Capital-Intensive Businesses

Yesterday, I wrote about my old boss, Oliver Cameron, and his company’s partnership with FCA to build customized driverless vehicles.

Oliver is back in the news today, quoted extensively in an honest and sobering New York Times article about the ups and downs of the self-driving car industry.

“That was a clear moment in time where the whole industry went from being a bull market to a bear market,” Mr. Cameron said. “Covid has taken us even further into the bear market.”

The Times closes with the high capital needs of self-driving companies.

With autonomous vehicles, “you may find yourself in a company that requires billions of dollars of capital,” with no clear timeline for building a large business or seeing a return on the investment, said Aaron Jacobson, a partner at NEA.

This is true, and it is one reason robotics companies are not super attractive generally, at the moment. But it would be a mistake to get too spooked by the industry’s capital needs.

The other side of that coin, as Warren Buffett has preached for years, is that capital intensive businesses offer the opportunity to deploy huge amounts of capital with attractive returns. Capital requirements also form a durable moat around the business.

I noticed the reverse perspective in today’s post on Fred Wilson’s blog, AVC. Fred describes profitability and low capital needs of online learning companies, which is also an industry of obvious interest to me.

“They [Duolingo, Quizlet, Skillshare, Codecademy, and Outschool] have all been very capital efficient and most are cash flow positive at this point.

What this tells me is that direct to learner businesses are very attractive. They can serve a very large number of learners very efficiently, they can lightly monetize and yet produce massive revenues because of their scale, and they don’t require a huge amount of capital to build.”

Autonomous vehicles and online education are both attractive industries, but they are very different industries, with distinct capital needs. Companies in each industry have to tailor their business plans to that reality.