Nothing Eats Like Software
Excluding Musk and biopharma, America has produced 1 profitable hard tech company in 20 years.
When reading about Akio Morita, Edwin Land, Steve Jobs, or Michael Dell, it’s impossible to ignore the simplicity of their products. Part of it was great design. Another part of it was the simple fact that hardware development in the 50s, 60s, 70s, and 80s was easier, because electrical devices were less sophisticated. They could build a minimum viable product in their garage.
A version of this continued in the 90s with the rise of the internet. Marc Andreessen observed the trend in his famous 2011 “Why Software is Eating the World” essay. Peter Thiel made his famously dour proclamation: “we wanted flying cars, instead we got 140 characters.” Software enabled new technological products, though notional in their physical presence, to nonetheless be built without much working capital.
During this period, venture had matured from the days of Arthur Rock and become a respected niche in the world of private equity. Despite the influx of new investors, returns nonetheless stayed strong. As Andreessen’s own investing style matured through this period, he focused on understanding software companies as opposed to “constantly questioning their valuations.” It worked, for reasons to be discussed. He and many others made a killing.
In recent years, his eponymous venture firm and the valley as a whole have directed considerable capital towards a new niche, hard tech. With it, they’ve brought three legacy practices from software investing: relative valuation insensitivity, a ten year exit window, and a willingness to double-down.1
These practices work in software because the marginal cost is zero, iteration is fast, and distribution scales exponentially. The same cannot be said for hard tech. We can observe this in outcomes; outside of biopharmaceuticals, hard tech startups founded in the last quarter century have largely floundered. A few eVTOL and self-driving firms (Archer, Joby, Cruise, and Zoox for instance) have IPO’d or been acquired; none have ever been profitable and some haven’t even generated revenue to this day. In fact, if we exclude companies founded by Elon Musk (SpaceX and Tesla) and the biopharmaceutical industry, we arrive at a simple yet terrifying fact: beyond them, there has been one profitable hard-tech company in founded in the US in the last 20 years.2 That company is Pure Storage.3
Sure, to a certain extent, profitability doesn’t matter to venture investors.4 Archer’s IPO could be considered a successful exit. Yet the appetite for unprofitable flashy businesses is bound to wane without a certain expectation of eventual free cash flow. I am not bearish on hard tech per se; I am however extremely bearish on venture returns from investing in hard tech.
As such, this is not to say that Helion, Varda, Skydio, and a multitude of others won’t succeed. But in a business dependent on power law dynamics, it’s difficult to understand how Series A and beyond investors intend to return their fund from 1-2 hitters in the absence of a fundamental change in market dynamics. Barring government intervention, I don’t see that coming.
Regardless of this, I’ve written several angel checks into hard-tech businesses in the last 18 months. I’ve done this for three reasons:5
I came in at or near inception
My time horizon is longer than a typical fund window
The companies used proven technology for new applications
These points seek to address the aforementioned software investing playbook that venture has brought to hard tech. By coming in at a lower valuation on a longer time horizon with a simpler product, upside materializes quicker and more acutely.
You can just do things, even in hard tech. But be wary of an old playbook being applied to a different landscape.
Call this the “software investing playbook” that has been misapplied to hard tech.
Musk is a truly sui generis founder, as we all know.
For what it’s worth, Pure Storage had to be incubated inside of Sutter Hill Ventures with $5m in seed funding and two years of stealth, about the furthest thing from founding a company in your garage.
Just ask a Coreweave investor!
Three reasons, that is, beyond the fact that the founders were fantastic.