The full-stack startup, as previously written about by our partner Chris Dixon, is an approach taken by some startups to bypass incumbents by constructing an entire, end-to-end services or products. This approach is in contrast to the normal approach, through which startups aim to sell or license their technology to existing firms of their industry. We consider that there are tremendous opportunities in American Dynamism categories for these full-stack firms to be built; furthermore, we predict these firms can enable a thriving ecosystem of recent technology firms to grow in industries that were previously tougher for brand new entrants.
The distinguished technology-first entrants in industries that contribute heavily to American resilience and dynamism often emerge first in the shape of full-stack startups. Generally speaking, these industries include sectors where firms sell to government (like aerospace and defense) and supply citizen services in government-adjacent markets (like education or transportation), and in core domestic industries where government is a stakeholder (like logistics and industrials). Typically, these firms own their distribution and relationship with the top customer, in addition to vertically integrate more (though under no circumstances ) of what goes into their product. In some ways, they run counter to the traditional wisdom that advises startups to narrow in on a core competency early, use it as a wedge with customers, after which expand from there.
Full-stack startups represent the start of a latest chapter of technological acceleration in these industries. They function because the enablers of recent startups within the industry, by creating latest markets for suppliers and other services around them. These latest startups wouldn’t have to be full stack, and might grow into massive businesses in their very own right, since the full-stack firms and the markets they operate in grow so large that even adjoining markets represent massive opportunities.
Some distinguished examples of full stack startups in these industries include:
- SpaceX, which built launch vehicles themselves reasonably than function some extent solution to NASA.
- Tesla, which didn’t start out by selling batteries or electrification technology to existing auto OEMs. They built and sold cars — competing against the incumbent automakers.
- Anduril, which focused on constructing products for defense with a vision to the subsequent prime, reasonably than start out as a supplier to the defense primes.
- Flexport didn’t sell a software solution to freight forwarders — they became a software-powered freight forwarder themselves.
- Lyft and Uber created parallel transportation systems as a substitute of selling software to public transit, taxi, or private automobile services.
- Zipline doesn’t sell delivery drones — it operates a logistics system.
The goal of this post is to stipulate a framework for occupied with full-stack startups — in a technology-agnostic way — as enablers of innovation in government-adjacent sectors, and the way this might translate to other vital yet technologically stagnant industries. To do that, we explore: (1) why markets in certain industries lend themselves well to full-stack startups; (2) how full-stack startups speed up technology development and adoption in these industries; (3) some common characteristics of full-stack startups in these markets; (4) areas of opportunity; and (5) why these firms are still anomalies.
Why full-stack startups arise in certain industries
The total-stack startup could be seen as a response against the challenges of reform in stagnant industries. Marc Andreessen has spoken in regards to the limits of institutional reform, where organizations — particularly large bureaucracies — are incapable of improvement via reform for a wide range of reasons. As a substitute, Marc argues that progress within the domains occupied by these incumbents is achieved by constructing latest institutions from scratch, and that the challengers starting these latest things have outsized opportunity because incumbents won’t change.
This dynamic is especially visible in a variety of verticals where technology contributes heavily to American Dynamism, including but not limited to aerospace, defense, public safety, education, housing, supply chain, industrials, and manufacturing. While these sectors are different across a spread of dimensions, they often have no less than considered one of just a few qualities that make a full-stack startup approach compelling.
High levels of consolidation
A few of these markets are largely dominated by just a few extremely large players. Examples include automotive, which, though less consolidated than previously, is essentially an industry of huge automakers with long histories; defense, which has consolidated because the Nineteen Nineties and is dominated by the defense primes; and space launch, which prior to SpaceX was largely the domain of presidency.
This concentration creates a market dynamic that makes a vendor approach (selling technology to incumbents) tougher for a venture-backed startup. First, the seller approach faces an oligopsony given the high customer concentration amongst incumbents — meaning customers hold the facility on this market, and moving downmarket becomes tougher (increasing the likelihood of a vendor growing right into a services provider for the most important incumbents). Secondly, the less competitive nature of this market dynamic can create less urgency for technology adoption, in addition to a bent to construct technology in-house over buying from a latest vendor.
High barriers to entry (often regulatory)
Plenty of these markets are supply constrained because of some style of regulatory barrier or licensure requirements. These barriers mean that even when the market is incredibly large, value is probably going largely captured by those incumbents capable of take part in it; latest technology vendors, in contrast, are only capable of capture a smaller sliver of the market.
An example is higher education: While revenues from postsecondary institutions in america were $695 billion (2019-20), the players which can be capable of meaningfully take part in this higher education market are accredited, Title IV-eligible institutions. Most startups that attempt to serve this market are subsequently only participating in a smaller sliver, corresponding to college IT budgets or consumer educational spending. Similar dynamics exist in markets like transportation and housing. Though it could be a rather more arduous and time-consuming path, startups that seek to beat these barriers and compete with incumbents may even see greater value accrual in the long term.
High levels of fragmentation across the worth chain
There are also often processes and markets inside these industries which can be characterised by high levels of fragmentation. While some markets throughout the industry are highly consolidated, as described above, other parts of the industry — particularly at the seller, supplier, or intermediary levels — could be very fragmented. An example is the variety of machine shops that make up the space, defense, and advanced manufacturing industrial base. The results of this fragmentation can include long lead times, limited visibility, and complicated coordination problems — and present a possibility and incentive for the full-stack startup to own more of its value chain by making gains on speed, cost, and quality.
How full-stack startups create startup ecosystems
As they grow, full-stack startups often enable other technology firms to enter these categories. They act as a catalyst for a lot of more startups, especially people who don’t take the full-stack approach, to form (e.g., SpaceX and the NewSpace industry). This enablement typically happens via just a few mechanisms:
Increasing competition and technology adoption
Recent full-stack startups that compete with incumbents can increase competitive pressure on incumbents to acquire and adopt similar technologies. If the technology leverage of those startups delivers faster growth or higher results, it might catalyze interest in and budgets for comparable solutions from incumbents, creating a possibility for a latest generation of startups taking the seller approach. For instance, across multiple markets in supply chain management, including freight brokerage, freight forwarding, and B2B marketplaces, there may be a recurring pattern where one wave of startups looks to disrupt and displace incumbents, and a second wave of firms emerge to sell to incumbents.
Serving as infrastructure
In some cases, an early full-stack startup serves because the infrastructure that allows a latest set of markets and firms pursuing them. A distinguished example of this dynamic is within the business space industry, where SpaceX serves because the launch infrastructure for a variety of other space firms, products, and services, making these businesses economically viable by de-risking attending to space. In these cases, the difficult work done by the full-stack startup enables latest firms and markets by lowering technological and economic hurdles.
Creating talent vortexes
A number of the full-stack startups discussed have created talent vortexes, and lots of alumni of those firms go on to construct more technology-first firms in these categories. Full-stack startups often have the effect of developing talent that’s accustomed to the nuances and technicalities of their industry, but in addition well-versed within the Silicon Valley way of company-building and never necessarily stuck within the ways of the industry’s incumbents. Outstanding examples include a variety of energy and transportation startups founded by former Tesla employees; the startups in business space and adjoining verticals founded by former SpaceX employees; or the quite a few firms founded by former employees of Palantir (which bears a variety of similarities to the full-stack startups discussed here, though can be different in some ways).
Patterns across full-stack startups
There are a variety of general patterns and attributes amongst full-stack American Dynamism startups which can be value discussing. They share these attributes even across industries due to common qualities amongst these industries that make them particularly apt for the complete stack approach. As characteristics like consolidation, barriers to entry, and fragmented value chains shape these markets and present a possibility for full-stack startups, additionally they drive the next patterns to emerge across full-stack startups as they grow in these markets.
Processes and operations are as vital as product
It’s common that processes and operations change into just as vital as product in these firms. Unlike with a vendor approach, full-stack startups often should develop many more operational components of the business around their core technology advantage. As a substitute of selling some core product to incumbents, the full-stack startup effectively must construct their very own customer – the core technology looks more like an internal tool or platform that the business is built around. Consider, for instance, a factory leveraging some level of automation for certain manufacturing processes. A vendor may sell or license their automation solution to other suitable factories, perhaps acting as a systems integrator as well; a full-stack startup will as a substitute develop all the opposite components of the factory as well, effectively becoming their very own customer and benefiting from the technology leverage their solution provides.
Similarly, the method by which the product is built becomes a key differentiator against incumbents, as well. As full-stack startups typically find yourself increase the production or servicing capability for his or her end product, magnified by some technology leverage, additionally they represent a possibility to construct latest processes and operational benefits. In these cases, the startup’s production capability and processes could be considered a product as well — along with the actual end product its customers buy.
Corporations are sometimes capital-intensive
These firms are sometimes, though not all the time, more capital intensive. These greater capital needs typically result from a mixture of needing to own more of the worth chain and needing to navigate a more complex go-to-market motion.
Furthermore, these aspects also often mean the businesses take longer to succeed in an inflection point of their growth. As such, a typical challenge for full-stack startups is needing to lift more capital off less realized business traction than their peers. Here, a mixture of historical capital efficiency, demonstrated product and technical progress, and validated demand may also help the businesses meet their capital needs.
Corporations change into multi-product businesses
As they scale, a lot of these firms change into multi-product businesses. The transition is smart as they’ve typically built each the relationships with customers and the systems and processes to expand into adjoining product areas. The multi-product model may also help justify the greater capital needs these businesses face.
Some great benefits of this full-stack approach are primarily around having the ability to compete on speed and adaptability, capturing more of the worth the corporate creates, and constructing a variety of moats at maturity. These firms are sometimes extremely defensible, and we typically observe that they change into n-of-1 firms. Furthermore, as they permit more startups to be inbuilt the vertical, it’s possible that growth also results in more value accruing to the full-stack startup.
Opportunities
There are a variety of markets and verticals which have a few of the dynamics described earlier that lend themselves to full-stack startups, but have yet to see one reach massive scale. These verticals represent potential opportunities for full-stack startups to introduce dynamism to foundational and vital industries.
Construction
Residential construction as an industry sees each high levels of fragmentation and barriers to entry, making it a compelling one for multiple kinds of full-stack startups to emerge. For instance, Cover is a full-stack residential construction company that owns each the top customer relationship and production capability, starting with accessory dwelling units (ADUs). There are also full-stack startups tackling specific markets and categories throughout the construction industry, corresponding to Mosaic for general contracting, or firms like Agorus, Assembly OSM, and Diamond Age tackling different dimensions of automated residential construction (all of which transcend being a pure technology vendor and operate within the business of homebuilding). One other barely different example is Culdesac, which takes the full-stack approach not simply to construction, but to urban development, by constructing neighborhoods from the bottom up.
Perhaps the most important challenge for the full-stack approach to residential construction is the net of state and native regulatory systems and processes that should be navigated with a view to reach scale.
Education
As discussed earlier, education has a few of the market dynamics that make a full-stack startup approach suitable. Particularly, higher education sees extremely high barriers to entry, and probably the most substantive work to create and deliver education of greater value is usually only doable by accredited, degree-granting institutions. So far, most education startups have focused on selling software, content, or services to varsities (e.g. online program managers) or into supplementary consumer spending on education (e.g., most MOOCs). Full-stack startups in higher education often must work out ways to take part in this closed market — otherwise, they’re confined to licensing curricula or selling software products to high schools.
Whereas one approach has been for a startup to partner with an existing college to deliver courses, Campus is taking the full-stack approach to two-year colleges by constructing a national online community college from the bottom up. While the local nature of K-12 education makes a full-stack startup more difficult, it is usually a market that represents a possibility for brand new firms to introduce improvements to the establishment from the bottom up.
Freight and transportation systems
While there have been full-stack firms inbuilt each passenger and freight transportation, there are a variety of verticals inside transportation which have the market dynamics suitable for a full-stack approach. The total-stack approach here might involve constructing entire vehicles as a substitute of being a supplier to OEMs. For instance, startups like Intramotev and Parallel Systems are introducing autonomous, electric railcars for the rail industry, and Fleetzero is electrifying freighters, with a long run plan to construct their very own ships. These firms represent a start line for full-stack startups to develop within the freight industries.
Semiconductor fabrication
There are few industries as highly consolidated, or with as high of technical and economic barriers to entry, as semiconductor fabrication. Given the complexity and capital intensity involved in constructing foundries, this can be a market typically left to incumbent integrated device manufacturers like Intel (itself an example of the full-stack approach) or third party foundries like TSMC. Nonetheless, some early-stage firms, like Atomic Semi, are pursuing a full-stack approach of constructing foundries.
Utilities
As a market, utilities have often been considered natural monopolies, and are highly regulated by utilities commissions, making them an particularly extreme type of a market where latest technology is likely to be introduced via a full-stack startup. Furthermore, the trendy history of public utilities markets in america has seen the introduction of more competition because the de-monopolization of electrical utilities within the late Nineteen Nineties. It stays to be seen how a technology-first startup is likely to be inbuilt these categories, however it’s possible it could look very different to historical incumbents given the challenges in these markets.
Why full-stack startups are rare
None of that is to say that every one startups in these categories must take the full-stack approach — removed from it. Actually, the overwhelming majority of successful businesses inbuilt these markets probably won’t take this approach. Full-stack startups are interesting precisely because they’re anomalies, and infrequently enable a variety of other technology firms that should be full-stack. There are just a few reasons we consider that to be the case.
First, they’re simply hard businesses to construct. They often require founders and teams to develop and exercise a wide range of different competencies, and perform all of them well — there can’t be just one core competency. By extension, there are simply more pieces of the business that have to be built before reaching product-market fit. Teams that may successfully execute on these visions are rare.
Second, as discussed earlier, the capital needs for a lot of these full-stack startups are comparatively greater than peer firms. Furthermore, these firms often take an extended time to succeed in an inflection point as a business — after which they’d likely have more business traction from which they will aggregate the capital needed. Prior to inflection, nevertheless, these firms can represent contrarian visions; founders that may successfully raise the capital needed for these visions are also rare.
Finally, many individuals will root for the entrepreneur constructing a full-stack startup to fail, reacting with skepticism and rooting against these firms. Many will take a look at a serious try and introduce ambitious technologies to vital industries and dismiss it as “Silicon Valley hubris” — especially if these attempts are led by entrepreneurs who’re industry outsiders. They’ll ask, cynically, whether these founders seriously think they will change an industry by constructing a venture-backed technology startup that differs from incumbents.
We definitely consider they will. In case you’re constructing a full stack startup, we’d love to listen to from you.
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