Revisiting Full-Stack (5 Years Later)

In a famous blog post in 2014, Chris Dixon described a major shift in the approach of new companies. In the past, companies would sell or license technology to existing companies in the industry. The new approach is “full-stack” i.e. “builds a complete, end-to-end product or service that bypasses existing companies.”

Some would rightly say that the rise of APIs have made it easier to build a full-stack company due to the possibility of outsourcing pieces that were previously difficult to build. For example, a direct-to-consumer subscription brand can build their website with Shopify, manage payments and subscription with Stripe, talk to customers with Intercom, and manage logistics and customer service through Fulfillment by Amazon. The cost and difficulty of starting a business have no doubt dropped.

Although the basic building blocks are the same, great companies are still digging in and rethinking or rebuilding parts of their stack to have full control of the product or service. For some, rebuilding part of the stack is fundamental to their entire approach. For growth stage companies that are scaling, it offers an opportunity to deepen their moat and improve the customer experience.

Differences By Stage

Early (fundamental part of their approach):

  • Brex: use cash in the bank instead of FICO scores to grant credit cards
  • Hims, Ro and many other telemedicine startups – use virtual visits instead of in-person visits to prescribe medications or make diagnoses
  • Lemonade – use AI instead of people to handle insurance claims
  • Uber – use algorithms instead of people to route taxis
  • Petal – [case study below]

Case Study: Petal – Early 

Petal saw a problem in the world of consumer credit: many consumers in the U.S. cannot get access to credit since they have limited or no credit history. I have seen this issue firsthand having worked with low-income people at the City of Boston to advise them on their personal finances.

One of the biggest pain points of getting a credit card is getting approved. Most lenders use a FICO score to screen borrowers’ creditworthiness based on their borrowing history. Again, a third-party service comes with problems: lack of transparency for both the customer and the lender, licensing fees for using the scores and inability to control the onboarding experience.

Petal decided to take a page out of the business lending playbook like Kabbage and rebuild credit scoring to incorporate income, monthly expenses and savings. They use Plaid and Quovo to connect to customers’ bank accounts and make their own underwriting decision. They call it cashflow underwriting and it addresses the issues previously mentioned with the FICO score.

Growth (deepen the moat and improve the customer experience):

  • Warby Parker – built Prescription Check app to conduct eye tests without needing to go in-person to a doctor; hold a patent on measuring distance to screen with phone camera
  • Harry’s – bought the German razor blade factory Feintechnik to control its own manufacturing supply chain
  • Robinhood – [case study below]

Case Study: Robinhood – Growth

Until recently, Robinhood used an external clearing service for reconciling trades between buyers and sellers. However, it has several problems that hampered the company:

  • Unable to onboard new customers over the weekend [the clearing house only operated during the weekend
  • High fees for customers on edge case situations such as bank reversals or overnight check delivery [passed on from the clearing house]
  • Difficult to read account statements and trade confirmations that were incongruous with the [since the clearing house generated them]
  • Robinhood’s developers did not have control over clearing house and thus could not roll out new features / products as quickly.

Did Robinhood find another clearing service? No. They built their own. It took them two years. They hired almost 100 people and received licenses from FINRA, the DTCC and the OCC. It was the only clearing system built from modern technology in the last decade since Vanguard in 2008.

The benefits:

  • Lower fees
  • Improved customer support due to more detailed account and trade information available in-house to support reps
  • Better experience due to ability to control language and look of account statements, tax documents, proxy statements
  • Foundation for shipping new features faster and expanding into different financial services

It is important to understand how companies are rethinking or rebuilding parts of the stack / value chain because they feed directly into a company’s moat / durable competitive advantage. These strategic decisions about rebuilding parts of the stack offer an approach for understanding the core thesis behind a company at the early stage and the investments in infrastructure at the growth stage. These upfront investments (both in terms of time and capital) compound over time.

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