Tackling Problems of Significance in Physical Industries

Seth Winterroth

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Jul 14, 2022

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6 MIN

The Eclipse team has partnered with Silicon Valley Bank (SVB) and put out a report, The State of HaaS, detailing critical metrics specific to companies in the physical industries space


“That’s one small step for man, one giant leap for all mankind.” 

The sweltering July air cut sharply by the force of the blast was momentarily obscured by the ensuing plume of exhaust. The rocket, picking up speed, propelled itself and its crew toward the moon at a clip of twenty-four thousand miles an hour. As the remastered footage played out on my screen, I watched this momentous feat unfold: the first space mission to put a man on the moon. Armed with less technology than a flip phone, the men and women behind the Apollo 11 moon landing accomplished something that a decade before had seemed impossible. Most impressive, however, was the grit, vision, timing, and preparation that enabled this modern miracle to come to fruition. 

This historical event brings to mind Richard Hamming’s talk, “You and Your Research.” In it, Hamming urges the listener to make a choice to spend their life working on “things of significance.” The Apollo 11 achievements were indeed incredible, yet as an industrial tech investor, what struck me most was that these achievements were also repeatable. In fact, throughout history, we have seen small teams move society forward by seeking out hard problems, working steadfastly in concert with a clear vision, and demonstrating a collective refusal to fail. These events are not architected by fate or subject to chance alone. Rather, the forces of technological progress that spurn humanity forward start with a desire to work on problems of significance. 

You are not Late”

In the immortal worlds of Kevin Kelly from his seminal post “You Are Not Late:”   “There has never been a better time in the whole history of the world to invent something. There has never been a better time with more opportunities, more openings, lower barriers, higher benefit/risk ratios, better returns, greater upside, than now. Right now, this minute. This is the time that folks in the future will look back at and say, “Oh to have been alive and well back then!”

The time is now to lead the charge in solving some of the world’s more pressing problems. The ability to drive bold and sweeping change has never been greater. Thanks to the availability of performant off-the-shelf components, the ubiquity of global connectivity, and the ability to prototype rapidly, small companies can go from ideas to proof-of-concept in a relatively short period. The advances in artificial intelligence, energy infrastructure, and autonomous systems in the physical world have never been more accessible to founders looking to build new solutions for the physical industries that drive our world forward. 

As we traverse this period of change, we must ask ourselves: what kind of legacy do we want to leave behind? It is not enough to play safe and conservative; to play the game trying not to lose. The time to solve significant problems is today. And there is certainly no shortage of problems to address. Physical industries have fallen behind the innovation curve, leaving themselves open and vulnerable — as we have seen and continue to see with supply chain disruptions and energy crises. The foundation upon which these mainstay industries were built no longer supports our changing world, and it is time for innovative operators to run towards the opportunity to solve hard problems and build something of meaning.

“Markets, markets, markets!” – Pierre Lamond

Turns out, working on the hard problems of our times is also great business because most meaningful problems are rooted in big market opportunities. Pierre Lamond, my Partner at Eclipse, has impressed upon me for years: markets are what matter most. When analyzing even the most technical engineering venture, you must start with a deep understanding of the market. 

If you can execute efficiently through a multi-year development cycle to build an industrial tech business targeting industry problems of enormous size, you can build a massively valuable and competitively differentiated business. Solving problems of significance in the industries that make up most of the global GDP results in high revenues per customer, highly favorable unit economics, strong net retention, and growth rates that are indicative of best-in-class businesses. Look no further than companies like Illumina, Tesla, or Apple for proof. Simply put, on the other side of challenging development cycles and scale is a valuable and differentiated business that capital markets can underwrite on financials alone. 

My friend Ian Rountree wrote about the opportunity to build these types of generational companies and why investing in them makes great financial sense. I liked what he had to say here, and the visual depicting it has stuck with me: “The thing about predominantly taking technical risk, though, is that if you’re careful to take virtually no market risk then growth can look more like a step function than a smooth curve.” 

Source: Ian Rountree, “A financial argument for deep tech”

However, the problem across the ecosystem of Early-Stage industrial tech companies is the absence of standardized metrics and milestones at each stage of progress leading up to commercial scale. Lack of clearly defined standards for best-in-class execution in the pre-commercial stages of development is hampering the ecosystem. The adoption of a standard execution framework will pave the way to build a scalable organization with solid financials that traditional capital allocators can underwrite on the merits with which they are comfortable. Our intention is to drive a more actionable discussion of key milestones stage by stage and ultimately help founders be more capital-efficient in their pursuit of these key points of execution. 

The desire for excellence is an essential feature for doing great work.” – Richard Hamming

The greatest trick VCs ever pulled was convincing late-stage capital that underwriting SaaS businesses was more art than science. That bluff was called, albeit with unsustainable fervor, over the last few years as late-stage capital began systematically asking companies of all stages for ~6 commercial metrics and turning a term sheet around in 24-48 hours. This dynamic is understandable given how quickly software companies can get to market and generate commercial metrics that can be underwritten by investors chasing growth and taking market risk alone. Unfortunately, there is no similar clarity for entrepreneurs endeavoring to solve challenging engineering problems that require several years of development required before commercialization. 

The Eclipse team has partnered with Silicon Valley Bank (SVB) and put out a report, The State of HaaS, detailing critical metrics specific to companies in the physical industries space (seen below). In aggregate, we reported data from over 400+ surveyed startups that are active commercially, mapping out the steps necessary to create a strong foundation upon which physical industry companies can build successful businesses. 

The foundation for building a successful business in physical world industries begins with an end-to-end evaluation of your systems, operations, contracts, lead time efficiency, sales cadence, and overall reliability. Keeping these metrics in mind early when building an industrial tech company will help you lay a strong foundation from which the business can scale efficiently. For example, does the system you’ve built have reasonable ROI? Does your operating margin improve as you deploy in greater volume, or do deployment costs scale linearly with revenue? How efficient are your procurement processes and vendor lead times? Have you built the infrastructure that enables efficient remote diagnostics and customer support? These are just some questions to ask when building a compelling, agile business that can bring value to the physical industry space.  

But, before evaluating your business through these metrics, you must build from a blank canvas. From our experience companies that succeed in our industries consistently navigate a multi-year development journey with efficiency and adhere to clear milestones indicative of success in the early stages of building. In the Industrial Tech Tactics Series to come, we will dive into a more actionable discussion of key milestones by stage, tactics to achieve them, and ultimately help founders be more capital efficient in their pursuit of excellent execution. Below is a brief framework we use internally at Eclipse to evaluate execution progress across the early stages of starting an industrial tech venture. In the coming weeks, we will be diving deeper into the granular tactics of building a strong foundation upon which your business can scale.

Running toward hard problems 

Eight years after Kennedy declared, “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth,” Apollo 11 took its maiden voyage, solidifying the United States as a world leader in space exploration. Since that historical day, millions have been inspired to take their own “moonshot” at challenging the status quo and solving complex problems that have otherwise seemed insurmountable. Since we know that the only true constant is change itself, it is safe to assume that opportunity is the forcing function of such great endeavors as the Apollo 11 mission. Our social and economic environment only plays a minor role in the successes and failures of founders and entrepreneurs — it is specifically the grit and vision paired with a little bit of luck and a lot of preparation that sets businesses on the course to rapid ascension.  

Be sure to visit the State of HaaS website to read the full report.

Follow Eclipse on LinkedIn and Twitter for the latest on the Industrial Evolution.

Tags

  • Digital Transformation
  • Early Stage
  • HaaS
  • Hard Tech
  • Physical Industry

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