The Right Kind of Building

In this article, the “building” that Mr. Marc Andreessen speaks of is put into concrete context — what, where, and how it can be funded.

What Should We Be Building?

An article, written by venture capital titan Marc Andreessen, has ignited debate in the world of startup investing. The article, entitled It’s Time to Build, has since been circulated widely. It’s a call-to-arms for the startup community: turn the pandemic crisis into an opportunity to reignite innovation.

Without reservation, I agree. But the type of innovation necessary requires “ecosystem innovation” (see our 3-part series on this topic). What we need to build are really tangible things. The growth-at-all-costs/break things mentality that’s been embodied in Silicon Valley’s current incarnation cannot serve as the foundation for the “building” suggested by Andreessen in his clarion call article.

The main critique I would make of Andreessen’s vision of “building” is that it reveals a twentieth century mindset. The things he wants to build — supersonic aircraft and high-speed trains on the one hand; more houses in San Francisco and more Harvard degrees on the other — aren’t going to happen. The trains and planes because they are archaic and unnecessary, and the latter because forces that oppose them are too strong.

We need to think bigger and further out. We need to leapfrog existing systems in the same way Africa developed cellular networks, avoiding politically and economically impossible landline networks. The opportunity provided by our current crisis is not that we can change human beings’ fundamental self-interest, or get sclerotic political systems to suddenly act. Rather, we should bypass the roadblocks they erect wherever possible, and improve incrementally wherever necessary.

Where Are They Being Built?

Social distancing demonstrates that one does not need to live in San Francisco to participate in the new economy, one can Zoom web-conference from a farmhouse in Kansas or a beach towel in Vietnam. The credential-focused educational system in the United States which made the Harvard degree a golden ticket does not serve society’s needs as much as completion of a Lambda School track or an apprenticeship in Germany. High-speed rail is obsolete, replaced by software-driven convoys tooling up the US Interstate 5 freeway at 90 miles (144 km) per hour. Supersonic jets will never be economically or environmentally sustainable, we need to focus on developing aircraft that obviate rather than exacerbate greenhouse gas emissions. The Tom Swift vision of the Silicon Valley cognoscenti is at odds with the practical vision seen in places like Southeast Asia, Scandinavia, the Baltic States, and the midwest region of the United States.

Consider the insightful critique Ben Thompson made in his response to Andreessen in his post How Tech Can Build. Because Silicon Valley succeeded by avoiding confronting the real world of regulatory capture, political inertia, and difficulty in building in the real world, it is ill-suited to lead a new world where its past strengths no longer resonate. Thompson’s recommendations: 1) accelerate distributed work; 2) invest in software-differentiated hardware; and, 3) develop a new investment model to better predict outcomes in order to accept lower returns. In my opinion this list makes enormous sense. The question is whether or not it is possible for Silicon Valley to disrupt itself, or will simply stick with the existing (and currently, extraordinarily lucrative) model.

How Can They Be Funded?

As Andreessen’s Silicon Valley venture capital peer, John Luttig (Founders Fund), made clear in When Tailwinds Vanish, the role VCs have increasingly taken—funding at the late stage, and capturing the most value at the point of least risk—will be taken over by modern Silicon Valley versions of Goldman Sachs and Morgan Stanley. New opportunities will be in the seed stages where venture capital was born. As Luttig put it: “a shift from R&D to SG&A will operationalize Silicon Valley, leaving room for new financial infrastructure. VCs will need to take risks on vision, not numbers.” Well said.

The pandemic crisis will accelerate that shift. Silicon Valley, while remaining dominant, will see its dominance decline relative to other ecosystems. It is no accident, as Andreessen notes, that the city of the future is imagined as Singapore. Software will (continue to) eat the world, but the applications to which it will be applied will not be the blitzscaling opportunities of the past. Instead, incrementally focused companies with operational focus will emerge with the advantage. More advanced infrastructure is not the only area lacking in the United States. Operational processes are also more advanced in places like Germany, Taiwan, Korea, Finland, and Sweden. In these countries, Silicon Valley has no intrinsic advantage. Those in the San Francisco Bay area will increasingly have to compete overseas with investors who have deeper experience and far greater cultural competence.

ExtraVallis is now building a twenty-first century funding marketplace. It’s focused on providing the right amount of capital when it’s most needed by operationally-focused startups. Rather than trying to fund explosive growth, we are determined to give more operationally-focused companies relevant options that enable them to build products better suited to a post-crisis world.

By working in geographic regions outside the “valleys” of SF, NYC, and China, ExtraVallis is connecting with companies that are doing that “building” Andreessen inspired us to be doing. We’re today exposing investors to the companies of the future, and giving those companies a funding platform that enables them to focus on their building rather than their fund-raising.