Category Archives: Entrepreneurship

the best startup ideas seem at first like bad ideas

Source: Paul Graham blog, Sep 2012

the best startup ideas seem at first like bad ideas. I’ve written about this before: if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.

The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled “seems like a bad idea” and the other “is a good idea.” The intersection is the sweet spot for startups.

This concept is a simple one and yet seeing it as a Venn diagram is illuminating. It reminds you that there is an intersection—that there are good ideas that seem bad. It also reminds you that the vast majority of ideas that seem bad are bad.

The fact that the best ideas seem like bad ideas makes it even harder to recognize the big winners. It means the probability of a startup making it really big is not merely not a constant fraction of the probability that it will succeed, but that the startups with a high probability of the former will seem to have a disproportionately low probability of the latter.

WeWork – Counterfeit Capitalism

Source: Matt Stoller blog, Sep 2019

WeWork, because it’s just such an obvious example of self-dealing couched in New Age management consulting speak. Its CEO, Adam Neumann, was just forced to step down.

The Stupidity of WeWork

WeWork describes itself as offering the ‘“space-as-a-service” membership model that offers the benefits of a collaborative culture, the flexibility to scale workspace up and down as needed and the power of a worldwide community, all for a lower cost.” In other words, the company sublets office space.

Generally speaking, Softbank’s model is to manipulate private capital markets as a way of drowning out competitors with cash.

For instance, there were several ‘rounds’ of WeWork investment where Softbank was buying more shares at higher valuations. WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary.

WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.

Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services.

What predatory pricing does is to enable competition purely based on access to capital.

Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to *make* money.

Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.

Another example was the Worldcom fraud in the late 1990s, which forced the rest of the U.S. telecom sector to over-invest into broadband. Competitors have to copy their fraudulent competitors. It’s a variant of Gresham’s Law, which says that “bad money drives out good.” If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity. That is what is happening in our economy writ large, a kind of counterfeit capitalism as ‘leaders’ like Neumann are celebrated and actual leaders who can make things and manage are treated like dogshit.

This kind of counterfeit capitalism is terrible for society as a whole. At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’

As euphoria in capital markets takes hold, predatory pricing scheme come to entirely wastes capital on money losing enterprises, and eventually these companies become Soviet-style generators of white elephants and self-dealing.

The men and women who run them have to be charlatans, because they are storytellers justifying losses. Powerful men like Dimon are sucked in, consultants start explaining to old-line economy companies how they too can become like WeWork, and eventually more and more of the economy just adopts counterfeit capitalism.

Across the West, the basic problem of a corrupted productive process is becoming a quiet crisis. The reason is simple. The people that do the work in organizations are increasingly excluded from the decision-making about the work.

That is why Boeing is losing its ability to build planes, why we can’t build infrastructure, and why New York City is on the verge of disaster. And the cherry on top is investors pouring money into enterprises that aren’t even speculative, but are purely loss-making, because they find a destructive personality like Adam Neumann compelling.

If we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away. We can then get back to the business of making and selling things to each other without engaging in celebrated cases of fraud and abuse under the guise of ‘quirkiness.’

On China: Technology, Innovation and Growth

Source: Dan Wang, Jan 2020

The main ideas can be summed up in two broad strokes.

  1. First, China’s technology foundations are fragile, which the trade war has made evident.
  2. Second, over the longer term, I expect that China will stiffen those foundations and develop firms capable of pushing forward the technological frontier.

It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP. (That’s why, I think, that the companies in Beijing work so hard. Since no one has any real, defensible IP, the only path to success is to brutally outwork the competition.)

I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.

How about emerging technologies like AI, quantum computing, biotechnology, and hypersonics, and other buzzing areas? I think there’s no scientific consensus on China’s position on any of these technologies, but let’s consider it at least a plausible claim that Chinese firms might lead in them.

So far however these fields are closer to being speculative science projects than real, commercial industries. AI is mostly a vague product or an add-on service whose total industry revenue is difficult to determine, and that goes for many of the other items.

In my view, focusing the discussion on the Chinese position in emerging technologies distracts from its weaknesses in established technologies. Take semiconductors, machine tools, and commercial aviation, which are measured by clearer technical and commercial benchmarks. They are considerably more difficult than making steel and solar panels, and Chinese firms have a poor track record of breaking into these industries.

The focus on speculative science projects brings to light another issue around discussions of China and technology: an emphasis on quantifying inputs. So much of the commentary focuses on its growth in patent registrations, R&D spending, journal publications, and other types of inputs.

One can find data on these metrics, which is why measures of “innovation” are often constructed around them. But these inputs are irrelevant if they don’t deliver output, and it’s not clear that they often do, neither in China nor anywhere else. Wonderfully asymptoting charts on Chinese patent registrations and R&D spending suggest that Chinese firms might overrun the rest of the world any day now. So far however the commercial outputs are not so impressive.

Learning by doing

I think however that long-term prospects are bright. In my view, Chinese firms face favorable odds first in reaching the technological frontier and next in pushing it forward. I consider two advantages to be important. First, Chinese workers produce most of the world’s goods, which means that they’re capturing most of the knowledge that comes from the production process. Second, China is a large and dynamic market. On top of these structural factors, Chinese firms have stiffened their resolve to master important technologies after repeated US sanctions.

My essay How Technology Grows argues that technological capabilities ought to be represented in the form of an experienced workforce. We should distinguish technology in three forms: tools, direct instructions (like blueprints and IP), and process knowledge.

The third is most important: “Process knowledge is hard to write down as an instruction: you can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but absent cooking experience, it’s hard to make a great dish.”

We should think of technology as a living product, which has to be practiced for knowledge even to be maintained at its current level. I offered the example of the Ise Grand Shrine, which Japanese caretakers tear down and rebuild anew every generation so that they don’t lose its production knowledge.

Here’s an example I came across more recently: Mother Jones reported in 2009 that the US government forgot how to produce “Fogbank,” a classified material essential to the production of the nuclear bomb, because relevant experts had retired. The government then had to spend millions of dollars to recover that production knowledge.

I believe that the hard-to-measure process knowledge is more important more easily observable tools and IP. We would be capable of making few meaningful advancements if a civilization from 2,000 years in the future were able to dump blueprints on us, just as the Pharaohs and Caesars from 2,000 years in the past would have been able to do nothing with the blueprints of today.

Today, Chinese workers produce most of the world’s goods, which means that they engage more than anyone else in the technological learning process. Few Chinese firms are world-leading brands. But workers in China are using the latest tools to manufacture many of the most sophisticated products in the world.

They’re capturing the marginal process knowledge, and my hypothesis is that puts them in a better place than anyone else to develop the next technological advancements. To be more concrete, Chinese workers will be able to replicate the mostly-foreign capital equipment they currently use, make more of their own IP, and build globally-competitive final products.

https://www.spglobal.com/en/research-insights/featured/a-new-great-game-china-the-u-s-and-technology

 

https://delta2020.com/contact/8-news/191-2030-vision-is-china-set-to-become-the-global-technology-leader

https://voxeu.org/article/technology-diffusion-and-global-living-standards

 

https://www.spglobal.com/en/research-insights/featured/a-new-great-game-china-the-u-s-and-technology

Tech Company Valuations

Source: ZeroHedge, Dec 2019

Technology can be thought of as the development of new tools. New tools enhance productivity and profits, and productivity improvements afford a rising standard of living for the people of a nation. Put to proper uses, technological advancement is a good thing; indeed, it is a necessary thing.

Like the invention of bricks and mortar as documented in the book of Genesis, the term technology has historically been applied to advancements in tangible instruments and machinery like those used in manufacturing.

Additional examples include the printing press, the cotton gin, and the internal combustion engine. These were truly remarkable technological achievements that changed the world.

described by Ben Thompson of stratechery.com –

This highlighted another critical factor that makes tech companies unique: the zero marginal cost nature of software.

To be sure, this wasn’t a new concept: Silicon Valley received its name because silicon-based chips have similar characteristics; there are massive up-front costs to develop and build a working chip, but once built additional chips can be manufactured for basically nothing.

It was this economic reality that gave rise to venture capital, which is about providing money ahead of a viable product for the chance at effectively infinite returns should the product and associated company be successful.

To summarize: venture capitalists fund tech companies, which are characterized by a zero marginal cost component that allows for uncapped returns on investment.

If a publicly traded company can convince the investing public that they are a legitimate tech company with scalability at zero marginal cost, it could be worth a large increase in their price-to-earnings multiple. Investors should be discerning in evaluating this claim. Getting caught with a pretender almost certainly means you will have bought high and will be forced to sell low.

VC Funding

Source: Medium, Dec 2019

Even though only 0.25% of companies receive venture financing, venture capital is an important source of financing that result in an outsized impact on the economy. Some studies estimate that 50% of U.S. IPOs are VC-backed and that these companies account for 20% of the U.S. market capitalization and 44% of R&D spending.

the average firm screened 200 companies and only made four investments in a given year. Once a company is considered at the top of the funnel, the selection process usually looks like the graphic below.

 

 

Become a Billionaire in 5 Easy Steps (with OPM)

Source: ZeroHedge, Aug 2019

Step 1:

Find a product that people love… then make a slightly better version of it, and price it WAY BELOW your cost so that you lose money on every unit sold.

Step 2:

Create a ridiculous mission statement.

It doesn’t matter what you’re selling– your real mission is things like consciousness, happiness, and community. And use the word ‘technology’ a lot. No matter what you’re producing, always pretend that you’re a tech company.

Step 3:

Raise money from investors at an obscene valuation on the basis that you’re a visionary tech company.

Don’t bother forecasting profits and creating conservative pro-forma statements, from which investors can derive a sensible valuation of your business. Instead, let the investors imagine how profitable your company can eventually become.

Step 4: 

At a minimum, double your losses every year. And, as you continue to burn through investor capital, raise even more money at progressively higher valuations.

Step 5: 

At the peak of the stock market bubble, take your company public at twice your last valuation.  Reward these gullible investors with limited voting rights, and consolidate your power over the company as you steer it towards greater and greater losses while showering yourself with gigantic compensation packages.

Google with its 90% market share was the 21st search engine

Source: Bloomberg, Jul 2019

Google is especially worrisome because it has maintained an unopposed monopoly on search worldwide for nearly a decade. It controls 92 percent of search, with the next largest competitor, Microsoft’s Bing, drawing only 2.5%.

http://gs.statcounter.com/search-engine-market-share 

One particular government intervention is especially relevant to the Big Tech dilemma: the 1956 consent decree in the U.S. in which AT&T agreed to share all its patents with other companies free of charge. As tech investor Roger McNamee and others have pointed out, that sharing reverberated around the world, leading to a significant increase in technological competition and innovation.

At the moment, it’s entirely up to Google to determine which bubble you’re in, which search suggestions you receive, and which search results appear at the top of the list; that’s the stuff of worldwide mind control. But with thousands of search platforms vying for your attention, the power is back in your hands. You pick your platform or platforms and shift to others when they draw your attention, as they will all be trying to do continuously.

My kids think Google was the world’s first search engine, but it was actually the 21st. I can remember when search was highly competitive—when Yahoo! was the big kid on the block and engines such as Ask Jeeves and Lycos were hot commodities.

Founded in 1998 amid a crowded field of competitors, Google didn’t begin to dominate search until?2003, by which time it still handled only about a third of searches in the U.S. Search can be competitive again—this time with a massive, authoritative, rapidly expanding index available to all parties.

In Google’s case, it would be absurd for the company to claim ownership rights over the contents of its index for the simple reason that it gathered almost all those contents. Google scraped the content by roaming the internet, examining webpages, and copying both the address of a page and language used on that page. None of those websites or any external authority ever gave Google permission to do this copying.

Who will implement this plan? In the U.S., Congress, the Federal Trade Commission, and the Department of Justice all have the power to make this happen. Because Google is a global company with, at this writing, 16 data centers—eight in the U.S., one in Chile, five in the EU, one in Taiwan, and one in Singapore—countries outside the U.S. could also declare its index to be a public commons. The EU is a prime candidate for taking such action.