Frontier Tech: an Investor’s Perspective
We’ve collectively witnessed something fairly remarkable over the past 12–36 months. Technologies that were once considered cutting edge, and world-changing (albeit they have indeed changed the world), have ridden their respective product diffusion curves to the point that the majority of consumers have accepted them as components of their every-day lives. A few examples; we all share a symbiotic relationship with pocket sized supercomputers, giving us the ability to connect instantaneously with anyone, anywhere on the globe, and the ability to augment our brains with an almost unlimited amount of on-demand data. By 2020, 80% of adults on earth will have an internet-connected smartphone. An iPhone 6 has about 2 billion transistors, roughly 625 times more transistors than a 1995 Intel Pentium computer. Today’s smartphones are what used to be considered supercomputers. Right now, a Masai warrior on a mobile phone in the middle of Kenya has has access to more information than the U.S. president did just 15 years ago. And the list goes on, we have electric vehicles that outperform what were once considered the fastest petrol-powered super-cars on the planet (Tesla Model S = 0–60 in 2.8 seconds? That’s a typo right? Nope.). We have self driving cars. We’ve made advancements in the medical devices and life science sectors are not only allowing people to live longer, healthier lives, they’re actually preventing and curing diseases once thought impossible. All of this would have seemed implausible, if not impossible in a galaxy not all that far away nor all that long ago.
Sometimes it feels like we’re on the tail end of the most recent big wave of innovation, one that was propelled by social, mobile and cloud. A lot of great companies emerged from that technological wave, and the concern is whether there’s room for a lot more “category-defining” startups to appear. Does the world need another Snapchat? Or another marketplace, on-demand company, food startup, peer to peer lending platform? Isn’t there a SaaS company in just about every segment now? And so on and so forth.
The simple answer is, ‘no’ we do not need more of the same. And if we use history as a guide, we’ll discover that we are unlikely to get more of the same. This is where “frontier tech” comes into play. Frontier tech is a group of emerging technologies that includes artificial intelligence, the Internet of Things, augmented reality, virtual reality, drones, robotics, autonomous vehicles, space, genomics, neuroscience, conversational UI and blockchain technologies.
As is obvious from my previous blog posts (and our current investment portfolio), I’m a big fan of frontier tech — but hopefully not blindly enamored with it, as an investor.
We’re talking about a whole new world of appearing in front of our eyes, one that was complete science fiction not just twenty or thirty years ago, but also as recently as three or four years ago. What’s fascinating to me is that all those areas are going from science project to functional products that actually work at the same time. It’s spectacular, and also truly, exponentially world-changing.
Second, it’s not as heterogeneous a group as it may first appear. Most of those areas have the same common core, which is the newly-found ability to capture, process and analyze massive amounts of data, cheaply and quickly. Of course, they benefit from many other key trends (mobile, cloud), but the IoT, drones, robots, self-driving vehicle, etc. are really fundamentally all about data — both capturing and processing tons of data- fundamentally powered by AI (machine learning, computer vision).
Third, it’s inevitable. We VCs can pontificate all we want, and to some extent we’re gatekeepers, but ultimately entrepreneurs drive the bus. And today, frontier tech is increasingly what many of the smartest uber-geeks want to work on. As I’ve said before, look at where the smartest geeks are spending their free time, and you’ll find the future of consumer technology. Different parts of frontier tech are at different parts of the hype cycle. But on the whole, this is where the world is going.
What’s tricky from an investment perspective
Before there was open source, AWS and the lean startup methodology (Steve Blank’s Lean Startup Methodology is a must-read for any aspiring entrepreneur), it would take millions of VC money for any startup just to start building a product (most of that money going to Sun and Oracle). Then for the last 10 years or so, startups have been able to do more, faster and with less money. It became possible to get a sense of product/market fit much faster.
Frontier tech startups operate, by definition, in very early markets. Any customer using their products is a super early adopter, generally in deep experimentation mode.
As a result, frontier tech startups often show up at Series A and Series B rounds looking considerably “behind” in terms of traction and metrics, compared to their non-frontier peers. For example, most VR startups in the US seem to need a full Series A (in addition to large seeds), just to be able to actually ship their product. By the time they show up for their Series B, they’ve hopefully had some early sales success, but typically don’t have enough units in the field to be able to evidence their claim that, ultimately, they’re all about the software and the data.
Given the above, what do I look for in frontier tech startups?
Technical founders with deep intellect. Of course, in any startup, you want smart founders. But in frontier tech, given all the above, we’re talking off-the-charts smart people with deep technical knowledge of the areas they operate in, and some significant relevant professional experience on top. This type of intellectual caliber can be evidenced in different ways, but more often than not, frontier tech is the land of PhDs (or PhD dropouts) in technical areas, ideally from top schools.
Deep customer focus. One key risk with the type of founders mentioned above is that they build “tech for the sake of tech”. You want founders who are also naturally customer-oriented, and happy to start working with at least one key beta customer very early in the life of the company. A great resource on this front is Steve Blank’s (yup, the Lean Startup guy again) Customer Development Model, to inform product development from the standpoint of what a customer actually wants/needs.
Pragmatism and patience. This is particularly important in early, undefined, yet already competitive markets. It can mean keeping the burn rate low, to make sure the company is still alive by the time your market actually takes off. Or building a team that is at least partly internationally distributed, because you’re probably not going to be able to outbid Google or Facebook for that deep learning engineer in SF or NYC.
Thoughtful market positioning. Easier said than done, but stay away from areas are likely to put you in direct competition with the giants sooner rather than later (for example, in AI, image recognition, video recognition or language translation are likely to be tricky). Everything else being equal, in terms of initial market positioning, enterprise is safer than consumer, vertical is safer than horizontal, and tools are safer than platforms. Whenever you can, position yourself as “the glue” between multiple platforms — for example, a solution that enables cross-compatibility across all VR headsets. Or as the “last mile” between their platforms and the end user.
I believe the current wave of innovation (mobile, cloud) is reaching it’s end, but will continue to produce a few great companies. Enormous industries (financial services, healthcare) still are early in their adoption of those technologies.
At the same time, while frontier tech covers different areas at different stages of advancement, it altogether feels like an inevitable future. It may offer interesting challenges to investors, but it is where the world is going, and the genie is out of the bottle. For entrepreneurs, as long as you go into it eyes wide open, it is perhaps one of the most exciting times ever to start a new venture.