Does Venture Subvert Markets?

That Was The Week, #46


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Editorial:


Happy Thanksgiving to all. As a gift, this week's That Was The Week has no stories about anti-trust or censorship and social media. Instead there are a few long reads but word of warning - some of them predict dire short and medium term outcomes - like "end of the world" scale predictions, and not from "the end is nigh" cranks.

But we can start with some more positive pieces. Charles Duhigg, writing in the New Yorker, has a piece that is critical of venture capital for "deforming" capitalism.

"Even the worst-run startup can beat competitors if investors prop it up. The V.C. firm Benchmark helped enable WeWork to make one wild mistake after another—hoping that its gamble would pay off before disaster struck."

and

"For decades, venture capitalists have succeeded in defining themselves as judicious meritocrats who direct money to those who will use it best. But examples like WeWork make it harder to believe that V.C.s help balance greedy impulses with enlightened innovation. Rather, V.C.s seem to embody the cynical shape of modern capitalism, which too often rewards crafty middlemen and bombastic charlatans rather than hardworking employees and creative businesspeople."

My take? This is a deformed view. Capitalism is driven by investment. The WeWork story, which this article is really about, is simply a failed investment. It is neither typical nor unusual. Tesla is an example of a great investment. Steve Jurvetson, then at Draper, Fisher, Jurvetson, invested in Elon Musk when nobody else would. Musk has raised billions since then, while making losses, but now has the world's leading and profitable electric car company. This is investment leading to innovation at its best. Capitalism cannot innovate without investing. So Venture does not deform capitalism. It enables it.

Elad Gil and James Currier have a wonderful podcast conversation about how to spot opportunities to invest in the next big thing and J. Skyler Fernandes outlines the characteristics an investor needs to be able to do a good job. His list includes intellectual curiosity, dynamic thinking, stamina, open mindedness, risk taking, and emotional regulation. That is this week's News of the Week highlight.

--News Of The Week:


Economics


But then we turn to two articles that look at the dark side. Graeme Wood, writing in The Atlantic, profiles Russian born professor Peter Turchin, a University of Connecticut at Storrs teacher. Turchin predicts outcomes for societies based on mathematical models. He predicts the next ten years are going to be terrible because elites have over-produced themselves relative to the availability of appropriate roles for them.

"The fundamental problems, he says, are a dark triad of social maladies: a bloated elite class, with too few elite jobs to go around; declining living standards among the general population; and a government that can’t cover its financial positions. His models, which track these factors in other societies across history, are too complicated to explain in a nontechnical publication. But they’ve succeeded in impressing writers for nontechnical publications, and have won him comparisons to other authors of “megahistories,” such as Jared Diamond and Yuval Noah Harari. The New York Times columnist Ross Douthat had once found Turchin’s historical model­ing unpersuasive, but 2020 made him a believer: “At this point,” Douthat recently admitted on a podcast, “I feel like you have to pay a little more attention to him.”

Turchin's modles lead him to predict an "iron law" of history that results in his dark diagnosis. A fellow academic, Dingxin Zhao, a sociology professor at the University of Chicago, begs to differ:

"Zhao said that human beings are just much more complicated than bugs. “Biological species don’t strategize in a very flexible way,” he told me. After millennia of evolutionary R&D, a woodpecker will come up with ingenious ways to stick its beak into a tree in search of food. It might even have social characteristics—an alpha woodpecker might strong-wing beta woodpeckers into giving it first dibs on the tastiest termites. But humans are much wilier social creatures, Zhao said. A woodpecker will eat a termite, but it “will not explain that he is doing so because it is his divine right.” Humans pull ideological power moves like this all the time, Zhao said, and to understand “the decisions of a Donald Trump, or a Xi Jinping,” a natural scientist has to incorporate the myriad complexities of human strategy, emotion, and belief. “I made that change,” Zhao told me, “and Peter Turchin has not.”

Its a long but interesting read. My take? Human beings are highly unpredictable except for one thing. We always make progress over the long term. We usually underestime our ability to do so, while over-estimating our short term ability to change things. The force is always with the light side, not the dark. The articles are here:

Politics

Finally ideas. Protocol has a nice piece showing how similar the main mobile social apps now are.

There are surely more features to invent, new platforms to copy and new tools to build for people to be creative online. But what works well will immediately be everywhere. And the platforms that win may not be the ones that invent the most features, but the ones that attach those features to a community who knows exactly why they're there.

And Ben Thompson has a thoughtful overview about technology adoption.

Innovation


And the rest is here:

--News You Can Use: For Founders


--The Best of the Rest: For VCs


Startup Of The Week: BitCoin


Podcast of the Week:


Tweet of the Week:



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--News Of The Week: Economics


How Venture Capitalists Are Deforming Capitalism

The New Yorker

  • In 2016, he began raising a hundred-billion-dollar Vision Fund, the largest pool of money ever devoted to venture-capital investment.
  • (Consumers posted videos demonstrating that they could press juice just as efficiently with their own hands.) Two years ago, when Wag!, an Uber-like service for dog walking, went looking for seventy-five million dollars in venture capital, its founders — among them, a pair of brothers in their twenties, with little business experience — discovered that investors were interested, as long as Wag!

The Unusual Signs of a Billion Dollar Company, with Elad Gil

NFX @jamescurrier @eladgil

A common question that investors ask startup Founders in pitch meetings: Can this company be a Billion-dollar business?

It’s a difficult question to answer in the early stages, though it is easy to parse answers that are directionally correct from those that are strategically flawed. What the question is actually intended to reveal is how the Founder sees and how they describe their path forward.

Exceptional Founders see what others do not and are unafraid to go in that direction.

This is true of startup Founders and investors alike. Elad Gil — most recently co-founder of Color Genomics, previously co-founder of Mixer Labs and responsible for corporate strategy at Twitter and early mobile at Google — is also flat out one of the best angel investors/advisors in the startup community. His portfolio includes Airbnb, Airtable, Anduril, Brex, Checkr, Coinbase, Flexport, Gitlab, Gusto, Instacart, Opendoor, PagerDuty, Pinterest, Samsara, Square, Stripe, and Wish.


10 Characteristics Which Make A Truly Great Venture Capital Investor

Medium

  • Article originally featured in ValueWalk As a VC for the past 10+ years, I have had the pleasure of meeting thousands of investors at many stages of their journeys, from analysts to first time fund managers to VCs with 30+ years of investment experience.
  • Great VCs are able to look past a boring pitch to find the real potential.

-News Of The Week: Politics


Iron Laws of History?
The Next Decade Could Be Even Worse

The Atlantic, @gcaw

Peter Turchin, one of the world’s experts on pine beetles and possibly also on human beings, met me reluctantly this summer on the campus of the University of Connecticut at Storrs, where he teaches. Like many people during the pandemic, he preferred to limit his human contact. He also doubted whether human contact would have much value anyway, when his mathematical models could already tell me everything I needed to know.

The year 2020 has been kind to Turchin, for many of the same reasons it has been hell for the rest of us. Cities on fire, elected leaders endorsing violence, homicides surging—­­to a normal American, these are apocalyptic signs. To Turchin, they indicate that his models, which incorporate thousands of years of data about human history, are working. (“Not all of human history,” he corrected me once. “Just the last 10,000 years.”) He has been warning for a decade that a few key social and political trends portend an “age of discord,” civil unrest and carnage worse than most Americans have experienced. In 2010, he predicted that the unrest would get serious around 2020, and that it wouldn’t let up until those social and political trends reversed. Havoc at the level of the late 1960s and early ’70s is the best-case scenario; all-out civil war is the worst.


Ignore the social media echo chambers — TechCrunch

TechCrunch

  • One idea spawned in some progressive echo chambers was the notion that Trump would stage a coup d’état if Joe Biden won the election (i.e., “Did you see those unmarked federal police!?”
  • The gap that supposedly divides our nation is narrower than the doomsaying pundits, intellectuals, politicians and cause leaders want you to believe.

--News Of The Week: Innovation


Snapchat is TikTok is Instagram is Facebook is Snapchat. What do we do now?

Protocol

  • Most recently, TikTok’s never-ending scroll of full-screen videos has become the latest way people navigate the internet, even on platforms far away from TikTok. Snap has originated as many of these features as any other app, and so the newest Snapchat feature feels almost full circle.
  • Snapchat debuted the Stories format, which Instagram copied, and is now a feature everywhere from LinkedIn to Twitter to YouTube.

The Idea Adoption Curve

Stratechery by Ben Thompson

  • Visionaries, meanwhile, were a collection of think tanks, journals, and speciality magazines that operated at a loss, which was fine because making money was never the point: getting ideas into publications like the New York Times was.
  • This is, to be sure, a crude simplification of two writers with nearly 40 years of material between them, but I don’t think it is an accident that Yglesias has set out on his own on Substack , whereas Klein is joining the New York Times .

--News You Can Use: For Founders


As edtech grows cash rich, some lessons for early stage

Fundings & Exits — TechCrunch

Udacity
  • Last week, Udemy, an online learning marketplace, raised $50 million at a $3.32 billion valuation , up from a $2 billion valuation earlier this year.
  • Language learning app Duolingo raised $35 million on a $2.4 billion valuation , up from a $1.65 valuation from earlier this year.

5 Interesting Learnings From Shopify. At $3+ Billion in ARR.

SaaStr

  • But, there are still many interesting things we can learn from Shopify, especially since it sells to so many SMBs, has been late to go upmarket, and combines a payments/fintech element with pure SaaS.
  • Both Shopify and Zendesk have added rich enterprise offerings over time, but despite the larger ACVs of bigger customers, SMBs have kept up as a percent of revenue.

--Best of the Rest: For VCs


3 new $100M ARR club members and a call for the next generation of growth-stage startups

Fundings & Exits — TechCrunch

  • It was nearly a year ago that The Exchange started keeping tabs on startups that managed to reach $100 million in annual recurring revenue, or ARR.
  • Yes, The Exchange will keep tabs on startups and other private companies that reach $100 million in ARR, or annual run rate, as the case may be.

The Asset Class That Raised Record Funds This Year — Institutional Investor

Institutional Investor

(Jeenah Moon/Bloomberg)
  • On Friday, two Andreessen Horowitz funds closed with a combined $4.5 billion in commitments, bringing the year-to-date fundraising total for the asset class to almost $70 billion, according to PitchBook.
  • However, while U.S. venture capital fundraising has hit a new high in terms of total assets, the number of fund closes have plummeted this year.

7 things we just learned about Sequoia’s European expansion plans — TechCrunch

TechCrunch

Sequoia
  • “There has been this evolution and maturity of the tech ecosystem that has been really meaningful, that has attracted us to want to put down boots on the ground and be more invested in Europe than ever before,” said Sequoia partner Matt Miller.
  • Yet, it is only now that the VC firm is putting people on the ground here in Europe, starting with an office in London that has a remit to invest across the continent.

Seed Investing in the UK Is Losing Momentum

Silicon Roundabout

  • We saw a lot of potential from this ecosystem and we wanted to help along the way those startups whose growth we know to be forthcoming, if they just got that extra push and financial support.
  • You need prove to the investors that you’re doing it right (If you can get people to invest a lot of money on the idea and the business principle the way Adam Neumann was able to do for WeWork, then you can probably skip this part!

Interview with an LP: Building (And Evolving) A Generational Fund Returns Platform

Substack

  • TLDR VenCap International , a UK-based fund-of-funds, has been investing successfully in VC funds since the late 1980s with a “ generational fund returns ” strategy Chris Witherspoon was one of the LP experts in Oper8r’s first cohort , and now shares his perspectives on what makes an outstanding VC For emerging VCs, specificity of strategy and focus is critical in the near-term.
  • Our current strategy (linking back to your recent article looking at LP motivation for investing in Emerging VCs) is most similar to “generational fund returns” in that we back a concentrated group of firms that have demonstrated an ability to identify and access those outlier companies that drive returns for
  • the entire industry, and show potential to do so across multiple funds.

--Startup of the Week: Bitcoin


Bitcoin is Near All-Time Highs and the Mainstream Doesn’t Care…Yet

Visual Capitalist

  • Even if current mainstream coverage isn’t far from previous peaks, it’s still likely that people are seeing an increase in bitcoin content in their news feeds following the recent surge.
  • While 2017’s run-up saw a huge surge in Google searches, interest this time around is less than a quarter of what it was back then.

--Podcasts of the Week


20VC: BENCHMARK’S SARAH TAVEL ON WHY CHASING GMV WILL LEAD TO THE WRONG DIRECTION, THE 2 CRUCIAL TIPPING POINTS FOR MARKETPLACE ADOPTION, WHY UGC PLAYS ARE LIKE MARKETPLACES & HOW TO DETERMINE BETWEEN EXISTENTIAL AND NON-EXISTENTIAL RISK


Episode 10: Validating Your Startup Idea

Fabrice Grinda

Last week we covered how to come up with great startup ideas. This week I present how to evaluate if the idea is worth pursuing. I detail which hypothesis you need to validate and how to go about providing or disproving them.


--Tweet of the Week: SEC Chair helps BitCoin


Jay Clayton Calls Bitcoin a Store of Value Beyond Regulatory Reach of SEC

Squawk Box @CNBC