Cutting your teeth in low-end markets

Yesterday, we had our USV annual meeting, and as we always do, we invited a few portfolio companies to present on their businesses and progress. This year, two companies I work closely with, Rune and Relay, both presented, and I realized they both have something very interesting in common: they both started out serving the very low-end of the market, and this caused them to come up with a hyper-efficient, low-cost delivery model, which has benefited them greatly as they’ve scaled and gone up market over time.

In the case of Rune: Rune mass-produces micro data centers that are co-located at places with excess power capacity (typically: solar & wind farms and EV charging depots). In the early days, the whole premise was that Rune could tap into bits and pieces of stranded power (eg the ~30% that’s lost on the conversion from DC->AC at the inverter, since Rune sits behind the inverter and is direct to DC), and could monetize that in the always-on bitcoin markets. Taking this approach forced Rune to adopt a super low-cost and hyper efficient approach. Rune is ruthlessly minimalist: from the physical footprint (no construction, not even a concrete pad; just a rugged box with server racks and a starlink) to the choice of compute hardware (initially: a variety of older model ASICs that were available at a discount). Over the years, as they’ve transitioned from bitcoin mining to AI inference workloads, they have moved up-market to higher-value compute but have kept the low-end spirit of rugged minimalism. This has enabled them to scale extremely fast while keeping costs low and performance high.

In the case of Relay: Relay is a crypto payments platform and decentralized cross-chain exchange. Today they’re doing billions of dollars in monthly volumes and serving all of the breakout use cases in crypto (eg. social trading apps like Fomo, new chains like Robinhood chain, new asset classes like perps and prediction markets). They’re able to do all this with incredible performance and speed, all because of where they came from. The initial product was focused on purchasing low-value NFTs cross chain (via a prior generation product, Reservoir). Starting here forced them to invent a model that was ultra low cost and extremely fast. With that founding heritage, as they’ve grown in scale and gone up market, it has allowed them to deliver a level of performance and cost that’s unmatched in the market.

Cutting your teeth at the low end has dual benefits: the first, as described above, is that constraints breed creativity and force you to operate under extreme and difficult conditions. The second – which is also apparent with both Rune and Relay – is that starting at the low-end typically means more scale and more reps, since each unit of work is smaller (and so are the margins). So really there it’s the combination of these two forces working together that have the potential to forge amazing things out of really difficult initial conditions.

All of this is just a good reminder that sometimes starting out in a hard place can have profound downstream benefits.

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Thank you to Jason from Relay and Will from Rune for the awesome presentations and for the feedback on this post.