The world of startups is often associated with cutting-edge technologies, disruptive ideas, and rapid growth. However, there are still huge opportunities in “old school” industries where the startups may not be as glamourous, yet still can create massive change and outsized returns. Especially in market conditions that prove hard to fundraise and prioritize financial sustainability vs. growth at all costs. Andreesen Horowitz’ new American Dynamism fund shows that there are investors out there that realized the opportunity that lies within bedrock industries such as supply chain, industrials and manufacturing.
At ShockVentures, we’ve spent the last 2 years investing in these “old school” industries and have deployed over $1M after reviewing hundreds of companies in these verticals. Along the way we’ve noticed that investing in these sectors requires a keen understanding of two critical components: behavior change and founder market fit. In this article, I wanted to take a quick dive into how these factors play a role in how we make investment decisions that we feel like can unlock untapped potential in traditional industries.
Understanding Behavior Change
Before investing in old school industries you first have to know how they operate. Luckily, my partner, Tim Saumier, has experience working for companies like John Deere, Moen and Phillips that gives us an inside perspective on the inner workings and what makes the people within tick. One of the most interesting things we’ve learned is that no-matter how innovative the tech is, sustained success of the product is heavily reliant on the people using it being open to adoption. Changing behavior is hard so you almost always want to reduce it, but if you have to make changes here are some key things to consider:
1. Culture: Keen understanding of a culture can reduce mistakes in the evaluation process. Knowing the ins-and-outs of a company’s financial model is important, but not nearly as important as knowing who the people are that work in it every day. By simply talking to those that work day-to-day in the space, we’ve learned about the people, their problems, and even uncovered new opportunities for investment by digging deep into the culture. If a specific task has been done the same way for 20 years, it may be tough to get someone to be open to changing “how things have always been done.”
2. Pain Points: Old School industries have been around so long because they’re extremely lucrative. Because they’ve been around so long there are plenty of holes and pain points due to the sheer size of the market. We’ve found that startups that focus on the needs of the operators in the space by fixing their pain points have a higher chance of success than those that create the tech and try to force it on the market. By focusing on the alleviation of pain, a startup can create ambassadors that push others to adopt a solution because it has helped them.
3. Incentives: One of the most unique components of old school industries is that there are often a multitude of stakeholders involved to perform tasks. For example, receiving a shipment at the port not only involves the shipping company, it involves other companies/stakeholders such as shipping agents, customs agents, logistics companies etc. When creating a solution, a startup should contemplate both the effectiveness of the solution as well as how it will affect other stakeholders in operations and economics.
Founder Market Fit
In these types of industries more than others founder market fit is extremely important. The way deals are done in these spaces is by handshake with a reliance on trust. If a founder has been in the industry, understands the nuances and can be trusted, they are far more likely to succeed and close big deals:
1. Deep industry expertise: Startups operating in traditional sectors benefit immensely from founders who possess domain knowledge. This knowledge can be leveraged to create innovative solutions and navigate the challenges unique to the industry. It takes years to understand the inner workings and to get to know the key players in a given space.
2. Credibility and network: Founders with a strong market fit bring credibility and established networks to the table. In industries where relationships and trust are paramount, having a founder who is well-connected and respected can open doors to partnerships, distribution channels, and funding opportunities that might otherwise be inaccessible.
3. Persistence and resilience: Old school industries often require startups to overcome significant resistance and skepticism. Seasoned founders (whether entrepreneurs or operators) are more likely to persevere in the face of adversity because they know the end goal is attainable. Investors should seek out founders who possess the passion and drive to navigate the complexities of the industry and see their vision through. Caring about the industry helps.
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Investing in “old school” industries is tricky. The allure of the massive markets and ripeness for disruption draws in many startups in hopes of creating the next unicorn. While that’s technically possible, we’ve found that “old school” industries still rely on “old fashioned” business techniques in some cases. This may not always be the best for pure innovation, but investors that understand this reality have a better chance of finding startups that can generate outsized returns.
The companies that stick in these industries often have impressive scalability potential because of the network effects available. One of our portfolio companies, Iron Sheepdog, is a great example of understanding behavior change and founder market fit. We believe the future is bright in these industries and as we see them succeed, our communities will benefit because of it.
