Introducing El Cap
Collision theory states that when suitable particles hit each other, only a certain percentage of them will result in a change. These collisions are the ones with enough energy at the moment of impact to break existing connections and form new bonds. In many ways, El Cap’s story is one of collisions—where people, companies, and technologies combine in powerful new ways. This is how our partnership came to be, and it’s a core concept of our investment philosophy.
Before starting El Cap together, we took wildly different career paths. Stew, a Salt Lake City native, spent the first seven years of his career as an NFL linebacker. After retiring from professional football, he joined Goldman Sachs’ investment banking division on the TMT team. His experience there led him to Steadfast, a Tiger Cub hedge fund in NYC, where he invested in technology companies.
Coming out of undergrad, Kunal, an Indian immigrant raised in New York, joined his family’s international logistics business to help modernize operations, grow revenue, and ultimately exit the business. As a lifelong early adopter of technology, his curiosity led him to Collaborative Fund, where he explored early-stage investments and worked closely with existing portfolio companies. Recognizing that there was real value in being on the other side of the table, he later joined Core Labs, a 500 Startups-backed product studio that was focused on building tools around the future of work.
While we are incredibly different people, we do share some similarities. We are both men in our 30s, who enjoy Harry Potter, fantasy shopping on Zillow, and eating Mexican food. We are also drawn to technology, and passionate about its potential as a transformative force and engine of progress. When we collided for a coffee in mid-2018, these shared interests became evident early in our conversation and we quickly formed a strong bond.
Energy alone is not enough for a successful collision. Particles must also be of a suitable type. When we were introduced through a mutual friend—and a forty-five-minute chat turned into a wide-ranging, several-hour discussion—it was evident that despite our differences in experience and as people, we shared a common set of beliefs, priorities, and attributes. Some of these were apparent in that first conversation, others surfaced gradually, in the hours we’ve spent learning, debating, and building together.
In computing, primitives are the simplest elements available. They are the building blocks used to construct everything else. At El Cap, our primitives—teamwork, curiosity, tenacity, and independent-thinking—are the foundation of our partnership; the common ground that enables our constructive and open dialogue. They also underpin the relationships we have with founders and will be the basis for new bonds that we form. While many aspects of our job are focused on identifying and embracing change, our primitives should be immutable. Constants to keep us grounded and stalwart amid the ever-shifting technology landscape.
Another of our similarities is an enthusiasm for the history and evolution of technology. In the early days of our partnership, as we mapped the disruptive path of technology across different industries, business models, and market types, a common theme emerged. In each major disruption, the collision of new technologies and changing behaviors played a vital role—creating reinforcing feedback loops that intensify adoption and accelerate change. A phenomenon with the power to disrupt old models and form new bonds. Despite this common thread, technology’s chronicle has been one of contingencies—a meandering path of switchbacks, dead ends, and missed opportunities, rather than a linear progression from one breakthrough to the next. Meaningful change doesn’t happen on the back of a single innovation, but when a constellation of technologies—some old, some new—reacts to each other in novel and unexpected ways. It is this interplay between seemingly disparate parts that gives technological progress its haphazard nature as well as its potency.
Why are these collisions so impactful? And what makes them exciting from an investment perspective? A collision is effectively a web of interlocking technologies with emergent properties. A combination that creates the potential for new business models, market opportunities, and even entire industries to blossom. Not only do they unlock latent market demand, they provide structural advantages for new entrants as well. In most markets, customer preferences are static and well-defined, thus it is typically advantageous to be an incumbent. In stable conditions, there are few opportunities for new entrants to successfully enter a market. And while it’s not impossible to break in by brute force, it’s certainly hard—like turning the proverbial difficulty setting to insanity mode. But collisions upend the status quo, and customer preferences are no exception. When the customer’s needs rapidly change, the advantage of being an incumbent quickly erodes. All of the corporate sprawl, the root of incumbent power, becomes an anchor hindering their ability to respond. Leaving legacy companies with the operational inertia, and the associated overhead, of a product that fewer customers want.
Collisions can have a powerful impact on customer preferences—a vital ingredient for upstarts looking to successfully enter a market. But they also enable new entrants to build around unique core concepts, fundamental ideas of the job to be done that materially differ from incumbents. By creating solutions with distinct primitive elements that are also more highly attuned to the evolving needs of customers, upstarts in a new market can gain a structural advantage that is difficult for incumbents to counter. It’s these low-level conceptual differences that turn an incumbent’s advantage of an established product and existing user base into a weakness that impedes their ability to counter upstarts.
Take Adobe and Figma as an example. How was a startup, like Figma, able to successfully enter and scale in a design market that Adobe had owned for decades? Adobe had built its design tools for editing photos and images, creating a powerful toolset for isolated design work. Adobe solutions were primarily built with a single user in mind, collaboration was never a native part of their products. As internet adoption became pervasive the demand for digital products sky-rocketed. Projects became bigger and more complex, requiring larger teams of both designers and non-designers to complete. Collaboration became a vital part of the design process for these bigger projects, and with more participants working together on a project version control became a nightmare. The job to be done for design tools had evolved. By leveraging technologies like WebGL and CRDT, Figma built a solution—based on a different set of fundamental concepts—that did this new job well. As a browser-based design tool tailored to help teams collaborate on complex digital projects, Figma can serve new use cases in a way that Adobe structurally can not.
Collisions come in various forms, sometimes they are subtle events, perceptible only by natives of a niche industry. Other times they are violent, deeply impactful tectonic shifts—market entropy incarnate, disrupting the status quo and helping to diffuse new best practices throughout an industry. Collisions are also often interconnected, forming a self-organized meshwork of markets and hierarchies. This co-mingling is key to unearthing new utility from existing technologies through combinations with recent breakthroughs—like microorganisms of the technology ecosystem, re-injecting nutrients vital to future growth.
One of the larger and more exciting collisions today is occurring at the intersection of cloud, connectivity, and data. A collision that encompasses both our investment focus looking forward and all the investments we have made to date. The ramifications of this collision will be tectonic and we are excited to continue partnering with companies leveraging this opportunity.
As monikers for massive trends, cloud, connectivity, and data are loosely defined and widely used. As we think about them: cloud refers to software, databases, and services that are accessed over the Internet, and powered by computers in data centers all over the world. Connectivity is the capacity for different platforms, systems, and applications to interconnect. And, data is information captured, processed, and/or stored by a computer.
By using the cloud, companies don’t have to manage physical servers or run applications on their own machines. Because the cloud allows resources to be shared across many users, it has dramatically lowered the cost of access, allowing companies to leverage computing power they otherwise wouldn’t be able to afford.
Increased connectivity doesn’t just mean more businesses building websites or consumers transacting online, it also signifies the growing appetite for direct connections between businesses; a willingness to leverage things like peer-to-peer networks, APIs, and web applications in core business functions. As connectivity grows, it’s unlocking exciting opportunities and new business cases in nearly every market. The impact of increased connectivity has already been wide-ranging and deeply impactful and it is still early.
As businesses and consumers have moved online, each action they take creates new event data to be captured and analyzed. As a society, we’ll create more data in the next three years than in all of human history. The numbers here are mind-boggling. But not all data is equally valuable, and siphoning through the mountains of potential insights from it can be difficult. As businesses better understand how to interpret and learn from the data available to them, they are able to move faster and more decisively. Efficiently using data to inform business decisions can create material advantages for companies. As data helps define new best practices for building a business, it is also unlocking new market opportunities for businesses to serve.
Cloud, connectivity, and data form a positive feedback loop that is characteristic of a powerful collision. Cheaper access to computing leads to greater capacity for interconnection, which creates more data to store and analyze, and in turn, grows the demand for compute and storage. This flywheel is playing a transformative role across industries and unlocking opportunities that wouldn’t otherwise exist. New frontiers enabled by this collision—like blockchain and machine learning—are already proving disruptive to the status quo and will create trillions of dollars in value.
While the opportunity set is massive, it is critical to avoid the facile conclusion that strong tailwinds will make building a company easier. In fact, the opposite is often true. Collisions are turbulent for markets, a time of transition when the competitive landscape can change quickly. Making even a rough sketch of competitors and partners can be a challenge. Plus, the operational best practices for building in these evolving markets are typically not established. Without the proverbial guidebooks that founders in more stable industries have at their disposal, navigating a business in these conditions can be treacherous.
The fluid aspects of building near collisions are not limited to operations and competition. Often the customers themselves are still learning precisely what they want. A dynamic that brings challenges, but also gives companies the opportunity to change how customers think about their own workflows. Successful companies will introduce better fundamental concepts that meet user needs in a way that pushes their customers forward, spurns greater adoption, and enables new ecosystems to form. The best companies don’t stop there but take an active role in fostering and directing the growth of these ecosystems in ways that further empower participants. Taking a staid approach to building a business is insufficient in today’s rapidly evolving world. Companies have greater visibility into customer usage than ever before, and winners and losers in a given market will be decided by which teams can more efficiently experiment, iterate, and learn. In this paradigm, customer experience is the new logistics, integrations and data are the new suppliers, and rapid learning and iteration are the new operations.
As best practices for building a company evolve, the approaches that investors take must adapt in kind. Finding the proper balance of opportunism and forbearance is the enduring struggle of any investor. Too often, those who have had success doing things a certain way become sclerotic in their approach—rigid and unwilling to adapt. Continued self-assessment is one of the ways we hope to hone our balance and avoid common pitfalls. And as we take stock of the funding landscape, new business formation, and tectonic shifts in how businesses are built, we are more enthusiastic than ever about our positioning and approach. It is an incredibly exciting time to be investing at the earliest stages of innovation.
An investment framework is a formalized and structured method to help with decision-making, serving as a guidepost for decomposing a problem and focusing attention on the most critical factors. It is an important part of the investment process. But in Venture, particularly at the earliest stages, deciding to write a check is only half the battle. We don’t believe that venture investing should be a passive activity, and while we are aware and respect that it is ultimately the team's job to build the business, too many investors use this as air-cover to not get involved at all.
Our approach with a company post-investment is a little different and can be summarized with this simple axiom: add value, don’t just capture it. Capital is abundant, focus and engagement are not. We don’t view an investment as a ticket to ride, but rather as an invitation to roll up our sleeves and get to work. We never want to simply be a check for entrepreneurs. Building is hard, and we believe involved investors can have a material positive impact on the outcome of a business. Taking on project-level work is a defining part of our approach and our willingness to do so is often a differentiator that founders value when evaluating whom to work with. It also enhances the working relationship post-investment, and we can’t imagine doing this job in a more passive way.
Getting closely involved with companies also creates a virtuous cycle for us. Taking on project-level work grows our institutional knowledge by giving us hands-on experience solving problems. This new learning informs future interactions with all companies, deepens our understanding of the challenges that founders face, and makes us better investment partners for the founders we work with. Our goal at El Cap is to be as closely aligned with founders as possible. Regular communication and collaboration help to remove the performative dynamic that invariably exists between founders and investors.
Investing is not an abstract exercise, we are bound to specific companies, full of people with unique imperatives and personal histories. At its core, early-stage investing is a people business, and it is that aspect of our job that gives us the most pleasure: the part that doesn’t fit on a spreadsheet, that resists structure and design. The way in which, when it works, a partnership between investor and operator—and by extension, a company—proves to be a chorus rather than a string of solo acts. When disparate ideas, experiences, and desires are harmonized into something greater than the individual parts. When faced with inevitable adversity, it is the human connections, the bonds formed in joint effort, that fortify an organization and ultimately determine its fate.
This letter is published on our website for two reasons. The first is for you, the founder who is searching for a partner in your journey to build a business. We want you to better understand who we are, what we’re excited about, which values drive us, and how we think about working with people. If a lot of what you just read resonates, then at the very least, we imagine we’d have a great conversation. The second reason is for both of us. We composed this letter at a period in time when we’re scaling our firm and laying a foundation that will allow us to do this work for many years to come. Time and progress have a way of sometimes clouding one’s perspective on what’s truly important. This document serves as a totem for us, something to revisit from time to time, ensuring that we are being true to our past selves, who had all the excitement and clarity of building something new.