Great post as always @cedric!
One point I’m thinking of from the Microsoft story is that there seems to be a cyclic nature in the need for VC in computing specifically. Essentially what I’m thinking is the following cyclic model:
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In the 60s-70s, personal computing is all the rage and hardware startups are the thing to do. As a result, companies need up front capital to source materials, develop products, ship to customers, etc. VC funding is critical
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In the late 70s-80s, Microsoft demonstrates the amazing economics of software. Massive margins, low COGS, large ROIC. As a result, VC funding is not critical for growth VC funding optional
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In the 90s-early 2000s, web applications became all the thing to do. This required companies to buy expensive servers for hosting, which in turn required upfront funding for that capital expenditure. In addition, growth required the purchase of more servers, reducing margins. VC funding critical
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In the 2010s, cloud providers became ubiquitious, removing the massive fixed cost for web and mobile startups. Now we return to the days of Microsoft, where software has low fixed costs and is super high margin. VC funding optional
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This brings us now to the 2020s with AI, where massive investments are needed in computing infrastructure in order to train custom large language models VC funding critical
So it seems that each new trend in technology has two funding phases:
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Fixed Cost Phase: If you want to start a business riding the new trend (whether it be PCs, web apps, or AI), the fixed costs are very, very high. This requires high injections of capital, usually from VCs
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Reduced Cost Phase: Now that the new technology has matured a bit, market innovations or new trends building on top of the old trend drive costs down, either through reducing fixed costs or changing the fixed costs to variable costs (or both).
It seems to me that knowing where you are in this cycle is important for understanding how and when to raise capital as a startup. If you’re in the fixed cost phase, you need to aggressively raise money and out-capitalize your comeptitors. More funding means ability to source more materials, produce more goods, etc. If you’re in the reduced cost phase, then you can take advantage of the expanding margins to raise smaller amounts of captial or forego raising capital at all.