Bits and Atoms: Building a Trillion-dollar Tech Ops Company

Nikolaus VolkJan 13, 2022

Operations and Assets in Silicon Valley

Whoever decides to start fundraising for a company that involves (a lot of) physical assets and operations soon realizes that there is an unwritten law, amongst Silicon Valley investors, that you should avoid (in-the-real-world) operations at all costs. Operations-heaviness is considered dangerous waters that you should avoid. And given that operations-heaviness is considered bad, then asset heaviness is considered even worse. “Being asset-heavy” is considered taboo and hazardous for many traditional Silicon Valley tech VCs. You might as well write “don’t invest” on the first slide of your pitch deck.

At Kyte, we have a contrarian and provocative view on many of these elements. So, in the following, we’d like to unpack a few core elements around tech startups, operations, and assets in Silicon Valley.

Rewarding but hard problems

When we started Kyte, one of the core driving forces was that we were incredibly excited by solving real problems in the real physical world. We believe solving problems in the physical world is the most exciting and interesting space to be in - you impact people's lives in a very direct and tangible way, you make the real world more efficient, and you help the world use its limited resources more efficiently, and thus you contribute to a sustainable future with more optimal resource allocation.

On the flip side, these are also the hardest problems to solve. There are so many companies in the “Uber for X” marketplace graveyard that infamously failed (valet services, delivery services, concierge/private services, etc, etc). Let’s unpack what exactly is so hard about them and unpack some “myths” that can explain this aversion of Silicon Valley investors. Then, let’s define how to crack these beasts.

Unpacking what is really hard and how to do it right

• Dealing with operations and assets is hard, really hard, because things in the real world break, they depreciate, they become dirty, data is noisy, and things are by default never “clean” (it's about cars, assets, but also about sensor data, signals, measurements, etc). Everything is 10x messier than in the purely digital / software world.

• Dealing with operations and assets is traditionally not a core competency of Silicon Valley. It’s not what a lot of Tech VCs understand. And what you don’t understand, you don’t invest in.

• Gross margins are oftentimes slim, CAC can make or break your company, … and ultimately it’s expensive to add humans into an equation. (In particular, in developed countries with a high salary level.) Physical goods have different profit equations than pure software products. A lot of people underestimate these mechanics and get deceived by amazing initial consumer reviews … of course I would buy an on-demand service that delivers cute dogs to my door for petting if it’s cheap and convenient, but “product market fit” is not really product market fit if the economics don’t work. Afterall, anyone would buy a dollar for 95 cents.

• Asset heaviness often means a different form of capital - debt capital, loans, … these are different types of capital than venture capital. Brutal covenants, very different terms, etc. Banks, with very different risk profiles than venture capitalists, protect themselves in very different ways than venture capitalists. Banks can never lose, VCs can. It’s scary at first;it's a different type of being on the hook. It's a different ballgame than an easy multi-million dollar SAFE round and then you go back into your garage to write code.

The solution: If you are building a company with ops and asset components, you have to do it right and you have to operate at a different (much higher) level of excellence than other companies.

Here are some core “recipes” if you still decide to tackle such a beast:

1. Gross margins are lower, so focusing on unit economics is more important than ever; you have to build a really healthy / sound business from the beginning. You cannot let amazing consumer reviews in the early days deceive you into a world of unsustainable economics in the long run. And you cannot explain away bad economics with “economies of scale” in every single aspect of your business. Yes, economies of scale are real, but they are almost always pitched as more shiny and more important than in reality.

2. You have to earn your growth. A good framework for earning your growth is to focus on driving a single market to profitability. Focus on n=1, then n=2, and then scale to n=10. Get your local economics into good, better, great shape, and then scale from there.

3. Build in sequences and don’t underestimate complexity at any point in time. You have to earn taking on more of the ops value chain. Kyte started on the shoulders of rental car companies, and now, 3 years later, we literally own and control hundreds of vehicles. But we are still not doing EVERYTHING ourselves. We are not repairing cars ourselves. We do not own auto shops …. . We are very cautious with the pieces of the stack that we take on.

4. Most importantly, you have to hire great people that are really good at doing all of this. Think from first principles and don’t think that the SF Bay Area has all of them. You both need people that have seen crazy stuff… accidents, lawsuits, real stuff going wrong, as well as the best raw talent that fits your company. And realize that you have to be so good, so freaking good, to build this business. You have to be scarily good; it can’t be overemphasized enough. We are looking for incredibly good people. People with raw intellectual horsepower, humbleness, the attitude to reflect and learn, the drive to tackle the hardest and scariest problems with grit, persistence, and pure force, and ambition to win and go big.

5. And lastly, don’t think it's easy. At Uber, people always said: Nobody just lets you build a billion dollar company. Nobody is handing it just to you. You have to fight for it. It’s true, it's incredibly hard, so you have to hire for this level of resilience, persistence; you have to hire people who, when getting slapped in their faces, don't lose their persistence and continue fighting back with all their energy, or even more.

Creating true trillion dollar value

Marrying bits and atoms

When we started Kyte and even more when we started to scale it, we realized we need to make a statement about operations vs tech. We cannot implicitly take the answer to this question for granted and assume it works. We have to make it explicit.

Here, in a nutshell, is the type of company Kyte is:

We are 100% a tech company. We are 100% an ops company. We are both.

Note, it’s not an “either … or”, it’s an “and”. This is super important. This means that operators are equally valued and respected at Kyte as engineers, product, growth, data folks, etc. Operational excellence and engineering/product/ growth/data excellence are both target states that we are striving towards. It’s the intersection of software and operations, data and real assets in the real world, across bits and atoms. We’re building the real on the ground operations, the turn-arounds, the maintenance, the customer operations, the asset management. And at the same time, we need the digital world where it's about the bit. Creating magical products for users and Kyte surfers, efficient growth engines, seamless in app experiences, building algorithms that literally dispatch hundreds of trips per day for Kyte. These bits manage hundreds of vehicles across Kyte’s markets. It’s complex and you can only manage it with the best software stack possible.

Why this is valuable

There are very few players in the space that can own the full spectrum, who can be excellent in BOTH. Google can't do this (and they have shown that they cannot do operations and assets really well, e.g. that’s why they are using Avis to service their fleet of Waymo cars).

Hertz can’t do this (they’re an ops-only player and have shown they are not able to build a great technology enabled product experience). It's funny that Uber uses the phrase “Bits and Atoms” and claims to be a company that understands assets. I would say, they don’t. Examples here involve the fact that the bike and scooter programs didn’t take off for Uber, as well the infamous “Xchange leasing” program (the program where vehicles were rented to Uber drivers) didn’t make it. Uber loves to be a technology marketplace, and Dara literally came from Expedia so the “Marketplace”-DNA makes sense. Maybe, with some of the old leadership, Uber would have the potential to go after an Amazon sized opportunity and seriously take on the asset and operations game, but it doesn’t look like they are willing to go after this anymore.

What we at Kyte are doing is super hard. But if we get it right, it’s incredibly valuable. That’s also why Amazon is a $1.7 trillion company. They marry bits and atoms in a beautiful and complex way - both for core Amazon as well as for AWS: Amazon is literally operating hundreds of fulfillment centers with ten thousands of vans, as well as their own data centers across the globe - with real assets on the ground, and with the best software stack orchestrating this engine. Building and scaling out this engine and infrastructure is extremely hard at first and requires an insane level of operational and technological excellence, but once you build it, it’s one of the strongest infrastructure moats of our time. There are very few companies that get this right. However, if you tackle bits and atoms in the right way, you will make it.

Conclusion

At Kyte, we are bold to take on one of the hardest problems out there. We don’t run away from operations or assets. Instead, we embrace dealing with the real world because it is hard, not a lot of companies are good at it, and because we know that if we get it right, it is tremendously valuable. We are diving head first into it.

We are looking for the best operators and the best engineers, growth, product, data, supply, finance, BD folks. You will be able to solve hyper complex and massive problems on a truly global scale. We are building some of the most complex logistics algorithms, growth engines, fleet intelligence systems, etc. that you can imagine. Everything involves bits and atoms at Kyte - and orchestrating this is our secret sauce.

Nikolaus Volk is a co-founder of Kyte.