Software’s Third Act

In 2011, Marc Andreessen famously proclaimed, “Software is Eating The World.” The thesis was that internet startups were “poised to take over large swathes of the economy,” and make all the failed dreams of the dot-com era (Act I) finally come true.

Andreessen was at least half right. In the decade that followed (Act II), software companies like Apple, Microsoft, and Google ascended to become the most valuable in the world. Billions of people did indeed buy smartphones, as predicted. And entire industries—news, entertainment, travel, communications, retail, productivity, finance, and more—were swallowed whole by software.

But software still hasn't eaten everything. The industries that form the foundation of the American economy—healthcare, logistics, construction, transportation, manufacturing, etc—are still waiting for the revolution. Just ask any consumer trying to find the right specialist at a hospital, or get insurance for a leaky roof. All across America, we are confronted with the type of antiquated, complex bureaucracies that we thought software would fix. The pandemic revealed how brittle our systems are. It’s now clear our foundations are crumbling.

But there’s good news: I and many others believe we’re on the precipice of a new revolution in software (Act III), in which startups will finally deliver on the dream of transforming the economy’s foundational industries. Identifying, backing, and supporting these companies is my life’s work, and inspires everything we do at The Council Fund.

Why now?

There are three main drivers:

1. Until recently, there weren’t many companies with Silicon Valley DNA and a track record of success in foundational industries, especially when compared to consumer software and horizontal SaaS. But success stories like the following have produced a new generation of operators-turned-founders with the know-how and drive to revolutionize foundational industries:

   • Flexport (tech-enabled logistics, $8B private valuation)

   • Procore (software for construction, $10.3B market cap)

   • ServiceTitan (software for the trades, $7.3B private valuation)

2. Previously, the operational complexity of running these businesses made them difficult to scale. Now, rapid advancements in AI allow businesses to analyze and act on complex operations data in real-time, as well as reduce legal and regulatory costs.

3. COVID exposed grave vulnerabilities in our essential industries as we faced nationwide shortages of not only PPE, but regular household items and medications. Healthcare workers experienced extreme burnout which still impacts staffing issues today. All of this spurred a wide recognition that change is needed for our society to thrive in the face of adversity. If one thing seems certain, it’s that the future will require more dynamic, flexible systems than the past.

Who will win?

It’s no secret that these foundational industries are intricate: success requires masterful navigation of gatekeepers, regulations, trade skills, and real-world operations. Founding teams need both A) deep exposure to their chosen vertical, and B) experience at high-growth startups or in tech-driven environments.

Throughout my own career before launching The Council Fund, I had the unique opportunity to see the worlds of tech and essential industries side by side, from Seed to Fortune 500. I spent my early career in operations for medical devices, insulin, and consumer electronics at Eli Lilly, Apple, and Snap. There I interfaced with manufacturing, supply chain, and logistics partners. I then focused on go-to-market for software products at Cruise and Atmos, where I interfaced with transportation and construction.

The contrast between the speed and quality of tools I had access to in the core tech industry and those available to my partners in essential industries was jarring. Multi-billion and trillion dollar industries at the core of our society were running on spreadsheets, emails, and phone calls. It was clear where the opportunities were.

Now, as a VC, I’ve been fortunate enough to invest in founders that have the same dual perspective:

• Nathan Mathews, Founder and CEO of Roofer.com, started roofing at 19 years old. It was there that he became aware of the danger of the job and fraud in the industry. Now his company uses drones and computer vision to help property owners diagnose roof damage and easily order a new roof online.

• Fifi Kara and Lailah Kara-Newton, Co-founders at Aster, bring their experiences together as a prior YC-backed founder and OBGYN to help doctors drive better pregnancy and maternal health outcomes for patients.

• Emma Guo, Co-founder and CEO of a stealth logistics company, was raised by a warehouse inventory manager. She became a software engineer and joined the ranks of Airbnb and Flexport. Now she is getting back to her roots and solving a big problem for 3rd party logistics providers (3PLs).

• Andy Rape, Co-founder of Leaficient, was raised on a farm. He also became a software engineer, focused on machine learning. Now he is building technology for farmers everywhere to improve crop yields and quality.

These founders are not only solving big problems and building big businesses. They are also assembling teams of entrepreneurial people around them who will play a great role in their success. Some of them will go on to start their own companies someday, with the perspective that they gain from this experience. Success begets success, and we will see flywheels of this founder archetype play out for decades.

Augmentation beats reinvention

Foundational industries won’t be rebuilt from scratch by technologists. Rather, these industries need to be augmented with products that are designed with their needs in mind.

Take WeWork, for example. It advertised itself as a tech company. But instead of investing in software designed to augment, the recently bankrupted firm tried to redesign core real estate operations themselves. This model only made sense with regular, massive influxes of capital—which slowed in recent years.

In contrast, One Medical’s $3.9 billion exit to Amazon is a great example of success. The hybrid in-person and telemedicine company did not attempt to redesign core medicine practices. Albeit a challenging model to pull off, the company was able to offset the cost of their in-person clinics with their high-margin software platform, economies of scale, and early understanding of health insurance and employer dynamics.

Procore’s $11 billion IPO is yet another success story, with a product that relies on software alone. With their platform, architects, general contractors, suppliers, and more can collaborate on complex projects and keep one source of truth on project documentation. This is way easier than trying to keep track of papers, emails, PDFs, and spreadsheets with multiple revisions. Staying dedicated to construction and solving a true painkiller has allowed them to scale quickly across the industry.

We prefer software-only solutions at The Council Fund for simplicity. Regardless of the approach, startups in these industries should augment core operations, rather than attempting to completely replace them.

Adoption can happen fast

There is a common misconception that leaders and workers in legacy industries have trouble adopting new software for problems on the job. But I’ve done countless customer reference calls when evaluating startups in these spaces and have found the opposite to be true. For example, when I talk with construction tech founders and their clientele — general contractors, steamfitters, trucking operators, and roofers — I hear over and over again that this notion is outdated. These folks rely on mobile devices like everyone else. They simply need products that meet them where they are – typically on the go and with text-based communications.

In all of these industries, people want to stay focused and have technology that’s working for them in the background. Complex multipoint solutions designed for all industries can be very inefficient and lead to unnecessary time spent behind the computer. General contractors want to be on the ground visiting job sites. Doctors want to be present with patients. Manufacturing leaders want to meet with their teams and walk the floor.

Industry-specific solutions take into account actual day-to-day needs and constraints. When they hit product market fit and become official painkillers, they can spread very quickly with low customer acquisition cost.

Silicon Valley DNA is key

Silicon Valley is as much an ethos as it is a location. There’s a quasi-religious nature to the rituals, manifestos, and special vocabulary. And it works. Early startup employees and young entrepreneurs flock to San Francisco for the chance to learn by osmosis. Longstanding programs like Y Combinator have shown repeated success in providing founders with the playbooks and networks they need to build generational companies.

And it doesn’t end there. When a company goes through a major liquidity event such as an IPO, as many as 15% of employees at companies like Airbnb become millionaires. Many will take those earnings and start new companies that have higher rates of success than the average founder.

But they tend to build in areas they understand best, hence the proliferation of consumer apps and horizontal SaaS we’ve seen over the years. Thankfully, this effect is beginning to ramp up in foundational industries. Consider Flexport, with an $8 billion valuation and expectations of a 2025 IPO. This is the type of success that positions their most entrepreneurial employees to be future founders in related industries. A staggering number of ex-Flexport founders pitched our fund last year, and we’ve invested in two to date. We will see more and more of this as more companies like Flexport mature.

Introducing: The Council Fund

Since 2019, I've been investing in startups serving foundational industries at the Pre-seed stage. I've observed that it can be challenging to get mainstream investors interested in unfamiliar spaces until there’s tangible traction. Additionally, many blue chip investors struggle to write small-enough checks for Pre-seed rounds. As a result, the cap table often consists of myself and a group of angels who recognize the potential in these industries.

Once these companies convert early design partners to customers and show repeated revenue and traction, they tend to take off quickly. This can happen as early as the Seed stage, but it becomes undeniable by the Series A stage. At that point, these deals become highly competitive because savvy investors recognize the massive market potential (ranging from $50 billion to $8 trillion) of the industries they serve. Pre-seed startups I've invested in have gone on to raise future funding from esteemed investors like Y Combinator, Lightspeed, Craft Ventures, and Union Square Ventures. I refer to the period between Pre-seed and Series A as the 'Valley of Subjectivity,' as investors are more inclined to support founders or company models they are familiar with.

As General Partner at The Council Fund and someone who has experience both in Silicon Valley and legacy industries, I have a unique perspective on the potential of these deals. Headquartered in San Francisco, with roots in the Midwest and founders in industrial hubs across the United States, our firm is designed from the ground up to be a bridge between century-old enterprises and the latest innovations in AI and software. We have a strong network of 90 Limited Partners and 160 operator-angels from companies like Figma, Square, Slack, and Lyft, who see the world differently and support our founders in areas like hiring, product strategy, and distribution.

While other investors shift their strategies to follow trends-of-the-moment, from creator economy to crypto to AI, The Council Fund has consistently invested in software for the essential economy. Now with recent financial success stories, advancements in AI, and widespread awareness of the work to be done, essential verticals are taking center stage. Founders of Act III, this is your moment and we can’t wait to partner with you.