I'm pleased to be cited in @DKThomp's new feature on the continuing stagnation in the physical world. Derek and I have ruffled some feathers so let me elaborate and possibly ruffle a few more. 🧵 theatlantic.com/magazine/archi…
First, it is obvious that the Internet has underperformed expectations if you will actually recall what the expectations were. It was supposed to be, in Barlow's words, "the new home of Mind," immune to government sovereignty. eff.org/cyberspace-ind…
In reality, Internet culture is not so lofty. For better and worse, it basically reflects humanity's virtues and foibles. There is a lot that is good, but man, there are a lot of foibles. It also isn't close to immune from shitty policymaking (like GDPR or Title II or AB5).
Then there's the lack of significant economic growth spurred by the Internet. Lots of smart people like Benedict Evans think that this could be an artifact of faulty economic statistics. And it's true that there is some consumer surplus that isn't captured
But come on. If we observe lots of economic anxiety in our country, lots of deaths of despair, and lots of zero-sum politics, shouldn't it be obvious that we're not economically crushing it? Digital consumer surplus is not enough. brookings.edu/wp-content/upl…
If we want rapid economic growth, we need investment in the physical world, especially in low-productivity-growth sectors that make up large portions of the economy. Foremost among these are health, housing, energy, and transportation. elidourado.com/blog/move-the-…
For all the good that Silicon Valley does, it seems institutionally incapable of providing enough investment into those sectors. This isn't the fault of any one person. It's simply the logic of a gold rush in a mostly unregulated digital space.
Large VC firms are funded by LPs who are often institutions like college endowments or public sector union pension funds. These institutions want exposure to trendy tech stuff with no regulatory risk. So that is what many VC firms fund.
Digital tech has a huge advantage in that much of it is protected by the First Amendment, so it is significantly sheltered from regulation. No such luck in health, housing, energy, and transportation, so less investment in those areas.
I am a fan of the First Amendment and if anything I would like it to offer more protection, but it seems to me it functions as a kind of investment subsidy for SV by wiping out regulatory risk in lots of digital tech.
Perhaps regulatory risk in the physical world can't go to zero, but we need to solve real regulatory problems if we want physical world investment to compete on anything like a level playing field with digital stuff. Otherwise it's a distortionary gold rush to digital tech.
A brief aside to my DC libertarian friends: yes, you should help protect SV from overregulation, but you don't have to defend the SV self-important narrative to do that. And don't neglect to deregulate the physical world.
Mechanisms like the App Store also contribute to a gold rush environment. It's a very efficient funding platform. No problem with that, respect. But it means a lot of talent is chasing those easy rewards. How much growth is the 1 million games in the App Store generating?
The incentives facing VCs and coders and technically-inclined college students all point in the direction of overinvestment in digital tech relative to physical tech. It's a gold rush. Again this is no one person's fault. It's institutional.
Now let me defend what I see as the biggest bright spot in Silicon Valley: the billionaires. There are a lot of individuals who have made big bucks in software and are re-investing funds in physical stuff without the constraints imposed by LPs.
For example, Elon Musk made money on PayPal, which enabled him to fund early-stage Tesla. In Series A, he put in $6.5M of $7.5M raised. In Series B, $9M of $13M. Tesla would not exist without Elon Musk's prior success.
Larry Page and Sergey Brin have also funded interesting physical world stuff. Bill Gates too. And less famous folks. If you are doing a hard technology startup, your best bet is raising money from family offices, not big VCs.
So if the incentives are wrong in the institutional Silicon Valley investment apparatus, at least independent investors in Silicon Valley are doing their part to fix physical tech productivity. Kudos to them.
I also mostly disagree with @Noahpinion, who says we only lack science, not investment attention. I am all for more science, but there are lots of existing ideas that remain underfunded in execution, where science is not the barrier.
Finally, let me stress again that this is an institutional failure. For me, it's not about blaming existing companies, which I am glad we have. But let's please be clear-eyed about what is going well and what is not.
