Tetris Business Models: The AI Opportunity Most Investors Miss
AI companies will build differently
Happy Sunday and welcome to Investing in AI. First of all, I’m excited to announce, finally, that BrandGuard was acquired by Sightly. I can finally say a bit more about what I”m doing next, so stay tuned. Also be sure to check out our AI Innovator’s podcast. The latest episode features Noah Brier from Brxnd.ai and Catherine Perloff from The Information talking about AI and branding.
Today I want to talk about what I call “tetris” business models. I wrote about this 4 years ago on Medium when I was still active there, but want to expand on it here. Here is what I said in that piece:
If you are a startup building the technology to power an Amazon Go style store — all tech, no employees, the question is, should you sell the tech to retailers, or should you build stores and compete with them? You capture more of the value created if you become a retailer, and you can customize and more tightly integrate your offering rather than make it standardized enough to be a product that appeals to a large part of the market. But, that takes more capital and time, and expertise in retailing that you have to hire.
What is starting to emerge from watching a lot of these companies struggle with this decision is that many of them will be able to do both.
There are plenty of precedents for this. The most notable is Amazon’s realization in the mid 2000s that running scalable on-demand I.T. infrastructure was a core competency, thus a business it should be in for others. Uber has also done a similar thing recently with mobility software.
In the AI space, this will be even more possible than before. Digital business models and cloud computing made this possible because the marginal cost of serving a new customer was low and these models are very scalable. Now AI will make that possible for things like learning, prediction, and automation.
We call them tetris business models because they are built in different configurations than we are used to. Common business sense, historically, says you expand in one of two directions. One is, you have a core customer, and you make a product offshoot of your core product to sell to that same customer. Two is, you have a core product, and you tweak it to take it into a different market.
But in this new world of AI tech, you get these weirder business models that still make sense, like being a vertically integrated tech convenience store but also selling your tech like a SaaS company. The way you build looks funny compared to previous waves of technology.
These tetris business models are arising because of the issues and opportunities of AI. One is that execution of almost everything is going to get easier because of AI. So, the parts of a business that AI can’t impact very much will get so much more valuable. Secondly, your assets in an AI business are often data and models and, those may give you an advantage in areas that are quite different than your core initial business model, at least from an investor perspective.
When I’ve spoken to companies who are building these tetris style businesses, the general feedback is that most investors hate them. It seems “unfocused.” And investors tell them “you can’t do both.” I disagree. The right thing to do is go after both (or more).
As an investors, you have to throw off your biases for how the last wave of businesses were built, and you have to reason from first principles again. What are the real assets and capabilities this business has, and where can it compete against others? And if those assets give it a competitive advantage in two markets that seem very different, the right call may be to go compete in both markets if the company has the resources.
At HalfCourt, we love these business models and so if other investors tell you “no”, come talk to us. We’ve invested in several of these and we understand how to evaluate the tradeoffs. We think it’s a few years before most investors catch up and realize these tetris business models can work. So if your business has a product or GTM configuration that other investors think is “unfocused” or doesn’t make sense, we’d love to hear about it and give you our opinion. So please reach out.
Thanks for reading.