E281:The Tsunami of Pain Facing Venture Capital
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What is the main topic discussed in this episode?
Before we go into the tsunami of pain, as you told me last time, that's facing the venture market. I want to go back to when you were in Etherius, which is a company I know is acquired. You put your earn out. You invested it all in Tesla. This was back in 2014. What gave you the conviction to invest so much of your capital in one stock?
I truly felt like I was watching a generational entrepreneur. And a lot of people were saying, you know, this is a car company, but if you were reading what he was doing, if you read the master plans, if you listen to how he was approaching the problem, he was going after something much, much larger. On one hand, him being a great entrepreneur is one thing, but that doesn't make it a compelling investment, right? Because if everyone agrees with you, The value is already baked in. What made it special was I had strong conviction, but the market didn't.
Why did Trey invest his Etherius earn‑out into Tesla in 2014?
Right. If you read the news articles, it was short positions. It was this is a car company that doesn't make money. And so to me, the best bets are something that you truly believe, but the market doesn't. E14 is when he announced the Gigafactory. And that to me was the line in the sand moment of, you think I'm building a car company, let's go, right? And built a multi-billion dollar battery factory.
Last time we chatted, you showed me a graph about how revenues diverge in software and hardware companies, right? Tell me about that. And what ways are these two different types of businesses fundamentally different?
The first element that comes to people's mind when you bring up hardware and software is they say hardware is so capital intensive. Like that's the initial gut reaction. It really isn't true. And it might be surprising, but if you start to look at the data, if you look at exits over 250 million, right? Deep tech fundraising, it's about 13% of the exit value. If you look at more traditional technology investments, it's around 11% of exit value. And so the capital intensity of these business models is more similar than people believe. But David, what you pointed on is really where I view the differences. It's speed to revenue and what the revenue ramps look like. So let's take software. Let's start with software.
If you have a successful venture-backed software business and you look at the revenue curve, two things are going to jump out. Number one is they can get to revenue very, very fast, right? And I think people know why, but the infrastructure and the tool set for software right now is amazing. I mean, you could build a product from scratch, start making revenue in six months very realistically. And then beyond that, another great feature of software is if you start to look at the revenue curves further out, you end up with pretty smooth curves. And the reason for that is instant global distribution. Right. So it's a great, really beautiful looking revenue curve now. I operate in the physical world, and I'll be the first one to tell you that the revenue curves aren't as pretty.
They just aren't. So that quick revenue, pretty much non-existent. It's very typical that a hardware business could have no revenue for five or six years. I mean, look at Tesla, no revenue for five years. Why is that? Well, if you're building something complex, think a car or a robot or a drone, it takes time. There's no way around it. Once you start to get revenue inflecting for a hardware business, it's also not as pretty. As opposed to a smooth revenue curve, you're going to get more of a step function. And the reason is you usually have to build up some sort of manufacturing or facility supply chain, some capabilities to meet that demand. Once that demand is met, you don't just flip a switch, right?
If you want to go to the next level, you're talking about greater manufacturing capabilities, maybe new facilities. And so in the early days, you kind of see it going in steps.
Walk me through the Death Valley that predictably hits most hard tech startups.
We go back to the example that we just talked through.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–0:55
2
Why did Trey invest his Etherius earn‑out into Tesla in 2014?
0:55–5:56
3
How do revenue trajectories differ between software and hard‑tech startups?
5:56–11:42
4
Why do hard‑tech companies often experience years of zero revenue?
11:42–16:06
5
What is the predictable 'Death Valley' most hard‑tech startups face?
16:06–20:38
Speakers
2 identifiedMore from How I Invest with David Weisburd
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