Deeper Tech is Sexy, Again!
The New Search for Hard Problems
How Did We Get Here?
At a very high level, the job of a founder primarily revolves around finding and solving a problem that can lead to a significant and sustainable business.
In the startup world, the solution to that problem often involves the use of technology to enable a new product, process, business model, or a combination of the three.
When building a product, defining a process or testing a business model, founders and investors face different degrees of uncertainty. That uncertainty or risk is determined by the state of the art.
State of the art (sometimes cutting edge) refers to the highest level of general development, as of a device, technique, or scientific field achieved at a particular time. It also refers to such a level of development reached at any particular time as a result of the common methodologies employed at the time — Wikipedia
Today, we have a decent understanding of the technology risks involved with building products and processes for the web and mobile. We also have some (more-or-less) advanced frameworks to understand a number of business models, such as SaaS, marketplaces, etc.
First Issue: Did We Get Complacent?
“We wanted flying cars, instead we got 140 characters.”― Peter Thiel
Over the last few years, the fast penetration of the internet and mobile into the consumer and enterprise markets has created incredibly powerful trends and opportunities, such as eCommerce, social media, marketplaces, mobile or SaaS.
If you compare this wave of innovation with previous trends like semiconductors, operating systems or enterprise software, you will notice a pattern: the most recent generation of companies has taken more risks on the business models and customer acceptance dynamics, but fewer on the technology side of things.
I wouldn’t dare to say that it’s easy to build those products — definitely, not at the scale of some of them. However, they tend to share similar technology stacks and architectures that are well understood and predictable to a certain degree (1, 2).
In an environment as risky as the startup world — where statistically most companies fail — reducing technology risk sounds like a great idea! Then, at least in theory, the founder can focus only on finding the right opportunity because it seems obvious that the solution can be built.
However, the success of the recent trends also has a side effect: most investors — and possibly, as a result, most founders — are comfortable taking those risks, but they aren’t pushing for new opportunities that might have different ones.
Second Issue: Insane Competition for the “Easy” Opportunities?
Today, everybody agrees that it is easier than ever to found a new startup. Costs are plummeting, and the information and tools needed to iterate fast and efficiently are readily available.
From a consumer point of view, that’s great! It means that more founders are trying to solve many more problems. But at the same time, that makes it a lot more challenging to build a large, sustainable business.
Economic theory helps us explain that: a proliferation of new entrants can lead to perfect competition. And in the absence of other moats, then everybody knows what can happen next: nobody makes any real money! But since it’s easier than ever before™ to start a company, it’s harmless for the new kid in the block to try it.
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? — Matt Turck
The Result: Frontier Tech Comeback
If the “easier” things are too competitive, then what’s left?
The hard things!
Luckily, founders looking for hard business problems to solve will not be out of business any time soon. Many things are still very hard to do:
On the one hand, even in SaaS or Mobile, finding product-market fit with a minimal amount of resources and in the fastest time is still hard today! But after finding PMF, other topics such as marketing or sales are slightly easier thanks to many playbooks and experienced people out there that you can hire.
On the other hand, there’s a group of new, complex technologies, in its early stages. These technologies are not so well understood and they carry a higher degree of uncertainty, but they have enormous potential to impact the world — and, to be honest, they also call the inner geek in most of us!
For those companies, there are no playbooks, and it’s very hard to group them into homogeneous categories because technologies and the state of the art evolves. What had a high degree of technology risk yesterday, may be easy today. What was a “hard tech” startup yesterday, may well be just a regular one tomorrow.
But today, if we look at areas where the underlying technology has been “democratized” (so it’s accessible to more founders), four areas are commonly considered “frontier tech”:
- Artificial Intelligence software
- Cryptocurrencies and Blockchain
- IoT, Hardware and Drones
- Artificial, Augmented and Virtual reality
There are also other areas in which very complex technology is evolving quickly towards its democratization. The following seven areas are among the candidates for the new frontiers of tech:
- Unmanned vehicles
- Quantum computing
It’s also worth mentioning that Developer tools and Infrastructure, Security software, and Fintech — not financial services — are not considered frontier tech. But they usually (1) require a high degree of specialisation and (2) tend to be built on the latest technology advancements.
A Frontier Tech Investment Thesis at Point Nine Capital
At Point Nine Capital we are mostly known for our focus on SaaS and marketplaces. At the same time, we have been also privileged to back some companies that are building “hard” technology, including the following:
- Artificial Intelligence software — candis.io, kreditech.com, remerge.io,
- Cryptocurrencies and Blockchain — bitbond.com, chainalysis.com
- IoT, Hardware and Drones — airstoc.com, automile.com, getkisi.com
- Developer tools and Infrastructure — algolia.com, contentful.com, sqreen.io
Christoph Janz recently published a sneak peek of our investment thesis. Pawel Chudzinski will follow up with more details on our thinking around marketplaces and during the next few months, I plan to do the same around our focus in frontier tech.
Please stay tuned :)
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