Going from Hoodies to Hard Hats
Why are founders and investors returning to capital intensive endeavors?
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In a landscape where "move fast and break things" has dominated, it might seem counterintuitive that founders are once again embracing capital-intensive endeavors. Over the last 15 years, we saw the relentless rise of SaaS. It promised high returns with low upfront costs. This helped minimize risk while delivering big outcomes. Because of this, more capital rushed into this sector. And that in turn attracted more founders to build lightweight SaaS companies.
This has been a great cycle. But we're seeing something very interesting in the venture ecosystem. It's an early signal, but it’s certainly there. Founders are building capital-intensive companies. And the rate at which new founders are embracing this is also increasing. So I wanted to dig into this trend.
Founders are increasingly recognizing that big problems need big solutions. This doesn’t mean they don’t do software at all.
To be clear, software is a CRITICAL part of the products they’re building. But it’s tightly coupled with the physical infrastructure that’s part of the product offering.
The key insight is that many of these big problems simply can't be solved with light software tools.
Let's take Tesla's Gigafactories for example. It required billions in capital investment to produce electric vehicle batteries at scale. The need for physical solutions is pushing founders to rethink capital allocation. When facing large-scale problems, the willingness to engage in resource-intensive endeavors has become more attractive to founders. When it works, it works spectacularly well.
Here are the top 10 global companies by market cap as of today:
Nvidia - Designs and sells GPUs primarily for AI
Apple - Creates and sells consumer electronics
Microsoft - Provides software and cloud computing services. It's built on top of their massive data centers.
Alphabet (Google) - Provides search engine and digital advertising. It's built on top of their massive data centers.
Amazon - Provides e-commerce platform and cloud computing services. It's built on top of their massive data centers.
Saudi Aramco - Extracts, refines, and sells crude oil (and related products). They have built huge refineries and factories.
Meta - Provides social media platforms. It's built on top of their massive data centers.
Berkshire Hathaway - Diversified conglomerate investing in insurance, energy, and consumer goods. These are products and services built on top of large-scale physical infrastructure.
TSMC - Manufactures advanced semiconductor chips for technology companies. They run the most sophisticated semiconductor plant in the world.
Tesla - Produces electric vehicles. And clean energy solutions like solar panels and batteries. They have built massive factories to do this.
Do you notice anything? They have all invested billions to build their physical infrastructure. And their cash flow is a result of customers paying money to either:
buy products and services produced using that infrastructure e.g. electric cars, GPUs
buy products and services built on top of that infrastructure e.g. cloud computing services, search engine.
Are VCs Ready to Invest in Capital-Intensive Startups?
VCs are changing how they view risk and reward. After a decade of heavy investment in SaaS, some VCs are noticing market saturation in these areas and the diminishing marginal returns. They're looking for opportunities with higher barriers to entry and unique defensibility. These are areas where the risk may be higher but the payoff is potentially much greater.
To support these endeavors, investors are rethinking how they invest. For example, many VCs are structuring deals with staggered capital injections that align with key milestones. This is commonly used in techbio, therapeutics, nuclear, and more. For example, Commonwealth Fusion Systems has secured hundreds of millions of dollars to fund their nuclear fusion reactor development. It's contingent upon hitting specific scientific milestones.
Early-stage funding for such startups is increasingly coming from specialized funds and they often have longer investment horizons. This VC support isn't without strings: investors expect precise milestones and path to big outcomes. But with aligned incentives, capital-heavy startups and their backers are finding ways to make high-risk ventures more manageable and attractive.
Is Embracing Capital Intensity a Risky Gamble?
With high capital requirements comes high risk. By committing to solving problems that require significant upfront investment, they’re opting for defensibility in markets that are hard to penetrate without similar resources. This defensibility (often referred to as a "moat") is a key advantage in capital-heavy models. Infrastructure investments, high-tech hardware, tightly-coupled software, and specialized manufacturing capabilities create barriers that competitors find hard to breach without equivalent capital and expertise.
These companies don't really have to justify what their moat is. Why?
Because to attack their castle, the attackers need to get there first. Their castles are so deep in the mountainous jungle that the attackers will perish well before they get anywhere close to the castle.
How Could Capital Intensity Shape the Next Decade of Startups?
The return to capital intensity could signal a fundamental shift in the venture-backed startup model. Over the next decade, we may see the rise of startups that tightly integrate software and physical assets to create fully integrated products.
This trend could also lead to a new generation of startups that are making their mark not by the speed of their growth but by the magnitude of their wins. We could see a resurgence in industries once seen as too slow or risky for startups as founders see both societal value and significant financial returns in long-term investments.
What Sectors Are Emerging as Leaders in Capital-Intensive Innovation?
Some industries naturally lend themselves to capital intensity. And these sectors are increasingly popular among ambitious founders. Here are the most prominent ones:
Robotics: This is about physical robots with tightly coupled software. This can be for agriculture, warehousing, or car factories. And it entails significant hardware development, field testing, and regulatory approvals. Boston Dynamics has spent years and millions of dollars developing sophisticated robotics for industrial applications. Autonomous Agriculture is another subsector within robotics that's booming. Building autonomous farming systems involves creating hardware, sourcing components, and extensive field testing. For example, there are autonomous greenhouse companies like Iron Ox or Zordi that are doing this.
AI Chips: Building specialized chips for AI computations is capital intensive. It involves R&D, fabrication, and manufacturing. For example, Graphcore has invested heavily in developing its Intelligence Processing Units (IPUs) for AI acceleration.
AI Compute Infrastructure: Developing cloud infrastructure specifically optimized for AI workloads is another growing capital-intensive field. Companies like Groq and Cerebras Systems have focused on creating large-scale processors tailored for AI needs.
Networking for AI Workloads: AI workloads require efficient data centers and high-speed networking. Companies like Nvidia are developing advanced networking solutions to handle the increased bandwidth required by AI applications.
TechBio: Bio startups need specialized lab equipment and facilities, while manufacturing innovations in biotechnology involve expensive R&D. For example, Ginkgo Bioworks has invested heavily in laboratory automation to revolutionize synthetic biology.
Renewable Energy Infrastructure: Wind farms, solar energy plants, and geothermal facilities require huge upfront investments. Companies like Ørsted and startups like SunCable are leading large-scale solar and wind projects that require multi-billion-dollar funding. Startup Heliogen is focusing on solar energy solutions that require substantial investment in concentrated solar power infrastructure. They are positioning themselves to meet industrial-scale energy demands. This sector demands capital to build infrastructure before seeing returns.
Building New Batteries: Innovations in battery technology like solid-state or lithium-sulfur batteries require high upfront R&D costs and manufacturing facilities. QuantumScape's investment in solid-state batteries is a clear example.
Precision Manufacturing: Innovations like 3D printing for industrial applications require expensive R&D and precision hardware. Desktop Metal is a prime example, focusing on the development of 3D metal printers for use in manufacturing sectors.
Spatial Computing: This refers to AI systems that are capable of understanding and interacting with the three-dimensional physical world. Fei-Fei Li cofounded World Labs to build spatial computing infrastructure.
Building New Materials: The development of new materials for industries such as construction, aerospace, and electronics requires significant lab research and pilot production facilities. For example, CarbonCure has invested heavily in new materials to reduce the carbon footprint of concrete production.
If you're a founder or an investor who has been thinking about this, I'd love to hear from you.
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