Commoditization
Innovation happens when rare becomes routine
Happy Thursday, 👋
Commoditization. It’s a term that many startups avoid because it often signals lower margins and tougher competition. However, it’s also a driving force behind societal progress, making once-exclusive technological advances broadly accessible and creating new opportunities for innovation. From groundbreaking ideas to transformative products, most significant advancements, over time, shift from being expensive with limited availability to accessible for most of society. The cell phone and personal computer are great examples: once scarce and expensive, they are now integral parts of daily life. Often, product transformation may feel like the end of innovation because it marks a shift from groundbreaking differentiation to widespread standardization. However, rather than signaling stagnation, commoditization serves as a cornerstone of how we advance by leveling up society and creating new foundations for progress. For venture capital investors, understanding this dynamic is critical to identifying future opportunities.
As investors, we are constantly asking the question: How can we spot opportunities in a world where today’s cutting-edge breakthrough becomes tomorrow’s commoditized product? The answer lies in adopting a dual mindset: identifying products and ideas that resist commoditization while also recognizing the opportunities created by the process itself. This week, we dig deeper into these ideas and share practical insights to help founders and investors navigate this dynamic.
The Role of Commoditization in Progress
Commoditization happens when innovations become widely available, driving down costs and increasing accessibility. It’s not just inevitable, it’s essential. By transforming the rare into the routine, commoditization lays the foundation for new waves of innovation.
The internet provides another good example. It started as an academic experiment to connect universities and share research. Over time, it transformed into what is now essentially a utility we view similarly to water and electricity. Its commoditization allowed numerous industries to emerge, such as e-commerce, social media, education, and the growing AI space.
Eventually, the business cycle catches up with innovative developments. Profit margins for early innovators shrink as competition increases, and once-unique products risk becoming indistinguishable from their peers. For founders or investors, the consistent challenge is anticipating what future developments can benefit from prior innovations become increasingly common.
Riding the Wave of Commoditization
While some view commoditization as a threat, others view it as an opportunity to build transformative businesses on the foundation of accessible technologies. This ability to embrace commoditization has become a hallmark of successful startups and a key area of focus for investors.
Building on Commoditized Foundations
Successful startups take advantage of the lowered barriers created by commoditized technologies:
🧬 Healthcare Startups: Sequencing DNA was once a monumental task, costing billions of dollars and taking over a decade to sequence the first human genome. Today, thanks to commoditized genetic sequencing technologies, the same process can be completed in a single day for just a few hundred dollars. This dramatic reduction in cost and time has enabled startups to focus on groundbreaking applications like personalized medicine and ancestry analysis, unlocking entirely new markets and opportunities.
☁ Cloud Computing: Years ago, startups needed to invest heavily in physical hardware and infrastructure to build products. Today, with advancements in cloud computing and broadband speeds, startups can access scalable resources on-demand through platforms like AWS and Azure. This has allowed teams to collaborate and innovate without the burden of expensive infrastructure or even a requirement to be in the same location.
Identifying Opportunities in Commoditization
For venture capitalists, the challenge is spotting technologies that are at the inflection point of commoditization and understanding the opportunities they unlock. Critical questions we ask include:
Which foundational technologies are becoming more accessible?
How does the accessibility of these new technologies reduce barriers for new entrants?
What emerging industries or applications could benefit most from these changes?
Example: Transportation’s Evolution
The commoditization of GPS and smartphone technology enabled the rapid growth of ride-sharing platforms like Uber and Lyft. These companies leveraged existing, widely accessible technologies in smartphones to create innovative services that transformed transportation. Uber and Lyft didn’t need to build a global GPS system or develop hand-held hardware. Instead, they capitalized on the commoditization of smartphones to develop software that provides easy and fast access to transportation.
By recognizing the path of commoditization within industries, investors and founders can identify early signals such as cost reductions, increasing accessibility, or standardization trends. This enables them to proactively uncover or develop ideas that take advantage of these shifts, building innovations that may not have been possible a few years prior. It’s the companies building at the forefront of commoditization that are able to create entirely new markets.
Final Thoughts: Commoditization Paradox
The commoditization paradox is the heart of progress and innovation. By transforming the rare into the routine, commoditization unlocks potential that society couldn’t previously imagine. For venture capitalists, this is both a challenge and opportunity to recognize which ideas will endure and which waves of commoditization will create the next great investments.
As we move forward, the rapid pace of technological advancement means the opportunities to build on commoditized foundations will only grow. Investors who embrace these cycles, spotting the inflection points and supporting visionary founders, are the ones who will help shape the future.
Ultimately, building the future requires a partnership between visionary founders and strategic venture capital. Venture capital isn’t just about funding businesses; it’s about enabling transformative change by empowering founders to realize their groundbreaking ideas. Historically, this collaboration has propelled industries like technology, healthcare, and transportation to new heights by identifying and supporting opportunities in commoditized advancements.
Together, investors and founders fuel the engines of progress, turning innovations into accessible solutions that reshape the world. Founders provide the vision and drive, while venture capital provides the resources and strategic guidance to navigate challenges and amplify impact. It’s about working together to find the sparks of innovation that thrive in the margins of change and turning them into transformative forces that drive society forward. With the right strategies, partnerships, and courage to embrace the commoditization paradox, the possibilities are endless.
Wishing everyone a great weekend,
-The Caymont Ventures Team.