A simple investment thesis on Sherpo.
Peter Thiel used to ask the well-known question: “What important truth do very few people agree with you on?” Our answer is simple: “To build a great, defensible tech business requires a lot of time early on spent building great infrastructure.” And that’s exactly what we did at Sherpo. If you’re raising your eyebrows, stick around for a bit. Let us explain.
When we uncovered a “secret sauce” for reaping higher profits than competitors through vastly lower costs (we estimate more than 10x), we knew we could enter the market with a strong chance to win. We also knew that great code, contrary to popular belief, can be a competitive advantage. That’s simply because it’s too hard to change a plane engine while it’s flying. Obviously, crafting a well-functioning plane takes time. Yet, ever since the Lean Startup methodology took over, entrepreneurs have adopted some misguided lessons, convinced that it’s best to just take off and experiment mid-flight—often resulting in a dramatic crash.
Of course, we understand that our Strategy can only work because we are a substitute product in SaaS. It makes sense to test hypotheses quickly in consumer products, unproven markets, or in general when testing features. But is being a substitute really a bad thing? We don’t think so.
Business history teaches us that many great companies have entered well-known markets and won by substitution. What often enables a challenger to unseat the incumbent is a steep change in technology or consumer preferences. Many times, vertical integration is involved. Examples range from the lesser-known Swift’s vertical integration in meat-packing to the better-known cases of Netflix vs. Blockbuster, Amazon vs. Barnes & Noble, AWS vs. IBM, ServiceNow vs. BMC, Booking vs. Expedia, Tesla vs. ICE automakers, and many more. The reason other upstarts often can’t copy the eventual winner is that they made the wrong infrastructure decisions early on, even though at the time, it may have seemed or been the right choice. We think this last specific dynamic explains success stories like Salesforce, Shopify, Stripe, Datadog, monday.com, and many others. Some of these weren’t apparent to many VCs early on, suggesting that maybe this mental model/recurring pattern isn’t yet widespread (it differs from Christensen’s well-known disruption theory).
In short, we could sum up our equation for increased venture success as: better business model × inflection point × better product × operational excellence.
Our investment thesis is simple: vertical integration allows us to dramatically lower costs by not relying on third parties to serve videos. This solves the business model/substitution part. In turn, it enables us to offer unmatched AI features for video, addressing the inflection point (which essentially means there’s a big market to tackle).
But that’s not all. Our “building-blocks” infrastructure, though more complex to build, also lowers development costs, leading to a better product and contributing to operational excellence (of course, we will also need excellence in sales, marketing, hiring, etc.). We believe these factors combined can make Sherpo a powerhouse and increase our odds of success.
Starting from the low end of the market is not just easier, but also long-term Strategic—if churn among small creators is high, we can constantly replenish new ones by being the downmarket leader. The added benefit is that some of them will grow into larger creators, resulting in outsized LTV:CAC ratios.
But we aren’t stopping with small creators. Our vision is to be the OS of any video academy and digital goods store. So, borrowing from the well-known Tesla’s “Secret” Master Plan, here’s our version:
Want to join us in this endeavor? Write us at [email protected].
Giacomo Di Pinto
May 4, 2024
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