Menu Icon Created with Sketch Beta.
View All "Securities" by Lux Capital Posts
Rishi S / Flickr / Creative Commons

“If you build it, they will come.”

It’s an aphorism that gets at one of the key dividing lines in venture capital and industrial policy today.

First, there’s the ironic interpretation that has disseminated across Silicon Valley and startup investing the past decade. No one comes just because you’ve built something novel. Instead, it’s all about lean startups, fast iteration, product-market fit and constant customer development. Markets can be identified, needs can be determined, and software can be designed to perfectly match all the constraints. It’s a fixed system, and all anyone needs is a fixed solution.

Investing thus transforms into an exercise in understanding different types of customers and evaluating whether a particular product is going to fit their needs. So you have cybersecurity specialists focused on CISOs, finance and operations experts building relationships with CFOs and COOs, data infrastructure gurus who talk to CIOs. Know the customer, and you’ve got the framework for evaluating any company that sends over a DocSend.

There is an optimistic interpretation though, which is that the world really will show up if you build something new and important. Here, the lens moves away from customers, markets and trendlines to something much more qualitative: what is the capability that a new product offers the world? If we had such a capability, how would markets evolve and adapt to accommodate and take advantage of it? How would customers change their thinking if they knew that such a new capability existed?

What’s been interesting to observe the last few months at Lux is how many of our companies start with the optimistic interpretation. They think of something the world would find useful if it existed, and then they forcefully will that capability into existence. Sometimes, there are customers that make obvious sense, but quite commonly, there are no guaranteed markets at all.

Much of this comes from regularly investing in plumbing, tools, platforms and infrastructure, particularly in deep tech and science. Products that at first seem to have utility only to a small set of customers suddenly connect with markets no one had ever thought about. It’s a pattern I’ve seen the last few months across at least satellites and space, biotech, web3, enterprise infrastructure, autonomous vehicles, and silicon. Once a capability exists, the number of applications always seem to expand as we learn more about what it offers and how it performs.

Now, there are legions of companies that have failed because they built something useful that no one wanted. Why is that? I think much of what goes wrong is that we miss the key word in the aphorism, which is “they.” It’s not enough to build for one small niche or industry. What you want to do is build new capabilities that are useful to a whole wide range of potential clients, often in mutually constructive yet different ways. The return comes from the combinatorial power of many markets suddenly lurching in one direction thanks to a powerful new ability they never had before.

We need more VCs investing in capabilities and not markets. In the classic model of the innovation pipeline, there was a clear divide between government-funded laboratories, which developed fundamental theories and determined the range of capabilities possible, and commercialization, which would take those capabilities and make them useful to specific customers and markets. VCs acted as a bridge where raw science and capitalism met.

From my vantage point, that bridge has an increasingly wide fissure. Too many VCs are allergic to investing in capabilities with the thoughtful dream that once developed, those products will find a myriad of customers to buy them. They increasingly want surety upfront — clear products designed for clear customers and markets that are ideally growing secularly. For capitalists, it’s a peculiar centrally-planned economic view of the world.

That’s the investment opportunity for bolder bets, but also an elegy for a time when America once drove forward the boundaries of science and technology, with less acute attention on spreadsheets and market development. We used to invest in platforms and capabilities, no deeper questions asked. It was obvious that if you build it, they will come — because they did.

A cloaking device for everyone