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Playing the Right Games
Anyone who's ever asked me for career advice knows that I'm fond of two principles. The first and most important is playing long-term games with long-term people. The second is playing the "right" game is more important than 90% of other variables.
The latter principle isn't just good career advice. It's good company-building advice too. Being great isn't enough; you have to do it in the right markets.
The inverse of this principle is also true. Building in the right market creates optionality when a startup is trying to find its way, and when things go right, the tailwinds are often exponential.
Veeva Systems illustrates the power of playing the right game better than any company in recent memory. Healthcare spending has grown at least 6% annually since 2000, and healthcare administrative costs are closer to 8% - resulting in a market roughly 3.2x larger in just two decades.
Procore is another excellent example. Despite struggling in its early days and raising a down round, it's now valued over $10B. Soft costs in construction range from 25-50% per project. In January 2021, construction-related spend was roughly $1.5T, a number that's remained relatively steady over the last decade outside of the 2008 financial crisis and COIVD-19—playing in big markets buys time.
This isn't just true for company-building. It works in investing too. Over the last several decades, the most successful venture firms have played on under-appreciated but large and growing markets. At first, it was technologies associated with the semiconductor, then processing power and storage, then the internet, then mobile, then cloud. Now, it's moved into large sectors like Fintech, software architecture, and data.
It may seem odd to say now, but all of these industries were under-estimated at the beginning. Personal computing seemed like something only "geeks" would buy, the internet was for academics and defense, banks can't be disrupted, and so on.
All of this brings me to the energy transition and digital industry. The energy and industrial sectors account for $11T in GDP yet have traditionally been among the smallest investors in technology.
This is changing in a big way. Over the next five years, Gartner expects software spend in these industries to grow roughly 20% per year. Not only will software spend increase, but new industries will be created as well.
We'll see new software opportunities in industries like solar (20.5% CAGR until 2025), batteries (14.1%), digital manufacturing (16%), and electric vehicles (24.3%).
These are the growth rates that take markets from large to massive and investment returns from good to game-changing. Yet, for some, the market still seems small.
Underappreciated trends in large and growing markets - these are the games worth playing, and I suspect we'll see the next Veeva, Procore, or Plaid built in these industries over the next decade.