The Race for Physical Assets

Everybody’s talking this week about Amazon’s purchase of Whole Foods. What it means for the future of retail. And the biggest questions…

Is Amazon taking over the world? And do you care? Here’s my quick take…

Home delivery is still young and unproven. Sure, now there’s a startup for practically anything you can think of, from home massages to home auto repair to high-end suit measurements.

In theory, the demand is there, but only at the right price. And only at the right price will these home delivery services be profitable.

This is business. Price matters. Ask Whole Foods. It was getting outmaneuvered on price. Now Amazon has come along… and everybody’s saying it will make Whole Foods more efficient, more convenient and CHEAPER.

Listen, I like Amazon. I’m an Amazon Prime customer. But food and grocery delivery is tricky. My wife Cecily and I tried it once – for a two-week trial period from a top-five company (reputation-wise). I went in with reservations. And I left vowing never to do it again.

The groceries were supposed to be super fresh. For every other delivery, we had to throw away something because it was going bad. The package came with recipes, which were uninspired. The whole thing was a colossal disappointment.

Okay, so maybe you’re thinking I’m finicky about my food. Damn right I am! And so are the vast majority of people. What happens when Amazon makes a Whole Foods delivery and the customer says the cut of fish is wrong?

This is no slam dunk. It’s going to be a learning experience for Amazon and Whole Foods.

The silver lining? If Amazon can do groceries – fresh, organic, non-preservative-laden groceries – it will be able to enter any delivery segment it wants.

“Software Eating the World”… Revisited

That’s my hot take. But something else about the purchase is much more relevant to early investors. And I’ve heard nothing about it these past few days.

It’s more evidence that the startup “asset-lite” model – in which the application of software replaces the necessity of hard physical assets – needs correcting.

It’s a beautiful, elegiac idea, described best by well-known entrepreneur, investor and software engineer Marc Andreessen: “Now for the first time we can basically go field by field, category by category, industry by industry, product by product, and we can say, ‘What would they be like if they were all software?’

Well, we’re arriving at an answer that maybe Andreessen didn’t anticipate.

What would they be like?

How about… not good enough.

And that’s not only for food delivery. That also goes for industries like…

  • Retail. Online retailers are experimenting with hybrid models of digital and brick-and-mortar stores. It helps build brand. It’s where the company can hold special events. It’s code for “we’ve arrived.” Alibaba CEO Daniel Zhang calls it the “new retail,” which combines online and offline commerce, mobile and data.
  • Taxi and ridesharing. Uber has struck an agreement with Daimler, manufacturer of Mercedes-Benz, to include the German company’s self-driving vehicles on its ride-hailing network in the “coming years.” Why? Because, according to its blog, “making cars is really hard.” Indeed. Other ridesharing companies will also have to figure out how to access their fleets of self-driving cars. The taxi industry is about to undergo another upheaval.
  • Virtual reality. Facebook bought hardware head-mounted-display-maker Oculus Rift. One of the VR holdings (VirZOOM) in our First Stage Investor portfolio is making part of its exercise bike in Mexico. Another VR holding is making its hardware in China.
  • Streaming. Netflix, Facebook and, of course, Amazon are getting into the non-asset-lite business of original productions.
  • Internet of Things. Of our three IoT holdings, two are product-centered and one is a pure software/platform service. Amazon is making headway in the connected home through its Echo device, Alexa. Hardware is turning out to be just as important as software.

Pure software plays are getting rarer. Facebook is creating drones. Google is creating energy-harvesting kites. In the AI world, there are robots like Intuition Robotics’ ElliQ (which I covered here) and Knightscope’s security robot (now raising on SeedInvest).

The asset-lite model that relies on brains and bits is getting indigestion “eating the world.” Perhaps this was unavoidable. Our offline physical world and online digital lifestyle are meshing in new ways every day. Health, exercise, transportation and dozens of other categories have a foot in both worlds.

Software alone sometimes isn’t good enough to bridge these worlds.

Once thought to be asset-lite and therefore very appealing to early investors, transportation, the delivery of product and services, virtual reality, AI and many other sectors are morphing into asset-heavy endeavors.

That doesn’t make them bad. But they’re not what we thought they were or what we thought they would become. I’ll be taking an extra hard look at early-stage companies moving forward on an idea or clever algorithm while claiming to be capital efficient.

That’s today. But how about tomorrow?

Invest early and well,

Andy Gordon
Founder, Early Investing