When Tailwinds Vanish
The Internet in the 2020s
Software companies founded today are competing less with pen and paper than with other Internet-first incumbents. Put another way, as happens in every maturing industry before it, Internet company revenue will become zero-sum. As a corollary, the time between founding years of software startups and their competitive incumbents is shrinking:
When the ecosystem-level diseconomies rival the company-level economies of scale – “first to scale” may become “first to fail”. Unit economics matter more than ever. Carefully measured growth will win.
Relative to the R&D-driven growth of early Internet companies, SG&A will become the primary growth vector in the 2020s.
Paul Graham tweeted that “a visitor who walks around and is impressed by the magnitude of your operation is implicitly saying “Did it really take all these people to make that crappy product?”” But this observation is fixated on a world where R&D dominated Internet startup headcount, and small teams were preferable.
As Alex Danco highlighted in his recent article Debt is Coming, it is clear that recurring revenue securitization – the notion of selling your future ARR bookings at a discount – is the future. The biggest barrier to adoption is cultural: the stigma that “venture debt is like a delicious sandwich that only costs ten cents, but occasionally explodes in your face” is deeply tied to the predatory reputation of old-school venture debt lenders. Companies like Pipe and Clearbanc are already starting to destigmatize securitization, and it will only become more culturally normalized in the coming years.
Once Sand Hill Sachs exists, it will become clear that VC dollars should be reserved for R&D, not S&M or G&A.
For startups taking R&D risk in new technological areas, the founding team may look like something we can’t pattern match to historical successes. Maybe it’s a scientist in his garage who escaped the tendrils of academia. Or your first hire for the founding team is no longer your college roommate, but an expert in your startup’s industry.
There certainly will be $10 billion dollar companies started within segments slow to adopt technology: legal tech, construction, agriculture, and mining are all prime candidates for massive new technology entrants. But new $100 billion dollar outcomes are less likely to come from pure Internet companies.
