🎤 Open Zeitgeist: Non-obvious Choices, Differentiated Returns
A piece by Letícia Doniak, investor at Santander Corporate Venture Capital and writer at Notes by Letícia
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Introducing today's author: Leticia Doniak
Letícia is a writer with one of the highest longevities I've seen in a long time. Those of you who create content will understand how hard it is to keep the discipline to put yourself out there. It's even more noteworthy when the content is as specialized as hers.
She's an investor at Santander Corporate Venture Capital and the writer of Notes by Letícia, a biweekly newsletter read by multiple hundreds of people interested in what she has to say about VC, investment frameworks, company building, and many other topics we're suckers for.
We met for the first time about a month ago to chat about a piece she wrote on the challenges of AI adoption in the energy sector. She mentioned how we're trying to generate enough energy to keep up with the increasing AI usage. Spoiler alert: we have a long way to make enough energy to ask Chat GPT all we want.
When I invited her to write this edition of Open Zeitgeist, she didn't hesitate: "What do you want me to write about?". A reply that encapsulated a level of braveness that is hard to find nowadays. "Tell us what you think needs changing. Something you think we should educate people about and nobody's mentioning." Easy peasy. NOT.
That's how she came up with the idea for this piece about paradigm changes in company building and innovation investments.
Here's what she has to say to I'm No Economist's readers:
Vision of the pure software model in light of other investment opportunities that can unlock greater value in the market
For a while, software reigned over other models, becoming the vertical business model with the highest value in the market around the year 2000. In addition, major VCs began to heavily focus on the SaaS model, largely driven by the moment Marc Andreessen wrote the famous article "Why Software is Eating the World”.
This happened at a time when the cost of building on software was increasingly falling, and incumbent companies and markets were being invaded by new players growing faster and at lower cost compared to previous infrastructures.
However, the increased ease of developing solutions and lower costs also generated greater competitiveness and difficulty in creating differentiation (building a moat).
Given this current market environment and the tools developed from artificial intelligence solutions, I believe that software will always be part of the market, but in a different format than has been seen until today:
The classic SaaS will be different in the short to medium term.
The combination of SaaS + hardware will have increasing perceived value.
Just as software has reduced the costs of developing solutions, AI has the ability to further decrease these costs by reducing the time needed to develop sophisticated technological solutions.
“In my little groupchat with my tech CEO friends there’s this betting pool for the first year that there is a one-person billion dollar company,” Altman told Ohanian. “Which would have been unimaginable without AI and now will happen.” - Alexis Ohanian 🇦🇲Alexis Ohanian 🇦🇲 on Twitter / X
In this scenario, competitiveness is even greater due to the ease of building new solutions. It only takes a small group of brilliant individuals to create something groundbreaking, unlike anything seen before. Now, differentiation isn't just about building a good MVP and doing the basics, it's about achieving distribution, accelerated growth, and customer retention.
Therefore, to stand out and deliver real value, it's important to build a pillar of defensibility that can be composed in different ways, such as leveraging data and/or integrating deeply into the client’s internal processes, which help lower churn.
One way to achieve this is by delivering a more "complete" solution to the customer quickly. Instead of following the traditional playbook of delivering a single feature exceptionally well, the path of delivering a set of interconnected solutions that address different parts of a process is a winning strategy.
As Peter Thiel wrote in Zero to One, the new solution needs to be 10x better than the existing one on the market, now, you need to deliver a full stack and experience 10x better.
In Matt Brown's article "Dark Software", a very interesting comparison is made by placing the SaaS construction model and dark kitchens side by side, a comparison drawn due to the high competitiveness in both markets (software and restaurants). The point he makes is that in a competitive market, a good strategy can be to focus on your core, outsource the rest, and thereby deliver a full-stack product.
The decrease in costs for building new businesses opens up opportunities for exploring new challenges.
Due to the drastic reduction in software development costs, VCs have favored this model because it requires less capital to achieve significant revenue and happens in a shorter time frame compared to hardware-based models, for example.
However, investing in obvious choices may not be the best way to achieve differentiated returns. This scenario opens up opportunities for markets that were previously less explored, such as energy, infrastructure, and climate, which are already being cautiously explored in the VC market. Here are some signs that those markets are starting to be more explored:
Funding to fusion-focused startups in 2023 amounted to $657 million, compared to $236 million in 2019.
Total global investment in climate tech in 2023 amounted to $50 billion, compared to $31 billion in 2019.
Even today, if we analyze the top 50 publicly traded companies in the United States, 70% have some type of hardware in their model. Now, considering only companies with high technology involved, the representation of companies with hardware as an important part increases to 54%, with approximately 20% of the total being hardware-focused, depending on what is considered a major focus on hardware. See the list of companies here.
Therefore, I see that the current moment favors unlocking value on multiple fronts, such as infrastructure and energy distribution, and the possibility of scaling processes that were previously more similar to services.
Article written by Leticia Doniak.
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