Category: Institutions and Revolutions

How Venture Capitalists Don’t Really Play the Role We Believe

In this must-read Harvard Business Review article ‘Six Myths About Venture Capitalists‘, Diane Mulcahy shows that Venture Capitalists (VC) don’t really play the role that conventional knowledge would expect.

Diane Mulcahy is also famous for being a Venture Capitalist herself and having written a well-known report (‘We Have Met the Ennemy… and He is Us’ accessible here in pdf)showing that Venture Capitalist’s return on investment is quite abysmal.

So what are those 6 myths?

  • Venture Capital Is the Primary Source of Start-Up Funding
  • VCs Take a Big Risk When They Invest in Your Start-Up
  • Most VCs Offer Great Advice and Mentoring
  • VCs Generate Spectacular Returns
  • In VC, Bigger Is Better
  • VCs Are Innovators

Basically it appears that VCs encounter the paradox of being institutions that deal with something very fluid and unstable, startup companies. And obviously their constraints as institutions do not really allow them to provide the kind of support and value that startup would need. And VC does not scale well: it works best as a “cottage industry” – personally I can that ‘craftsmanship’.

The most interesting part is how little VCs actually contribute to the funding of young companies overall – less than 1% apparently. Still they seem to make the US startup scene quite dynamic, but behind the hype, the situations isn’t so rosy.

Venture Capital is only one solution for funding a fast-growing company, and it may not be the best or most adapted. And there’s too much hype and money to make it work as good as it should.

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Indications of Monopoly Behavior by the GAFA

Following on the previous post ‘How Increased Monopolies Could Explain Low Interest Rates‘, this post by Seth Godin about Google ‘The Google tax‘ provides another interesting perspective.

Seth Godin notes that usage of Google creates a double whammy taxation for people and companies that try to sell through this portal (that is, anyone who tries to have an internet presence). First, companies will have to pay for adds to be more visible than actual search results, increasing their visibility. Second, and much less visible, search results are prioritized according to a certain algorithm that constantly changes. Staying on top of SEO (Search Engine Optimisation) costs a lot of money, having to go through specialists to permanently update one’s website to keep it visible to the world.

The point Seth Godin makes is that on the internet there is so much difference between being listed first and listed second that it is worth paying the money to remain first. And Google – and more generally all those portals that live off advertising like Facebook or Twitter – are geared to get a lot of that investment. This in effect amounts to a tax on the economy that is conveniently captured by those service providers which are in monopolistic positions thanks to the same rule: the number one gets most of the value and traffic!

Contrary to monopolies in the industrial age, which were backed by large assets, it won’t be easy to dismantle those. However it is worth doing in the long term – at some stage, this global tax will not be accepted anymore by the world.

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How Amazon Grew to Become So Central in the E-Economy

This interesting Bloomberg post ‘The Enormous Numbers Behind Amazon’s Market Reach‘ proposes a nice visual history of Amazon’s growth and reach. It also provides an interesting status report of the weight of the company across several markets.

It shows that Amazon is not entirely dominant (yet!) and that it depends a lot on the particular industry or products. In reality, “Despite being the largest e-commerce player, Amazon still accounts for roughly 1 percent of global retail. In the U.S., the company’s share of all retail sales is as high as 7.7 percent, including sales made by other retailers who sell on Amazon’s Marketplace. Absent that, Amazon itself accounts for less than 3 percent of U.S. retail sales, according to Euromonitor International.”

The most impressive is the market share in e-books thanks to the Kindle, where Amazon is really dominant.

The exponential growth is also linked to a disciplined re-investment of its surplus over time (hence almost no profit since the start), in a real entrepreneurial approach sustained over time. It has also been patient when trying to develop into new fields, failing long before reaching success.

The most amazing in this story finally is that the company was able to maintain a long-term view and a startup spirit all those years, together with a strict cost discipline. A feat clearly due to its founder and the management style he embodies. What about the sustainability of the enterprise if the founder departs?

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How Private Initiatives to Reach the Graal of Nuclear Fusion Show a Tipping Point in the Financing of Fundamental Science

I was not aware of so many initiatives in parallel to seek to master the energy of nuclear fusion. Beyond the international collaboration around ITER in the south of France there are also large investments made in China and through a private company in California, TAE technologies (here a Wikipedia article on TAE technologies).

This last initiative is very interesting in its form: it is the only such endeavors that I know of that is entirely private and in the form of a start-up financed by venture capitalists and large corporations from the internet industry.

The fact that such fundamental science can be financed entirely by private funds is quite new. Of course it may have industrial applications some day, but previously the standard institutional setup was that fundamental science and associated large scientific instruments would be financed publicly, and that private funds would only take over once the science would be sufficiently advanced to get to practical applications in a reasonable time-frame and with a reasonable probability.

This exceptional example shows that private companies have very deep pockets to be able to fund such fundamental science (and that they dream of being able to exploit such technology in a monopolistic manner!). And also that the industrial age public research institutions will need to reconfigure in the Collaborative Age, since the border between fundamental and applied science is definitely shifting.

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How Over-Protection of University Students Is Spreading and May Be Due to a Generational Issue

Also known as the “coddling of the american mind”, this disturbing trend is spreading and speeding up, as exposed in the following papers the Atlantic ‘the coddling of the american mind is speeding up‘, and the two National Review papers ‘Are We Setting a Generation Up for Failure?’ Part 1 and Part 2. Those follow the publication of the book ‘The Coddling of the American Mind: How Good Intentions and Bad Ideas Are Setting Up a Generation for Failure‘ And it now also spreads to other countries like France. We had already addressed this trend in our 2016 post ‘How Overprotecting from Different Points of View is a Moral Hazard‘.

The issue is that students can declare to be violently assaulted by ideas that do not fit their opinions and therefore decline to participate to debates and presentations. They can flee to safe rooms. Moreover this leads to cancelling speeches and debates even with renown philosophers and personalities, that have strong opinions on certain subjects.

The interesting point made in the analysis of the situation is the observation that this issue may be generational – linked to the first generation reaching university that has known internet since early childhood and social networks since teenage years. The theory would be they this generation falls prey to a low exposure to contradictory ideas, staying comfortably within their own online communities. “The new beliefs about fragility really came in only for those born after 1995. When [you] read the book iGen by Jean Twenge, and when I saw the graphs that she shows of how mental health plummeted when iGen reached its teen years, that’s when a whole new dimension of the problem became visible.”

This would be the demonstration that internet and online social networks effectively fostering community-centered and intolerant feelings. In addition, excessive protection from parents investing more in their children would also be a culprit.

Another issue is that universities in the US become increasingly corporatized, funded by large endowment funds and avoid to feel the wrath of past and future donors. This may also be a factor.

In any case, this trend is disturbing and needs to be curbed. In the modern world we can’t live in a society where people would close themselves to contradiction and avoid exposure to other ideas than the ones they are familiar with.

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How Smart City Data Should Not Be Made Free

In this article ‘A smart city should serve its users, not mine their data‘, Cory Doctorow verbalizes one of the important issues facing infrastructure digitalization.

The first aspect, following our post ‘How Data Really is the New Oil, and Better‘, is that whatever data a smart city gathers should not be left available for free to service suppliers. It belongs to the community and should be valued if it is to be made available.

Further than that, the risk of the smart city in terms of data management and privacy is that the system decides how to change the city instead of the citizens.

“What if people were the things that smart cities were designed to serve, rather than the data that smart cities lived to process?” Cory Doctorow goes on to suggest that the flow of data access should be reversed, the individual having the opportunity to tap into the collective data, not letting know of his final choice, rather than data being collected independently of his will.

This would be quite a different model from the one that develops currently where our data is reaped by giant organizations without our consent. The data should not be made free, both economically and in terms of availability. Quite an interesting avenue to investigate: the final equilibrium of the Collaborative Age will probably be somewhere in the middle.

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How Access to University Campuses for Education Becomes a Luxury

In a different dimension but quite related to our previous post ‘How Human Contact is Becoming a Luxury‘, Seth Godin post ‘Toward abundant systems‘ takes the example of college admissions to show how the world moves from an Industrial Age’s world of scarcity into a Collaborative Age’s world of abundance. But is it the right example?

“Space on the Harvard campus is highly valued and also scarce. But if we can break education out of the campus/scarcity mindset and instead focus on learning, learning at scale, learning that happens despite status not because of it–then we can begin to shift many of the other power structures in our society.”

It is true that the availability of free or very cheap online courses is an opportunity to scale the acquisition of knowledge. Still, admission to renowned university campuses remains more competitive than ever (in part because it is now global). The reason is probably that a major value of university is the human connection and network – something not so easy to scale – and for which a limited group of students is more adapted as it creates a denser relationship network.

Alumni groups still play important roles in society and in the professional world. While globalization may diversify universities of origins, those social groups are still very influential because they remain limited in size. Therefore, while access to knowledge becomes abundant, access to the social connection of university campuses becomes increasingly a luxury.

This aspect is probably not accounted for sufficiently in the development of online education programs. Developing the community and the alumni group can also be done virtually but this requires a lot of effort and possibly some face-to-face real-life interactions. This will remain, and while this can be made more efficient, it will always be a limit to scalability for educational institutions.

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How Human Contact is Becoming a Luxury

In this great New-York Times article ‘Human Contact Is Now a Luxury Good‘, the issue of diminishing daily human interaction is addressed. “Screens used to be for the elite. Now avoiding them is a status symbol.”

Human check-in, a luxury?

Our lives and interactions are indeed increasingly held through screens; not mentioning upcoming AI applications that will make us increasingly interact with virtual entities.

Of course, replacing humans with screens is cheaper, and requires specifically much less maintenance and management. Screens don’t have free will and are much less complex to manage.

And the luxury is now to avoid screens and have a direct human interaction. Moreover, the very rich increasingly try to avoid screens – like for their children.

As the article mentions, this is a very swift change from the 1980s and 1990s when having screens was a luxury, to the opposite now that they have become cheap and ubiquitous.

I think human contact remains much needed, and we need to find ways to both benefit from the productivity and convenience provided by screens, while keeping the density of human interaction. The balance will not be easy to find, and there may be substantial differences in outcome depending on wealth. Definitely an issue to keep in mind moving into the Collaborative Age!

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How Easy Modern Technology Makes It For Spies

In this excellent Foreign Policy article ‘the Spycraft Revolution‘ (recommended read although a bit long) the changes in the world of espionnage are described, as well as the challenges faced by those involved in this activity to adapt.

Cover identities are now much harder to forge, as we leave many traces of our past on internet. Closed data societies such as China would seem to have an edge on open data societies like the western world (and authoritarian governments over liberal democracies that limit spying). Counterintelligence can leverage the internet to resist deception. Mobile phones are the most spy-friendly device that has ever been invented, it is an incredible tracking tool, and they can even listen to what’s happening remotely.

“The cloak of anonymity is steadily shrinking“. Still, western intelligence agencies are facing legal hurdles but they may have to be partly removed to allow competition with opponents that don’t have this type of issues. Which leaves society more open to intrusive spying. The right balance has not been defined yet.

“Most of us don’t want to live in a country […] where the intelligence and security agencies are at the heart of public life and political decision-making.” Still we need to be realistic enough to defend ourselves against undue foreign influence. This balance will take time to establish and there will be blunders along the way.

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How the Increase of Asset Values Could be Linked to the Fourth Revolution Transformation

Following up from our previous post ‘How the Current Asset Over-valuation Changes Economic Behavior‘, the question is open whether this historical trend about historically extremely high asset prices and always lower interest rates since the 1980s (the Era of Big Balance Sheets) is a temporary situation, or if it could be representative of a shift created by the Fourth Revolution (a shift to the virtual, global economy).

In the research paper ‘Bubble or nothing‘, the enclosed graph and a few others remind us that there is currently overcapacity in terms of assets compared to the production capacity (this observation seems to apply to manufacturing as well as to offices or any class of asset supporting value production). This can be explained partly by the high value of assets but also by the fact that actual physical production does not increase any more and is disconnected from overall economic growth: the economy becomes increasingly virtual with the Fourth Revolution.

One of the reasons behind asset relative value increase could thus be that value being created virtually in the new economy drives up the value of the physical assets, which are in limited quantity. Therefore, an interpretation of the current overvaluation of assets could be the virtualisation and increased productivity of the Collaborative Age economy. This would be a bit similar to the Baumol effect explaining the relative increase in cost of less productive areas of the economy such as healthcare (see our post ‘How the Relative Increase of Cost for Education or Health Care Can be Explained‘). If that is the case, then we should not expect asset valuations to drop off anytime soon (independently from temporary recessions and readjustments).

I would be quite interested to see whether there has been some economic studies about the impact of the virtual economy on asset valuation. Please contact me if you know of any such study.

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How the Current Asset Over-valuation Changes Economic Behavior

I can only recommend to read this enlightening research paper ‘Bubble or nothing‘, produced by an American Think Tank. It may require some time to read, but I believe it is absolutely worthwhile to understand how the current economic situation differs from the 20th century economic situation – and how therefore, history can only be of limited value in understanding future economic behavior.

The point is that “The evolution of the economy’s aggregate financial structure [with a much higher value of assets compared to value production] has, over decades, altered the playing field for financial decision makers throughout the economy, increasingly skewing their available options toward higher risks, lower returns, or both.” Basically, the increase in asset value implies low interest rates. Those low interest rates are much below the return rates expected from financial players (such as retirement funds), and this leads them inevitably to take higher risks than they would have in the past.

The author calls the time since the mid-1980s the “era of the Big Balance Sheets”. According to him, this excessive risk-taking behavior explains situations as the one giving way to the 2008 financial crisis, which stemmed from the property market. “Each successive crisis, with more bloated balance sheets to stabilize, was more difficult to resolve and therefore required the government to engineer dramatic new lows in interest rates, heavy fiscal stimulus, and other measures to stabilize economic conditions. The measures eventually overcame recession and chronic weakness, but in doing so they necessarily caused further expansion of balance sheets relative to income.“

This current situation appears to be quite metastable, with excessive risk-taking happening since the early 2010s, and may lead to another hard recession with substantial asset value decrease. Whether this decrease will be temporary or more permanent is still open (previous recessions have not changed the excessive asset value on the long term).

As a summary, “The U.S. economy continues to face a bubble-or-nothing outlook. Participants in the economy and markets will keep increasing their financial risk until the expansion breaks down, and the bigger the balance sheets are relative to income, the more severe the breakdown is likely to be.”

Take some time to read this instructive analysis, as it provides an interesting explanation of the changes in our economy in the last decades.

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How To Avoid that Increasing Complexity of Business Leads to Collapse

In this Gapingvoid post about business complexity, that refers to a Clay Shirky 2010 post ‘The Collapse of Complex Business Models‘, we are reminded that excessive increase in complexity often leads to collapse of organisations or societies (and not to improved adaptability).

Organisations and societies would sometime collapse because of their sophistication. According to some studies, increase in complexity is first positive, before reaching a point of diminishing returns and even becoming detrimental. And “When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.”

The issue here is not that complexity inevitably increases in organizations and societies. It does. The issue is how to ensure that this additional complexity makes the organization or society more flexible and adaptable to substantial changes and shifts in its environment – and not too rigid, leading to collapse.

In the business world I know only of one solution: allowing new activities to develop in relatively independent subsidiaries. They may one day replace the mother company as values shift, but then the accretion of new activities won’t create excessive additional complexity and the various activities remain relatively flexible and nimble. The case for the diversified group of companies as a way to be more resilient is open!

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