In a post last year, I described sitting at the frontier of human knowledge as being a recipe for having a unique business insight. That article built upon the graphic below. Based on the dialogues it sparked, I wanted to write a follow-up talking about every VC’s favourite question of Why Now?
The Evolution of Software Businesses
As industries become penetrated by software, they tend to follow a similar development curve. Here’s how it normally goes:
Creation of Software for Industry: This is when a new type of software successfully serves (or creates) an industry for the first time. It’s usually spurred by a new wave of technology. Think web, mobile, and cloud. Today, it’s AI.
Best Practices: As software begins serving an industry, best practices are established across the lifecycle of the user journey. Initially, these best practices are hotly debated. Companies spring up, each addressing an individual best practice. This is particularly true for AI today, where there are multiple ways of applying the technology, but no best practice for how it should be used. As an example, every sales org within every enterprise is adopting AI tools, but there isn’t yet a gold standard for how this should be done.
Stabilisation: After some period of time, best practices stabilise. From then on, each existing tool or point solution solving a best practice is on the hunt to consolidate all other best practices into their own tool.
Let’s talk about a few examples and present the very important counterfactual:
Design: In the early 2010s, cloud computing was commercialised and WebGL was released. As a result, graphic design came to the browser. Best practices emerged with companies each solving a specific part of the customer journey. There were design companies for version control, file management, wireframing, prototyping, etc. At the time, none of these were trivial problems to solve and many companies did quite well.
Ultimately, best practices stabilised and these not-so-trivial problems became… trivial. As a result, there was an opportunity to bundle them together and build a platform. The net result was Figma.
We’re seeing a similar phenomenon play out today in HR Tech, with companies like Rippling tackling payroll, recruiting, workforce management, and much more. Every scale HR player is on the hunt to layer on additional modules, because their initial products have become table stakes.
The Counterfactual in DevOps: In some industries, the “jobs to be done” are so complex, or still in their maturing phase. This complexity means that solving a best practice is non-trivial, and is unlikely to be so for a long time. The DevOps stack, below, is case in point. Each part is so complex that solving a single job is non-trivial. Nonetheless, I expect that over time, these will converge. GitLab, for example, is positioning as the go-to DevSecOps platform and has built products across most parts of the user journey.
Cybersecurity: Another interesting example is cybersecurity. The industry is predicated on perennial reinvention. Hackers try to break stuff and cyber tools try to prevent it. Every decade or so, hackers find more powerful tools to break things, and so the cyber industry has to reinvent itself. As a result, new best practices for cyber have (and will continue) to emerge every decade or so. This is why VCs love investing in cybersecurity businesses, and why AI is likely to lead to the birth of numerous multibillion-dollar companies in the space.
Why Now?
VCs love arguing about whether it’s a great team or a great market that makes an investment successful. I’m of the opinion that the best teams find the best markets. Put differently, the best founders have a well-articulated opinion on the stage of development that their industry is at, and a thesis on why now is the right moment for their business to exist.
When PetCircle was founded in the early 2010s, there was a window of opportunity. Australians were quickly warming up to the idea of buying things online and the pet industry was continuing its upward trajectory. It was a confluence of factors that allowed PetCircle to become the billion-dollar business it is today. If you were to try and start the same business in 2023, the tide would be against you. Similarly, if you tried to start Figma today, you’d be rowing against the current.
What’s my point?
If you’re a founder, it’s helpful to have a strong opinion on your market’s stage of development and the direction it’s heading in. Startups have the odds stacked against them from the very beginning so choosing a market with great tailwinds can be one of the most important decisions you make.
The level of software maturation, from best practice to bundled solution, can be a helpful guise with which you can craft your strategy. When I meet founders, I always ask them to talk me through their market. I’m not looking for some manufactured bullets on “Why Now?” or a table comparing feature sets with competitors. Instead, I’m looking for a deep understanding of an industry, and more importantly, a strong opinion about the direction it is heading in. I describe these founders as sitting at the edge, and they give people like me a glimpse into the future.