Is your startup a toll road or a gold mine?
Both can become big businesses, but high-level decisions made in the earliest days of your startup will reverberate for decades.
By David Frankel, Managing Partner
Are you better off owning a gold mine or operating a toll road?
Both can be lucrative businesses.
Each has dramatic drawbacks.
Specific personalities are required to make either work.
A quick overview of the pros and cons for each model follow, but first a story:
I invested in a company that developed SaaS tools for the mining industry. Monthly contracts ranged into the six figures, but the mining companies were happy to pay since improved productivity could create hundreds of millions of dollars in value.
Despite hefty revenues and healthy margins, the startup’s founders viewed their slice of the pie as negligible compared to the mining co’s margins on the glittering bounty buried in the Earth. Everyone did well, but it helped me understand the lure of “Full-Stack Startups.”
Why sell enabling software when you can own the goldmine? Full-stack models offer the benefits of letting startups fundamentally rework the product experience to meet user needs *and* the promise of improved top-line revenue and margin. But these benefits come at a cost:
🏷️ Acquiring customers
🏭 Sourcing factories
💳 Financing inventory
🛍️ Physical retail
🚚 Delivery truck Shipping
🗑️ Processing returns
…and all the other headaches that go into running a full-stack business are time-consuming and expensive.
We’re now starting to see some hangovers from this line of thinking. The wisdom of building a pure software business is being reconsidered. Sure, some revenue/margin is left on the table, but sales relationships and server uptime are comparatively easier to manage.
There is no other type of business that provides the leverage of software imo. After you’ve spent years wrangling with food co-processors, robot manufacturers, and the rogue’s gallery of Full Stack partners, the simple wisdom of a software-focused startup reasserts itself.
Software allows entrepreneurs to create virtual toll roads in almost any industry. Once established, these businesses deliver low-friction, high margin revenue in a pleasantly recurring fashion.
Of course, these businesses have their drawbacks. Software, especially SaaS, tends to involve:
🗡️ Winner take all sales processes
💤 Dreadfully dull product categories
🥺 An expectation of obsequious levels of customer service at the high-end.
Neither model is better than the other. I’ve seen both work tremendously well. And I’ve witnessed both go up in flames. Some businesses, and founders, are more likely to fit into one model than the other. Remember, this choice is real, so make yours carefully.
If you are an inveterate, impatient executor, the rough and tumble life of a miner is likely for you. If you are a methodical planner and patient strategist, toll roads beckon. And if you decide to go against type, be conscious of the world which you choose to enter.
I’d strongly recommend anyone considering a startup to listen to this classic episode of the @twentyminutevc featuring Josh Koppelman from First Round where he talks about the importance of “The Pick.”
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“The Pick” is the highest-level decision about what kind of business one should start, which strategy they’ll employ, and other high-level considerations. It’s important to always note that startups aren’t destined for success or failure based solely on an “idea.”
That said, some ideas and decisions are more impactful than others. The initial “Pick” in this case, between building a toll road or goldmine, creates a kind of path dependency that’s tough to fully escape later on.
High-level decisions made in the earliest days of your startup will reverberate for decades.
Maybe for the rest of your career.
Make them patiently and wisely!