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Happy New Year!
Tech's future in 2023, staring into the abyss, and the Perfectionists
My family and I are back in Winnipeg, Manitoba for the holidays. It has been -40 a few days here. And as the soft Californian I have become, I empathized with this guy.
And now back to our regular programming.
It’s been a bad year for tech, but that’s OK – the future is bright
This piece was originally published in the Globe & Mail, here. Alexandre Lazarow is a global venture capitalist and the author of Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley.
With the current beatdowns in the technology industry, there is a certain feeling that the tide is starting to go out, and as the Warren Buffett adage warns, we are starting to see who has been swimming naked. Startups often look like the pebbles on a beach, crashed upon by waves. But that’s okay.
As the tide recedes, we’ll see which get washed away, and which have built boulders in the sand. Those that remain will be positioned to thrive in a saner and healthier future.
The long-standing approach has been to focus on growth at all costs – sacrificing profit to capture market share. Not only has that not been a problem, it was essential to getting a startup off the ground in a winner-take-all competition for customers in industries such as social media, digital streaming and ridesharing.
With low interest rates and cheap capital came longer acceptable runways to achieve market consolidation and, eventually, profitability. In the past decade, more than 1,500 startups have reached unicorn status, valued at more than US$1-billion, in more than 100 cities.
But now, with the backdrop of rising inflation, macroeconomic uncertainty, the war in Ukraine and rising interest rates, the music has stopped for venture capital funding. More and more unicorns are having down rounds that strip them of their mythical status, and others that raised capital before the recent spike in interest rates are breathing a sigh of relief.
The previous short-term outlook of the industry had propelled the special purpose acquisition company (SPAC) boom – a vehicle expressly designed for back-breaking speed to public markets. Along with that had come the WallStreetBets and the FOMO (fear-of-missing-out) investment style in venture capital and publicly traded companies. Now there’s devastation across the land, even among the giants. Amazon, Alphabet, Apple, and Microsoft lost $2-trillion collectively in the past year.
Yet all is not lost, and this is not a bursting-bubble moment like the year 2000. The startups of today have real revenue and real customers – they are not Potemkin websites. Plus, the centre of the startup world is no longer focused in Silicon Valley. There has been a great dispersion of tech talent and funding. More prudent, sustainable and resilient approaches outside of yesterday’s tech bubbles are now the norm.
Startups have identified and are solving critical global problems. Neobanks like Chime (an investment I made at a previous VC firm) and broader fintech disruptors have taken the $30-billion overdraft industry head-on. And without fast-moving technology companies, everything from remote work to remote health care would have made managing the COVID-19 crisis all the more challenging. The drivers of innovation have become better understood outside of Silicon Valley, and startup engines are up and running, creating growth in places like Canada and around the world.
The tide always goes out, and we are starting to get a glimpse of the unprepared. But for those companies that make it out of lean times and built the metaphorical boulders on the beach, the long-term future is bright. The obvious has become obvious again. Business fundamentals matter. Proper diligence matters. Governance matters. Conduct matters.
While next few tumultuous months will showcase some big losses, we should remember that creative destruction is a natural part of the business cycle. For technology companies already built for the long-haul, now is the time to show their mettle.
Emerging innovation locations
What is the future of the Bay Area? On the one hand, the city has been in some ways hit the hardest by Covid. A technology center, its businesses were uniquely adept at remote work, and so the work has become particularly remote and decentralized. Commercial rent vacancies are at their highest point. Job losses have loomed large. Some argue it is heading towards a meltdown.
At the same time, others argue that it is back, and hasn’t changed.
The reality is somewhere in the middle.
But in my view it is also the wrong question: it is less about whether Silicon Valley is going up or down. Silicon Valley will remain a powerful force for tech for decades to come. Rather, it is about the rise of other ecosystems.
As an example of an under the radar ecosystem: nice 2022 retrospective on New Orleans. “Based on the data in the four years of the GNO Startup Report and these exciting new developments, I am hopeful that the next four years will prove out Steve Case’s belief in the New American Dream, right here in New Orleans, and Alex Lazarow’s thesis on startup resiliency for ecosystems like ours. We just need to remember who we are, study what is working, and expand, enhance and encourage each other. Instead of trying to be the next Silicon Valley, we need to be the best New Orleans. I believe we will.”
Perhaps the most exciting venture exposure will be in these emerging tech hubs. “The distribution of returns for VC funds is multiple times larger than comparable public asset classes, making manager selection extremely important (and nothing in this blog post will change this fact). However, the data shows that it is very hard to generate truly outsized returns in VC…Like their more developed predecessors, frontier emerging markets are rapidly shifting from offline to online, driven by widespread mobile and internet adoption. History has repeatedly rewarded LPs backing the best early GPs in this space, monetising the long-term secular digitalisation trend, which begins from a non-existent digital base to leapfrog towards more developed EM peers.”
I had the opportunity to discuss the rise of latam ecosystems here:
With the market in the doldrums, another question to ask is which part of tech is Kmart? "Kmart and Yahoo still persist, of course, in the way Werther’s Original butterscotch candies do: as withered husks that make it difficult to ponder their former heroism or tragedy. But these two organizations also mark two heydays separated by a quarter century, and two endings that occurred roughly that long ago....Today, the collapse of a big technology or retail company is almost unthinkable...But the certainty of death, rather than the hubris of assumed eternity, was the salient cosmic feeling of the 1990s internet."
So, which are Kmart today? Is it Google, challenged by a completely orthogonal approach to search and information via generative AI like Chat GPT? Is it Tesla, with the rise of other electrified competitors - both startups but also mainstream players?
What does it take to be an entrepreneur? Convincing argument that one key trait is being able to stare into the abyss. “Staring into the abyss means thinking reasonably about things that are uncomfortable to contemplate, like arguments against your religious beliefs, or in favor of breaking up with your partner. It’s common to procrastinate on thinking hard about these things because it might require you to acknowledge that you were very wrong about something in the past, and perhaps wasted a bunch of time based on that... However, in most cases you have to either admit this eventually or, if you never admit it, lock yourself into a sub-optimal future life trajectory, so it’s best to be impatient and stare directly into the uncomfortable topic until you’ve figured out what to do.” Being able to look at the uncomfortable situation, see it objectively and dispassionately, and correct the course - fast - is a key aspect to entrepreneurial success.
What could be the biggest company in the world? As an investor in fintech and health, I resonated with this piece arguing the largest company in the world may one day be in consumer health. “This may sound crazy to some, but why shouldn’t this be true? Four of the top five biggest companies in the world are consumer companies, and healthcare is one of the nation’s biggest industries…In fact, those massive consumer companies—Google, Apple, Facebook, Amazon (GAFA, for short)—are all working to move into healthcare because they realize the size of the opportunity: a $4 trillion American industry that makes up 20% of US GDP (and growing). This is five times the size of the advertising industry globally…A consumer health company will win by placing consumers first and ruthlessly building for them, while still taking into account the realities of payor and provider incentives.”
For VCs, the bias is often thinking about when is the right time to invest in a company (the entry-point), be it product market fit, or repeatable sales, or whatever. But equally important for VCs and entrepreneurs alike is thinking about the exit. “The vast majority of startup exits occur via acquisition. And while the internet is full of advice for pre-exit founders, remarkably little content exists to help guide them through post-acquisition life — even though they and the employees they recruited will often spend two-to-three years toiling away with the acquirer. An acquisition is an exciting occasion, to be sure, but it is hardly the happily-ever-after ending that the ‘founder’s journey’ story might suggest.” The piece dives in to some of the unique strategies founders and Boards can take to better understand the acquirer and the fit.
Great (old) read on the birth of credit cards in the US. This is not just a story of financial innovation, but also about collaboration to create economies of scale and customer value.
In that vein, great piece on credit in the digital age today, in the US. “An entire industry has been built around either coaching how to improve one's FICO score or providing data that, while potentially misleading, is favorably interpreted by the Score 8 algorithm…Rather than relying on a single score, lenders should utilize contextual, less manipulable data to more accurately assess a borrower for a given loan.”
What happened to $9 trillion in ESG investments? “Sustainable investment assets in the U.S. totaled $17.1 trillion in 2020, according to US SIF. This year? Just $8.4 trillion. Where did $8.7 trillion – more than half of sustainable investments – go? To the greenwashing graveyard. Environmental, social and governance, or ESG, advocates and regulators alike are clamping down on greenwashing. Many once “sustainable” funds do not stand up to the scrutiny.” There has been a lot of criticism for ESG this year. But it is important not to throw the baby out with the bathwater. The movement itself is a positive force, though perhaps we should focus more on the E rather than the other metrics.
Book of the month
This month I read The Perfectionists: How Precision Engineers Created the Modern World.
As the NY Times reviews it: “The word ‘perfectionist’ can conjure up the image of a fussy, slightly anxious person who needs to relax more. The constant pursuit of the flawless can be exhausting. Nothing in our world, after all, is exactly perfect. But what if perfection is not only a goal for its own sake but something on which the lives of others depend? What if the slightest misalignment of a tiny tube in a jet engine could cause a fatal catastrophe?” In ‘The Perfectionists,’ Simon Winchester celebrates the unsung breed of engineers who through the ages have designed ever more creative and intricate machines. He takes us on a journey through the evolution of ‘precision,’ which in his view is the major driver of what we experience as modern life.”
The fruits of their labor power our entire world. “Our cars, planes, cellphones, washing machines, computers, every manufactured mechanism, are all the result of our pursuit of this fundamental concept.”
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*Thank you to James Plamondon for the help on the Globe and Mail piece.
H/T to Austin Arensberg for flagging the piece on the Abyss and Jeremy Solomon for sharing the piece on FICO (and from which I also found the credit card piece).