Full stack startup: symptom or clear winning strategy?

I read Chris Dixon’s post extolling the benefits of Full stack startups To paraphrase, Chris discusses that the old way for startups to go to market, particularly those attacking a large market full of incumbents, was to build something and then license it to large entrenched participants. The new way is to build all elements into a single service. Thus the “full stack” definition. In his post Chris mentions Tesla, Nest and Uber as some examples of new startups with a full stack approach.

First let’s look at the merits of the argument more closely

i) Apple is the ultimate full stack company. By guarding the entire stack they made all the other participants in each part of the stack competitors. Early iterations of Android were terrible compared to iOS. Yet Android thrived because hardware, software and telco companies needed it to survive. And now you’re at the point where Apple is again looking at being a high margin, small market share player in a category it initially dominated.

ii) Nest was acquired for $3.2 billion. Let’s be clear that was a fantastic exit for all involved. Yet Nest cited the need to be acquired to continue to scale. It was going head to head with really large entrenched players and it was so far down the full stack path that it had no choice but to be acquired to continue. It all depends on your definition of “scale” but Nest took an approach that later meant they hit a brick wall and decided to get acquired.

iii) Tesla is actively licensing its technology to Mercedes Benz and Toyota This helps defray battery development costs and helps bring multiple parties to the table to support infrastructure. So Tesla is not married to the full stack approach. I’ve always thought Tesla - especially given Musk’s mission - would rather put all the large auto manufacturers to work selling their batteries in electric cars vs one day being just another car company amongst the top 10.

Now I’m neither for or against full stack startups. I think it’s an important decision to be made at the individual company level. I do think there are real benefits to VC’s in full stack companies. Much like Nest, I think they’re a) More disruptive out of the gate b) thus more likely to be acquired and c) large acquirers can justify solid valuations because they know that they can i) tear out all of those full stack costs once acquired and ii) turbo charge revenue by now making the technology available in a mature distribution channel. Of course, those last two reasons are the reasons why you might want to do those licensing agreements in the first place! (to be clear I’m not anti VC at all - I think they play a fantastic role getting companies started that would otherwise never be able to exist)

In terms of being a symptom….the rise (rightly so) of developers and engineers to the top positions in tech startups in the last decade is one reason full stack companies are more popular and more achievable. If there’s a downside it’s also because their comfort level is probably more around building a full stack company vs trying to understand how they’d engage a F500 company in a licensing type of agreement. Their role model is Steve Jobs of the 2000’s and Facebook this decade. Yet Apple’s approach is showing full stack cracks and FB is a pretty unique consumer advertising service. With Elon Musk now becoming the pre-eminent technology leader and clearly showing how to go full stack and partner across his projects perhaps there’ll be a change in thinking.

As a startup CEO I would not be enamored with either approach. I would take a step back and say “Are we going full stack only because we’re culturally not comfortable with engaging the stack?” The answer might be “No, there are really compelling reasons to go full stack” Or it might be “For now it’s the right approach” But if the answer is “We’re culturally uncomfortable engaging the stack” then that’s the perfect opportunity for your VC or advisors to help you find the right person/people to go an engage the stack. I think the cultural piece is happening a lot more often than we’d like to admit.

“The greatest warrior would always rather fight with 100 men than against 100 men” - some quote I heard one time but have no idea from whom.