Our Thesis on Systems of Record

In our thesis on AI, we discussed the ever-increasing importance of data. To build a truly great AI, you need access to unique data sets. However, AI is just one of the applications that can be built on top of data. You can also create workflows, platforms, and marketplaces.

At 2048 Ventures we believe the next generation of venture scale returns will accrue to companies creating Systems of Record. At the core of these companies is a powerful form of data which exists across many industries and presents an opportunity to build a platform business with very strong moats.

What is a System of Record?

Let’s start with an example — Shopify.

Shopify started as the System of Record for the online catalog of e-commerce brands. What they’ve built is an easy way for an e-commerce brand to enter, update, and manage the products they sell, and display them in an online store. Next, they expanded into payments.

With its payments product, Shopify became embedded in the money flow for every single purchase in every one of their stores. Then, Shopify launched an API and an app marketplace, connecting online sellers with developers eager to sell a wide range of products — from analytics to image editing, couponing, and more.

Shopify transformed from a System of Record into a Platform. This is the most interesting thing about Systems of Record -- their ability to become Platforms.

How Systems of Record become Platforms

Data is the lifeblood of any business. All the code -- internal and external -- wants to access the data to compute and to make money. That's exactly why Systems of Records are so valuable because they are the gate keepers of data, and are able to monetize the access and the flow around this data. The more interesting the business the more activity you will get around it, and the more nonlinear unlocks and scalability it will enjoy.

These Systems of Record are everywhere. They are the backbone of many industries, particularly in long-tail sectors like online sellers, hairstylists, restaurants, doctors, financial advisors, real estate agents, banks, and more.

Systems of Record are related to SaaS businesses, but they have stronger business moats. A plain SaaS product might store data, but it typically offers linear services to do specific types of work. Most SaaS does not have nonlinear unlocks or a platform potential.

On the other hand, Systems of Record are nonlinear, offering many lucrative unlocks, and much stronger moats over time.

Systems of Record may start as a CRM or catalog or another kind of store of valuable data, and then expand into payments, marketing, payroll, insurance, lending, product sales, website management, scheduling, API, app stores or marketplaces.

3 Examples of Systems of Record

Let’s look at a few more examples from the 2048 Ventures portfolio.

AirspaceLink is the system of record for drone flights beyond the visual line of sight.

• The company works with local and state governments to define permissible routes for drones to fly.
• At its core, AirspaceLink has databases of these routes —a kind of System of Record.
• Every single drone has to call into the AirspaceLink API before it flies.
• AirspaceLink can monetize these API calls similarly to how Amazon Web Services are monetized.
• Beyond API calls, AirspaceLink has launched several apps, and most notably, a marketplace where other companies working in the drone space can plug in.
• Much like Shopify leveraged data to capture payments and create a marketplace for apps, AirspaceLink is doing the same through its API and marketplace.

Another example is a portfolio company called Impilo, which is rapidly becoming the System of Record and a leader in the at-home patient monitoring infrastructure space.

• Impilo offers logistics and data APIs to its customers — health systems.
• These customers use Impilo to provision glucometers, heart monitors, and other devices in patients’ homes.
• Impilo then uses software adapters to get the data off those devices into its cloud.
• This System of Record for patients' data is then used by health systems to monitor patients' health in real time.

GlossGenius supports 70,000 beauty professionals in their daily practice.

• The company started with a CRM and built an incredible app around the CRM, which now includes scheduling, marketing, payroll, and much more.
• Similar to Shopify, GlossGenius is in the money flow of every transaction — they get a cut from every haircut.
• Like Toast, GlossGenius offers its own payment terminals (though GlossGenius terminals look much more fun).
• This is a powerful, nonlinear unlock that doesn’t exist in regular SaaS businesses. With this unlock, GlossGenius is part of every single transaction.

Common Elements and Unlocks in Systems of Record

At 2048 Ventures, we are obsessed with Systems of Record and what we call "Data Capture Machines." We seek to invest in businesses that capture and own interesting data, turning it into long-term moats and venture-scale outcomes.

These Systems of Record can become incredibly powerful and scalable. Here are some common elements we find exciting:

Step 1: Capture the Customer

• Start with critical data capture, typically CRM or a catalog.
• Sell a powerful workflow to the customers and capture the data.

Step 2: Create Stickiness

• Build key apps on top of the data to ensure stickiness and provide more customer value.
• Offer website and social media management.
• Provide marketing tools.
• Launch AI tools specific to the business category.

Step 3: Nonlinear Unlocks

• Capture payments between businesses and their customers.
• Launch an API and developer app store.
• Introduce financial products such as insurance, lending, and payroll.
• Monetize through product sales, B2B or B2C marketplaces, networks, and more.

If you are a founder building a System of Record or another type of data capture machine with the potential to become a platform, we’d love to talk to you.