When I started angel investing in the late 1990s, a tech investment included a significant technology risk, with the potential upside being groundbreaking innovation. Being an investor at this time meant taking a considerable technology risk and betting on actual tech, such as nanotech, semiconductors or biotech.
E-commerce, albeit hyped and interesting, was not considered tech. It was “Business 2.0”, plain and straightforward, hype included.
In the 00s and 10s, VC hype shifted to software-based tech built off of the tech of the previous generation. Think fintech, games, food delivery, and, of course, SaaS. Money started being pumped into the industry, and science-based innovations lost popularity because of their longer development times and longer time for VCs to see returns.
Yet, all companies were lumped under the same umbrella — tech. And it became sexy and lucrative. Startups today spend lots of energy and PR on getting investors and the public to think they’re a tech company since that implies higher valuations. Remember WeWork? It’s the ultimate example of putting tech-coloured lipstick on a pig.
The same goes for some VCs that have spent the last decade or so successfully picking the low-hanging SaaS, mobile, and/or e-commerce fruits, and now trying to repeat this with a similar approach in biotech, energy systems, or quantum computing.
Remember WeWork? It’s the ultimate example of putting tech-coloured lipstick on a pig.
About five years ago, my focus on science-based breakthrough innovations was labelled ‘deeptech’ to distinguish it from the rest of ‘tech’. I found this utterly confusing, as I knew a tech company to be a business that developed technology, not just built on top of existing technology.
We’re seeing this conflation again with GenAI. Investors call companies that apply GenAI to a specific industry a tech company. How can this be when building them does not involve a technology risk other than the potential downtime of your technology provider (OpenAI, AWS, and others), the changing of an API, or the introduction of a competing product in the future? Surely a company that builds an application on top of an LLM isn’t an ‘AI company’; actual AI tech companies are designing AI chips, developing a novel way of combining LLMs to reduce hallucinations, or working on revolutionary neural engines to help reach true AGI.
We need a new way of differentiating between “tech companies”
Using tech is no longer a differentiator in VC, and it’s no longer a guarantee of startup/investor success. People smarter than me also see this. Some time ago, Sam Lessin, general partner at San Fransisco-based Slow Ventures, argued that software is a business tool, not a business model. The real value of software will come when you use it as a competitive edge to disrupt an industry. Meanwhile, in a recent report, UBS, the Swiss banking behemoth, stated that the future of successful investing is to be found in the physical, tech-infused world.
Taking a research breakthrough, a new industrial process, or a novel cancer therapy to market completely differs from scaling a SaaS company or e-commerce operation. I’m impressed by and have much respect for people who saw what I didn’t see during the last decades and made impressive returns as investors in mobile, gaming, SaaS, food delivery, and fintech.
Business model innovation is valuable, creative, and sometimes profitable — but not tech. There’s nothing wrong with being a non-tech company or a non-tech VC. You can still be a disruptor and change an industry for the better; you can use tech to infuse new perspectives and get incumbents to step up. But that doesn’t mean we can’t call a spade a spade. There are impressive companies run by great entrepreneurs that provide value to their customers by utilising existing technology — but they’re not developing tech.
Business model innovation is valuable, creative, and sometimes profitable — but not tech.
Now that more entrepreneurs and VCs are turning their attention to what they call deeptech, I have a dream. Can we move on from the fog of the “tech company” and agree that using the internet or GenAI doesn’t make you a tech company? Nowadays, it’s just business as usual and standard operating practice. Companies should be judged on their actual merits, tech or not.
Some might argue that this is just semantics, but they’re missing the point. Startups, and investors for that matter, use “tech” as an insignia to imply everything from high growth or margins, unique market approach, or general “coolness”. All with the purpose of seducing the market and increasing valuation. This is not on a Theranos level, but with the current spread of misinformation and “alternative facts”, any suspicion of over-selling a technology angle could harm the startup ecosystem.
The road ahead for tech investing
As I’m living through my third (or is it fourth?) tech bubble, I keep asking myself, “What’s next?”
I believe we’ll return to normal, and lots of money will be available for entrepreneurs with great ideas. It will just be a different normal — one with less low-hanging digital fruit to pick in VC. To a greater degree, investors’ future success will depend on understanding complex industrial (physical) systems and fundamental science, not on blitzscaling, MVPs, or churn.
To be a successful tech investor in the future, you’ll have to go deep down tech rabbit holes, form your own opinions on what’s coming, understand existing value chains in detail, and have deep knowledge of how to take a concept that works in a lab or workshop setting into fully fledged production scaling. This is easier said than done.
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