Since the advent of human computer interaction (HCI), technologists have striven to remove friction between user and machine. Each layer of technology or software that sits between the user and the end requirement she seeks forms a layer of abstraction and increases complexity of use. These layers sit on top of each other to form vertical stacks in various processes and industries in order to complete computing tasks. Inside Bee Partners, we often consider investment opportunities relative to their particular process or industry stack—for example, supply chain management, enterprise sales software, or NewSpace.
We assess the solution’s ability to extract economic rent from the value chain—its ability to augment the stack, aggregate or realign adjacent offerings, or ability to fit into the white space between existing layers. We call this our Stack Discipline, a useful framework for understanding value creation.
A key element of understanding this discipline is the overall maturity of the relevant software stack. A well-formed or long-established value chain (e.g., enterprise sales) is harder to break into than an emerging market stack (e.g., NewSpace). There are opportunities in both, but each must be considered differently.
In the example of a mature stack, the solution must be disciplined so as to not add complexity and friction, but remove it. It must replace one existing or multiple layers in the stack with a superior, cheaper option, and/or aggregate multiple layers in a stack into a single, efficient piece of software. There is potential for fitting into a particular white space between existing stack layers, but this offering must be highly technically defensible, effectively a tool that the user can’t believe she previously operated without.
The immature stack, on the other hand, provides significantly more opportunity to create value and extract economic rent, yet comes with a far less defined value chain as a guide. The user may understand the end requirement, but have little access to the tools to get there. Take the emergence of speech recognition technology and the new voice platforms. A user knows what she wants Alexa to do, but the layers of the stack are not yet developed enough to allow booking a flight or dictating an email. One can see how this would present opportunities for Founders to build lasting businesses, either in the end application layer, or the enabling layers in between.
Here’s an example from the emerging VR stack as we’re considering it today. It’s a relatively immature stack that we believe offers many business opportunities. On the left is the current state, on the right, a proposed future state:
Founders are building specific technologies and solutions up and down this immature stack to solve problems completing the chain from buyer to seller. As they prove their value, they will create defensibility and extract economic rent.
Often these new stacks stand on the shoulders of technology breakthroughs or emerging hardware platforms. In the early evolution of the drone stack, the value chain was uncertain. Often, entrants had to build out multiple layers in the drone stack simply to bring their offering to market. This often included specific hardware, power sources, or other foundational elements. As the stack matured and new specialized entrants brought more targeted offerings, startups were forced to focus on their core value-add offering within the stack (hardware, flight controllers, sense-and-avoid, or end application), staunchly defending its borders over time with better technology and design.
Each layer of abstraction adds complexity of use. So while the immature stack must be built out at first, the closer a user can stay to the end action taken, the more effective the technology stack will be. There are huge opportunities to insert technologies or remove layers across many stacks, nascent and mature. The healthcare value chain is long known to be a mess, with misaligned incentives and inefficient workflows. The computer vision stack is evolving before our eyes, so to speak, with the biggest players open-sourcing many of the layers of technology. Understanding the fundamentals and dynamics of each stack and applying our Stack Discipline approach will serve Bee Partners’ investors for years to come.