34 Comments

I think you can look at holding companies like IAC and Liberty Media for an example model for what John is proposing -- i.e., companies that have treated consumer Internet growth as partly an exercise in R&D, but with SG&A-based growth playing a major role. Interestingly, many of the consumer Internet companies that have operated in this way are headquartered outside Silicon Valley (MTCH - Dallas, Booking - Amsterdam, IAC - New York, etc.). They have had to take a different approach to capital because they operated outside the Silicon Valley VC ethos.

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I was going to mention IAC/Liberty - a lot of this happened to the computer hardware and game console industry in the 70s/80s/90s. Look at Commodore, Atari, etc, they used many different financial tools to continue existing.

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This is a great call out. Even to this day, gaming is a capital intensive business, but has operated outside of what most VCs are willing to invest in. Tencent was able to build a massive equity portfolio in gaming by adapting its investment model to better match the hit-driven dynamics of the industry -- an opportunity missed by VCs and game publishers.

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Most founders have very little experience in dealing with investment banks on structuring unique financial structures for their companies. As much as I despised working in the "crypto" world, I learned a lot about all of the different financing options, tax optimizations, and how much support/leverage a good banker can give a company. All of these tools have been available for most large industries with historical data backing them up. I don't know if we are there yet for the internet right after covid - but getting close - Vista, ThomaBravo, and KKR's new tech fund are pretty much paving the road for this and I kind of agree with one of the comments that GS is in a position to really dominate here. I feel like the VCs are not as well equipped compared to what GS offers: global govt connections, unique non-equity financing, and a history of offering these products. It would be really nice to see a VC or fintech in the valley pioneer this.

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One of the differences might be the sourcing & risk-appetite of non-bank lenders. If there is a secular rise in the market of lending to software, no doubt GS will take its share. But non-bank lenders have fewer regulations than public banks and can underwrite pieces that GS will abstain from.

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Apr 23, 2020Liked by John Luttig

This is huge. Great perspective.

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Great points especially about headcount being causal of growth rather than resultative. Keeping tab on the CAC to LTV spend in public enterprise companies will surely result in interesting insights.

I am not sure whether there will be a centralized/public lender (Sand Hill Sachs) in lending to software companies. There have been structural shifts in public and private markets where there has been an increase in non-bank private lending (see whitepaper by Ares) mainly because a) banks have shifted focus to larger companies/borrowers and b) private debt is better positioned to sustain the risk associated with lending to smaller companies. I see this structural shift to extend to the private debt market for software companies.

Why? Unlike deposit-funded commercial banks, non-bank lenders generally operate through closed-end funds and lower leverage, allowing them to bear more risk and sustain riskier debt loans. Also distributed lending through multiple private entities allows for a distribution of the systemic risk rather than accumulating in one entity (which, if gone wrong, would lead to collapse of the tech lending market).

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As an econ major, many might argue that CS is more highly valued as a holistic skill. But with more innovation happening in atoms, isn't it likely that STEM will see the bulk of the growth (CS + bio) and not econ, which people feel they can learn on the side?

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Fantastic read. Would love an updated version for 2024/25!

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What is the source of the data for the graphs "annual growth rates across tech categories" and "incremental internet speed distribution"?

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Hi, Luttig, this is Sharon from Ab Initio capital, the article is really enlightening and helpful, and want to ask can we translate it into Chinese and share it to our portfolio CEOs? we will post the version on our WeChat blogger only for informational purpose, and we will put the title and this original link at the beginning of the Chinese version so that the readers can click back. Enclosed our official web site link, http://abicap.com, and hope to get your permission.

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Hi John, Nice Article! Thank you. I am a journalist from South Korea and wanted to include this assertion within my article. Am I free to use quote this? My media outlet is Maeil Business Newspaper ( https://pulsenews.co.kr/intro/about.php) and my name is HK Shin.

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author

I'm good with this, thanks for reading!

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Great points John.

I just wanted to understand more about SG&A vs R&D. As you said that there is a trend moving towards SG&A.

Do you think due to this shift there might be a surge in companies only doing R&D and licensing the technology/product to a firm that has mastered SG&A and distribution?

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Wow, excellent post John. This brought me back to discovering Ben Thompson back in 2013. You need to start a weekly podcast.

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Hi John,

When you say that the defense or health insurance companies "will be relatively immune to this shift," could you please expand a little bit on why you think that's the case?

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Hello ,

This is Vincent, the editor of InfoQ China(https://www.infoq.cn/), which focuses on software development. We like your articles and plan to translate one of them entitled "When Tailwinds Vanish"(https://luttig.substack.com/p/when-tailwinds-vanish).

Before we translate it into Chinese and publish it on our website, I want to ask for your permission first! This translation version is provided for informational purposes only, and will not be used for any commercial use.

In exchange, we will put the English title and link at the end of Chinese article. If our readers want to read more about this, he/she can click back to your website.

Thanks a lot, hope to get your help. Any more question, please let me know.

Best Regards,

Vincent

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Hello Luttig, could you please confirm your permission so I could proceed? :) Thanks!

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author

I'm good with this, thanks for reading!

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Great article thank you. Among other things I think it makes an eloquent argument for deep tech as a key area of evolution/growth for startup founders/investors. Only so many hours we can fill on a screen as you say! But so many amazing frontiers for software interfacing with the physical world - biology, chemistry, physics.

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