detecting human threats early
• Veo: Industrial robotics to transform manufacturing plants
• Kymeta: Satellite communications for a world on the move
• Recursion: Computational drug discovery
• Anduril: Modern defense systems
• Pivotal: 5G infrastructure
• Shiru: Computational synthetic biology for alternative food development
• Latch: Digital locks and ID/access
• And many others…

As I think about challenges that such deeptech companies face – and there are many – a few immediately come to mind. If we are to turn deeptech and infrastructure startups from a niche in the early stage investment world to more mainstream, we will need to think creatively about these hurdles, and find ways to overcome them.

• Lower margin — VCs have become used to 70–80%+ margins in software businesses. Well, that is hard,if not impossible, to achieve in hardware companies. So many entities along the value chain ‘touch’ the product that if everyone took such high margins, products would become too expensive to be useful. But 40–50% margins are not to be scoffed at, and we need to adjust our view of what successful businesses look like.
• Long sales cycles — Large buyers in infrastructure, industrial, and national security sectors have tended to buy through intermediaries, and typically only from large corporations who ‘check off all the boxes’, e.g. Prime contractors, Tier 1 suppliers, Consultancies etc. It is time to change that, and in addition to a small business grant program, we need to require purchase from startups. Beyond small grants and NRE dollars, these startups need purchase orders.
• Complex supply chains — COVID19 has revealed the fragility of our hardware supply chains that blindly followed low cost manufacturing centers. We need to build in a resiliency premium when we select supply chain partners; wider geographical distribution, on-demand manufacturing (such as additive manufacturing), and local sourcing.
• Regulatory hurdles — Hardware, autonomous systems, healthcare, and security tend to be regulated industries. While Emergency Use Authorization type tools cannot be used for non-emergency matters, we need formal mechanisms to prioritize and fast-track startup innovations through regulatory hurdles. Others have written plenty on how FDA must evolve, but similarly FAA, FCC, and others (including US PTO) should also adapt to this new reality.
• Capital intensity — Turns out research, development, manufacturing, and distribution of physical products is capital intensive, and that alone has kept a lot of early stage capital away from investing in such ideas. A decade or so ago, biotech early stage investors innovated by blending Series As and Bs into one bigger financing round to enable biotech startups to have sufficient cash from the beginning to hit critical science and regulatory milestones. We need to rethink how we stage financings, and how investment syndicates taken on bigger risks, but shared with more participants.
• Fewer acquirors — Large software firms and big tech have shown a great interest in acquiring traditional software startups. Strangely the lack of exit opportunities are not discussed enough when lamenting a lack of investment in certain sectors or geographies. And there have tended to be fewer acquirors for hardware companies. When major tech companies are not in the mix as acquirors, exit multiples tend to be significantly lower. This should be a reason to bring about regulatory and other changes that enable more smaller companies to IPO so the public can own and support companies that do good for the society, and are seen as important and successful in their work?

However the startup industry adjusts and morphs in the post-COVID world (beyond the obvious focus on more remote work etc), Marc’s essay has clearly given us all a lot to ponder about. He is probably not the first to drive attention to this important issue, and hopefully not the last, but it is time for action. Inaction on building what we need to survive and thrive despite natural or human caused disasters (such as pandemics or climate change) is not an option.

I am ready. Lux is ready. Are you?

If you’re ready to build the future we want to hear from you. Lets do this!