The Return of the Capital Intensive Startup

This post is a bit more thinking out loud than usual but I am grappling with what I perceive to be a big change in the startup landscape.  Here are some of its symptoms: the return of TV, print and subway ads for Internet companies; Uber subsidizing their drivers to prop up NY supply; Level Up providing free point of sales Android devices; Udacity, Coursera and Minerva all raising large rounds.  All of these are in one way or another signs of the return of the capital intensive startup.

Historically startups were capital intensive because they had to spend a lot of money to build the product and bring it to market before they were able to generate revenues.  Now it seems that everyone believes in network effects and the capital intensity comes from trying to build the biggest network faster than the competition.  The use of capital has thus shifted to customer and/or supplier acquisition or maybe more generally towards network growth.

This is likely to be bad news both for startups and for investors (but potentially great news for customers).  A lot of capital will be spent but if network effects do exist in the end only one or maybe two companies will dominate the market and provide any returns.  Now for the part that I am grappling with.  What should one do about this as a startup and as an investor in startups?

One theory is to just go for a low burn and wait it out approach.  It’s unclear that approach can work though because it implicitly relies on all the big spenders stumbling.  But if one of them gets execution roughly right and spends a lot they will dominate.  And good and repeatable execution is becoming more common with more people having built a network or understanding how to build one.  So that alone cannot be the answer.  Right now the best I can come up with is the following: go after seemingly small problems (that turn out to be large when solved), look at out of the way geographies, or wait until the dust has settled.  The one thing that doesn’t seem advisable is to compete head on by spending lots of capital.

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Posted: 1st November 2012Comments
Tags:  Capital intensity startups VC

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