Something about that joke, which was not really a joke, made me realize that I had run out of time. Up until that point, I had not really made any serious choices. I felt like I had unlimited bandwidth and could do everything in life that I wanted to do simultaneously. But his joke made it suddenly clear that by continuing on the course I was on, I might lose my family. By doing everything, I would fail at the most important thing. It was the first time that I forced myself to look at the world through priorities that were not purely my own. I thought that I could pursue my career, all my interests, and build my family. More important, I always thought about myself first. When you are part of a family or part of a group, that kind of thinking can get you into trouble, and I was in deep trouble. In my mind, I was confident that I was a good person and not selfish, but my actions said otherwise.
Have you ever worked in a place where there was a lot of gossip? If so, it might have been due to a cover-up policy. A lot of companies try to cover up crises or when things go wrong, in order to solve them quietly while the employees think everything is great.
The Hard Thing About Hard Things
In The Hard Things About Hard Things, Ben Horowitz shares his experience in managing startups and companies through both good and hard times. The book contains tips on how to manage employees, build relationships, and how to work as an effective CEO. A great read with many valuable lessons.
Happy employees deliver great products. A good place to work values employees and their contributions. They know that if they get their work done, good things will happen for them and for the company.
If that world is compelling, I dig in further. I look at the usual things: exceptional founders, big markets (or the potential for big markets), business models that make sense at scale, strong customer understanding and product chops.
Fourth, hard startups face less competition to serve that demand. Hard businesses can be more defensible. Remember that competitor chart from earlier? For many hard startups, the chart can look more like this:
I suspect that, like clockwork, other growth funds will see the returns being generated by these hard startups and shift dollars away from more mature industries better suited for non-dilutive financing or public markets.
Venture capital, meanwhile, which is theoretically speculative \u201CFinancial Capital\u201D, has increasingly become professionalized and standardized, thanks in part to the rise of cloud platforms like AWS; building a new SaaS company to take on another old-world vertical certainly takes hard work, but the playbook is fairly well-known.
Investing in hard businesses might seem counterintuitive, but at this point in the cycle (the long arc of history, not specifically the current market cycle), I think investing in hard businesses is the best way to generate outsized returns. I\u2019ll explain.
The battlefield moved to brand, which works for some category leaders, and paid acquisition, where it\u2019s expensive to compete and you get practically no long-term competitive advantage from doing so. This has gotten worse as Google and Facebook and even Amazon get more expensive and harder. The worst part is this: even if you have a better product than competitors or substitutes, you still have to compete for the same ad slots with them, and you have to pay to educate consumers on the superiority of your product.
This is now obvious to everyone reading this. It\u2019s fairly easy to build a $1 million revenue DTC brand. It\u2019s reasonably easy to build a DTC brand to a $50-100 million outcome, which is an incredible outcome if you don\u2019t raise a ton of money. It\u2019s practically impossible to create a venture-scale, multi-billion-dollar outcome in DTC. The companies who have the best shot use DTC as a channel, but really have some differentiated and hard ways to create an obviously better product. Cometeer comes to mind; it\u2019s a frozen coffee company that happens to use DTC as its first channel.
I don\u2019t think I went far enough in the original piece. The piece was about DTC companies (or any CPG-esque ecommerce retail business), but increasingly, the hard thing about easy things describes software companies.
Software is not dead. There are other reasons that tech stocks have struggled alongside, and even worse than, the rest of the economy in recent months. A lot of software spend was pulled forward during COVID; they over-earned. Discount rates are higher and tech companies\u2019 projected cash flows are further in the future, so they get hit harder. And there was too much exuberance. Founders Fund\u2019s John Luttig wrote an excellent piece, Reversion to the mean: the real long COVID, exploring many of the factors.
It\u2019s easier than ever to build the average software company \u2013 plug into AWS, snap in a bunch of APIs, follow established playbooks \u2013 and harder than ever to make it really big. Modularized inputs and playbooks lead to more competition, smaller opportunities, and lower margins.
All of this means that, while the theoretical margins of pure software and SaaS businesses are juicier and more predictable than those of hard startups, at this point in a cycle, they may be a mirage for new startups. Put another way, gross margins \u2013 revenue minus COGS \u2013 might be high, companies can generate cash on each sale, but net margins \u2013 which include overhead and sales & marketing \u2013 might come under pressure in the face of more competition.
I\u2019m going broad strokes here, and there are obviously exceptions. For example, selling SaaS into a newly-exploding industry like synthetic biology or many of the harder atoms-based categories I listed above will come with less competition and more nuanced needs, and I still love APIs and infrastructure businesses, which I view separately. But in many cases, venture capital might no longer be the best or only money for SaaS companies. It\u2019s reaching the Maturity stage.
On the bits side, software is still eating the world, but its palette has matured. It\u2019s eating things like oysters and foie gras and escargot that it had no desire to eat when it was a kid, because those things are often gross and hard to eat. I\u2019ll stop torturing the analogy, but what I mean is that hard startups on the bits side are solving difficult technical challenges, creating new business models, or touching industries that previously didn\u2019t make sense to touch.
APIs/Infrastructure: While many of the biggest opportunities in this category have been taken, and many are in the portfolio already, there will always be opportunities to abstract away the newest complicated technology and deliver it via APIs. Plus, these companies are often 100x harder below the surface than above it; there\u2019s a lot of schlep.
The atoms category is full of what Rahul Rana called moonshot companies in his Not Boring essay last week. It\u2019s more straightforward to understand how hard it is to build these companies.
In these industries, the hardest part is typically actually building something that works in a way that has the potential to generate strong unit economics at scale. Often, there\u2019s a clear need for the products this group makes, but they haven\u2019t been possible to build before, require cutting edge science, and often need both great hardware and great software.
Hard startups in the atoms category often have to build everything from scratch. They often need to figure out how to sell into buyers that don\u2019t traditionally buy from startups, as Palantir and Anduril have in government and defense. They need to compete for some of the same talent as deep-pocketed tech companies with cushier jobs to offer and they need to hire people with skills that Silicon Valley doesn\u2019t typically hire for. They need to innovate on both electrical and mechanical engineering. Sometimes, they need to convince local, state, and national governments to even let them operate. To do so, and to meet safety requirements, they often need to build rigorous testing into their operations. They need to deal with all of the messiness and complexity and delays that come with building physical things in the physical world.
Plus, if everything goes right, they\u2019ll often need to raise tremendous amounts of money to scale, which can dilute earlier investors without the bank accounts to keep up. The pressure to raise dilutive venture capital should decline as these companies begin to produce consistent cashflows and they\u2019re able to access credit earlier. Multiple hard startups in our portfolio have already secured large lines of credit to fund capital intensive pieces of their businesses.
Hard startups are hard to build. Definitionally, there\u2019s no playbook. They\u2019re often expensive to build, too. And they demand a tremendous amount from employees. But when they work, they have the potential to create lasting, defensible businesses, enormous outcomes, and meaningful improvement in peoples\u2019 lives.
The main reason hard startups can be great businesses is that, because they are hard, they\u2019ll face less competition if they succeed. All of the things that make it hard for them to succeed in the first place makes it hard for others to copy them. That\u2019s doubly true because, by being first, they\u2019ll often attract the best talent, lock down the most willing buyers, build a strong brand, and achieve economies of scale.
It\u2019s not a coincidence that the biggest DTC companies today were all founded before 2014, the biggest social media companies were all founded before 2011 (other than TikTok, which is an AI company that does entertainment), and the four biggest SaaS companies by market cap (Microsoft, Adobe, Salesforce, and Intuit) were founded in the last century, even though it\u2019s become a lot easier for the companies that followed to get started. Those were all hard startups at the time; thanks largely to their success, getting started in those categories has become easier. 2ff7e9595c
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