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Why Being Vertically Integrated Matters for European Tech Entrepreneurs in Tangible Industries

Defensibilities drive value.

I could not stress this enough.

Some people tell founders: “Don’t worry about defensibility, focus on growth”.

Worst advice ever… especially for European founders.

James Currier (NfX)

There is a fundamental difference between competitive advantages such as speed and defensibilities regarding value creation.

If you build a business with good competitive advantages, your value grows linearly as you grow revenues. But if you’re able to move past competitive advantages to defensibility — the ability to protect your business from competition — your value grows exponentially.

When it comes to creating an experience based on tangible assets (such as in IoT, real estate, etc), the way you are interacting with those tangibles assets and your domestic market is critical to your overall success in building a valuable business.

By Thomas Tcheudjio

If you (= your business) are asset-light, meaning you are managing the tangible part, you won’t have the troubles coming with tangible assets (high upfront investment, working capital, less scalable unit economics).

However, your barrier to entry is weak because competitors can easily manage those same assets.

The only way to build defensibilities is to blitzscale (high growth, high cash burn) to reach as fast as possible increasing returns to scale. A fancy way to say that a business benefits from economies of scale while being scalable.

Nevertheless, don’t forget the domestic market.

Compared to the US or China, the European market is fragmented from a customer perspective.

Let’s take cuisine for illustrating my point.

Most cuisines from all over the world taste good. But a Thaï restaurant aiming to target the French mass-market needs to adapt food spiciness to French tastes.

The same is true for experiences.

It might be good in your domestic market, but you really need to fit the local culture of each country if you want your experience to be purchased.

In essence, blitzscaling a tangible-related business in a context of market fragmentation (Quadrant 2) is not, according to me, the best strategy to build a defensible — hence valuable — business.

You don’t really have the benefit of increasing return to scale before it’s quite late in the game.

And, one of the things you see crystal clear in Tech is how much competition emerges whenever anything works.

However, if your business is integrating the tangible part (asset-heavy), you certainly are less scalable but you will have defensibilities, based on a unique experience no other competitors could copy.

As you are in a smaller market (Quadrant 3), think rather of economies of scope rather than economies of scale.

That’s the case of Yesitis Company which I’ve recently supported in its €8.7m Series A.

Yesitis Company has started building an IoT platform, then has buyout a unique IoT manufacturing plant.

Yesitis Company becomes, then, an infrastructure for incumbent Enterprise companies aiming to build value-added IoT-related lines of business.

For example, a company that sold undifferentiated vegetable seeds for decades has started to sell personalized gardening recommendations. Very difficult to offer such a kind of experience.

Also, momentum is good for asset-heavy entrepreneurs because the financial services industry is mature to provide them capital with the funding they need.

It’s not only the already traditional venture capital designed for blitzscaling but more diverse, complex funding options between classic equity and classic debt.

Thanks for reading!



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