An Evolutionary Theory of Startups
Companies go from feature to product to platform. But there's one more stage.
Author’s Note: It’s my first week back in school - apologies for the delay!
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Most companies start as a simple feature addressing a pain point.
Think Fireflies.ai starting as an automated notetaker or Copy.ai leveraging GPT-2 to generate text.
After some initial success, they developed a product or service to streamline a user’s workflow where the pain paint originally existed.
Fireflies evolve from simple notetaking to generating transcripts you can edit and share with your colleagues. Copy.ai helps you iterate
Software automating and simplifying previously manual workflows opens doors to other problems faced by the end user and related stakeholders, inviting new products and services to emerge as solutions. A suite of these relevant products and services collectively forms a platform.
If your startup reaches the platform stage, most VCs will be estatic. Platform businesses generally fetch higher valuations in both the public and private markets due to multiple expansion.
However, I would argue there’s one more stage beyond the Platform level.
Infrastructure.
Your company’s software is so ubiquitous that it’s a default part of doing anything in your field.
Each company has provided a product or service so challenging to furnish individually that it becomes a no-brainer to use their solution to save time, labor, and money.
Think Stripe for e-commerce payments, Tesla’s Supercharger Network for its electric vehicles, or AWS for cloud computing.
Your startup should aim to become an infrastructure business. This will require you to rethink how software exists in our society.
Ask yourself: Would a significant societal disruption exist if you removed this software? Your software should be a bridge everyone else depends on to get from Point A to Point B.
In a past post, I argued that Facebook qualifies as infrastructure, as removing it would significantly disrupt the billions of users who use it (or Instagram, Messenger, WhatsApp, etc.) to communicate daily.
There’s an equivalent financial perspective of becoming an infrastructure software company, too. Robert F. Smith, Chairman and CEO of Vista Equity Partners, had a paradigm-shifting view of software that motivated the launch of his software-focused PE fund:
“Software contracts are better than first-lien debt. A company will not pay the interest payment on its first-lien until after they pay their software maintenance or subscription fee. We get paid our money first.”
Software always gets paid, or the customer’s business stops functioning.
Your startup should aim to be an irreparable part of someone’s business (SMB/Enterprise) or behavior (consumer mobile apps or packaged goods).
If you can achieve that, you have an infrastructure business able to endure the test of time.
Soda