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CLVII
[Peter Thiel in Malibu; Creating Value; Value Creation != Value Capture; Value Destruction; Don't Invest in my Business; Old AI on Hidden Data; Fighting Surveillance States; Sci-Fi Maxxing; Read SciFi]
Thesis: The best place for venture capital is investing in value creating technologies that need capital to change the world.
[Peter Thiel in Malibu]
Last week, I got an interesting question last week about where I think the money and investment should go instead.
It was actually very similar to the question that I personally asked Peter Thiel that one time I got to meet him at a gala in Malibu in Fall 2021.*
We wanted flying cars, instead we got 140 characters.
He once said something about over investing in the 'bit' rather than the 'atom.’ Meaning, we're overspending on digital technology rather than 'real world' physical stuff.
In a very convoluted and long winded way, I asked him if he still thought that was true in 2021, and he said something along the lines of 'kind of yes, but bit vs atom is also not the only paradigm that matters.'
DE** asked me basically the same question: I keep ranting about AI and LLMs wasting money, but still seem to be a proponent of investment in digital technology. Why?
I bring up the Malibu story because it occurred to me that my answer to DE is maybe actually what Thiel meant when he answered me 5 years ago. But also, maybe not.
I think digital technology actually enables pretty amazing things in terms of physical hardware & unlocks functionality and gains otherwise impossible with strictly hardware devices.
So we’ll talk about that a bit today with 2 real examples, but more broadly, I’ll explain from a high level some of the places I think it’d be interesting to deploy venture dollars.
We cover:
Value Creation, Value Capture, & Value Destruction
Why you'd never want to invest in my startup, WhiteWhale
2 examples of digital tech enabling physical hardware to create genuine value
A list of other really cool technologies, like space ships and nuclear energy.
Before we begin, remember: I'm just a guy building cool shit & sharing strong opinions.
*Funnily enough, a couple days after that, BH & I ended up a hacker house in SF full of OpenAI engineers. Probably some irony given my questions & current views; at the time, I had no idea what they were doing.
**If you haven’t inferred yet, I use personal friend’s initials when I talk about them. If you know who it is, you know who it is, I guess.
[Creating Value]
First and foremost, I really believe that anything you invest in should actually be creating value. I'm actually pleased that this week, a friend commented that I'm one of the few people she knows who is both very focused on wealth accumulation while also being focused on value creation.
Value creation is this idea that the product or service you sell, when used, makes more of something that is worth something to someone, and ideally something that makes the world more resource rich and enjoyable.
With my own simple startup, WhiteWhale, as example, we started with no code, no product etc. We traded our time and effort to make a piece of software that wasn't there before. Now, people can use our software to 'get value.'
If a sales or marketing person is able to use our software to, say, create a $60,000 deal that they have have a 33% chance of winning (so the Expected Value is $20,000), and they paid us, say, $10,000 to use the software, and it cost us, say $2,000 to run the software for them, then the total value created was $18K, $10K of which went to them, $8K of which went to us.
This is very much a toy example, because it's hard to say what % chance they had of creating that deal without the software & the additional cost of adding that deal to the pipeline (in this case, cost was negligible, and probability of getting it otherwise was explicitly low).
Alternatively, you could look at value created from a time saving perspective: if finding the information WhiteWhale produces would've taken 10 man hours a week per user and you're supporting 3 users on a $200/mo plan, that's 120 hours a month saved. If their average hourly rate as a seller is even equivalent to $30, that's $3600 of hourly wages saved for the employer; $3400 captured by the team, $160 captured by us (assume 20% margins), and $40 over to our vendors.
So, in theory, if someone buys and uses our product, more 'work' is done substantially more efficiently and our customer's grow faster and the economy gets bigger and overall wealthier. Value is created!
[Value Creation != Value Capture]
Exactly how much value creation is a hard thing to pin down, especially because it's not simply related to how much money you make.
I'll give the canonical Peter Thiel example: Airlines create immense value, likely more than Facebook (would you rather get rid of Facebook or planes?*). You'd be misled if you used profits as a pure measure for 'value', though, because Facebook is insanely profitable, while airlines seem to be forced to either become a credit card company or go bankrupt.
Going back to the WhiteWhale example, we'd be capturing a smaller percentage of value created in the second example than in the first example. But, maybe that wouldn't matter to us if in the first case, we needed a sales team to justify & remind the client of that value created and in the second case was so obvious and low cost we didn't need to talk to anyone ever.
Going back to Facebook, we would observe a lot of their revenue coming from ads. The companies buying these ads would likely be getting positive ROI on them or they wouldn't otherwise keep buying them. So, maybe on the axis of advertisers, Meta still is creating value, even if capturing much more of it than an airline could dream of.
*If the answer is somehow planes, we've strayed further than god than I feared
[Value Destruction]
Just like it's possible to build a business that creates value by letting someone trade money for time back, it's also possible to build a business that destroys value, too. If the pre requisite for being worthy of investment is value creation, then value destroying businesses should be avoided like the plague.
Note how I was talking about the advertising side of Meta / Facebook. If we go to the consumer side, you could easily argue that Facebook DESTROYS value.
We've been through this before: I'd never argue that social media is useless. Hell, it's how my busienss gets all of it's customers.
I would speculate, however, that on average, people's lives are net worse by using social media like Facebook. I'll spare you the full rant about algorithms designed to be addictive, etc, etc.
Just briefly think about the trade being made by using social media: the consumer gives their most precious resource, time, in exchange for a stream of lights and colors and sounds to give them dopamine while incidentally rewiring their brains to be less capable of valuable things like focus and presence.
And if you don't believe me on social media as something that is Destructive for the average user, just think about something else like Vapes that make people feel good in the short term but also make good progress towards killing them.
[Don't Invest in my Business]
One more negative example before we get to the positive ones, and this is a funny one, because it's an abbreviated version of why venture dollars shouldn't go to a business like mine.
In short, Jack & I are just building a useful software product. Yeah, I can tell you the long term vision of making markets other than financial ones more efficient, and that sounds investable, but I don't think you really need millions of dollars to work towards that.
Building a software business is hard to do, but the barrier to entry is kind of low. You can start building the thing today and selling it tomorrow and then rebuilding it the next day and reselling it the day after that. It will take you a while til you get there and a lot of trial and error and it's not for every one and you won't make any money at the start.
But you can keep going, and as long as you can avoid starving until you're ramen profitable*, you'll be fine.
You can build a software product that creates value without needing tens of millions of dollars to get there. Sure, there are reasons to invest in software companies and good uses of capital if you are a software company, but for the business Jack & I are building in particular, I still don't think it's the case.
A really cool use of digital technology that I've seen actually comes from a founder who lives at C House with me.
Basically, he built a product that goes into the pipes at factories producing liquid goods. This device lets them clean the pipes with a precision automation that minimizes chemical usage & downtime.
The alternative is having a guy kind of vibe check how much chemicals to use and generally have to wait longer than needed to make sure it's clean before turning it back on because he can't really tell.
Of course, once this data is collected by the hardware, you can do some pretty crazy optimizations & experimentation with AI to really figure out the cheapest and least invasive ways to clean. And, I don’t think you don't need an LLM for that, either.
This is really, really cool, because it's taking a real and important piece of hardware and using digital technology to unlock new levels of performance.
[Fighting Surveillance States]
I don't think I've written about surveillance states and fascism before, but I really do think that they are a great threat to an open society & scientific progress. Worth an essay on it's own.
China is already a surveillance state, and the US in some ways is & increasingly has the infrastructure in place to become one.
I think it's harder to roll back the clock on tech that's already out there than it is to produce and distribute counter measures. One such counter measure is a device like this that prevents all those annoying always on recorders from picking up your voice. (also founded by a former C House resident)
This falls into the same category as the above because while it's very much a hardware product there is also sophisticated software involved in making it work.
I hope I’ve gotten the point across that these two things have a strong interplay, hardware and software, physical and digital, atom and bit.
[Sci-Fi Maxxing]
Okay, I gave you the two real, grounded examples. Now we're about to go off the deep end into cool shit that I think would be awesome if it existed. Some notes:
Not all of this requires digital technology, but I think in all cases it would likely help.
These are just vague, broad ideas. You still need a way to make money & really good execution (sorry JL).
I’m very technically naive about all of them
I say these are potentially interesting spots for VC investment because this is where putting capital in the hands of a shrewd operator would make a difference in the outcome of the venture
[Nuclear]
I wrote my college essay to Ross about putting nuclear reactors in places like abandoned coal mines in Appalachia. One of the graders thought it was cool and ambitious, the other one thought it was basically brain dead.
Nuclear is one of those technologies that from an admittedly naive perspective seems that if we were to aggressively invest in, would lead us a lot closer to hyper abundance.
It’s also one of those technologies that seems to have been poisoned by regulation into irrelevance.
[Space]
I, like perhaps 20% or the US population, wanted to be an astronaut when I was younger. Unlike that 20%, I never actually gave it up. I have a to do list from when I was ~19 with ‘go to space on it’. Given that I’m already about 1/3rd through the to do list, I’m never giving that item up.
There's an argument that going to space is wasteful because there are problems to solve on Earth. Here are my 2 biggest counters to that argument:
The technology it would take us to colonize the solar system and then the galaxy would be incredibly valuable to life on Earth: self sufficient food systems, robust 3D printing, super efficient energy systems
The problems on Earth are irrelevant in the event of some global catastrophe that we can't contain, whether it be man made or astronomical like an asteroid wrecking our planet. We don't know if life exists elsewhere. If we think life itself is valuable, then we should be invested in protecting it from both ourselves and chance; an interplanetary (or better, interstellar) society is a massive step in that direction.
And, it'd also be really cool to go to space.
[Vertical Farms & Regenerative Agriculture]
Why aren't our city scapes covered in greens hanging from windows everywhere? I feel like I saw some movie with a futuristic city scape integrated with microgreens everywhere when I was a kid but it never happened. Why not? I don't know. Maybe there's a good reason, but probably not.
One of the engineers I respect most took an indoor vertical farming company from 0 to unicorn status. More stuff like that would be awesome.
And, while we're at it, I think that regenerative agriculture is far better for the environment and human diets than monoculture; worth exploring how to to scale it up as much as possible.
The empire state building but covered in these
[Bio & Longevity]
I don't know shit about bio, but man it would be cool if we cured cancer.
And, while we're at it, why not increase average lifespans from whatever they are now to like 150 years or something. I met a guy working at a startup to grow organs for replacement. According to him, that gets us quite far, especially if you can also find a way to increase the health-span of the brain.
If you love hearing the weekly ramblings of your friendly neighborhood bootstrapped SaaS founder, smash that subscribe button.
[Read SciFi]
After writing this, I can see the temptation of wanting to be a VC. You just get to talk about & invest in cool stuff.
I can also see how it'd be easy to get fucking scammed if you did't know what you're talking about. VCs get scammed so much that sometimes I have to wonder if they like it.
That being said, I can hope the impending contraction is like a forest fire that removes the blight and lets healthy, strong, & wise firms grow.
The future tends to look better when we invest in and cultivate technology that genuinely creates value. I can understand if you’re disillusioned by the recent uses of capital to reinvest in things that aren’t really making anything better.
That’s not a call to go inward and be afraid of what’s next, that’s a call to remember the things that actually give us hope and make the world more exciting and awe inspiring.
To be clear, I'll likely work on something from the above list once I achieve my financial ambitions with WhiteWhale.
Dream big.
Live Deeply,
