- The capital investment required for Instagram is well under a million dollars
- The capital investment required for Hyperloop is well over a billion dollars (R&D, Materials/Prototypes, Insurance, Land, Construction)
The best-case returns are:
- 1 billion for Instagram
- 20 billion for Hyperloop
Thus, the best-case ROI for both are:
- 1000x for Instagram
- 20x for Hyperloop
The timelines to get to production are:
- less than 1 year for Instagram
- minimum 5 years for Hyperloop
The only way Hyperloop will happen is if there is a way to incrementally get there. In other words, if you can make a 1/1000-size scaled-down prototype, iterate and improve upon the design, and then scale up to a full-sized model.
This is wrong on many levels. Firstly funding over a billion dollars is not remotely intimidating to the large VC funds who understand about capital intensive businesses and managing the investment lifecycle.
When you put together very large sums of investment you don't have a 100x expectation for return. The institutionals which will take on later stages of this financing just want to outperform the other investment options they have for that amount of casH (not that many).
Your 20Bn upside for Hyperloop is very low. If done to scale and over the long haul it's a very big opportunity. Even then I know of no investors - ZERO - who wouldn't take a 20x return on a billion dollar placement.
Finally. Instagram. Really? An outlier like that is what you're going to base your idea of investment on. Look at VC returns. They take a portfolio strategy for a reason.
It's a common misunderstanding that VCs want to put small amounts of money to work for huge returns. They'd much rather put much bigger amounts of money to work. It's how they're structured. Do they want the odd moonshot Instagram in their? Sure. They'll take it. But they'd take 1billion -> 20billion over 1million -> 1billion every day.
"Even then I know of no investors - ZERO - who wouldn't take a 20x return on a billion dollar placement."
Sure, if there was any sort of guarantee it would work. When there's a serious chance of throwing your money into a black hole where cash goes to die, then I'm not sure the upside is worth it. And even then, if you can make 1,000 investments into Instagrams for the cost of one investment into Hyperloop, I'd do that every time. "But they'd take 1billion -> 20billion over 1million -> 1billion every day." sounds wrong to me. If you have the $1B to invest, wouldn't you want to spread that out, make 1,000 $1M investments? I'd imagine your return would be better with that than an outside shot you could hit 20x your money on one investment.
Right. But no investment has a guarantee of working. There aren't 1,000 Instagrams in tech. There are roughly 10-15 moonshot investments made a year out of thousands. So you can't find 1,000 instagrams.
Investment doesn't scale like that. You can "imagine" return would be better but it isn't is it? Look at VC returns. If you make 1,000 investments of $1million how many do you think make it to being a billion dollars vs just losing your money? How many of those investments need ZERO more capital along the way - if they need more capital you either get diluted out or you're putting a ton more cash in.
Instagram is a ridiculous outlier to build an investment strategy on. How many other Instagrams have you heard of this year? Yeah... not 1,000.
People investing in Hyperloop type investments don't put all their money on one investment either. If you're an investment manager at a pension fund having to find places to park $500BILLION you cannot be managing million dollar investments, they're meaningless. Even an Instagram doesn't move the needle. You have to place lots of billion dollar bets.
funding over a billion dollars is not remotely intimidating to the large VC funds
I think the idea is that some of the companies in the $1 billion fund will succeed and others will fail. But, funding a single company/public works project to the tune of $1 billion would give some pause.
Not really. Funding comes in stages. No VC with a billion dollars in their pocket is making one bet. But for folks with a lot of money to put in this is not unusual for lifecycle.
Look at the actual amounts raised through multiple rounds by - not just the initial seed investment the time they IPOd by any big tech name of the last decade or two: Google, Cisco, Facebook... hell look how much Groupon burned through.
The idea that you cannot raise a billion dollars if you can deliver a return on it greater than capital markets would otherwise provide is nonsense.
Exactly. I'd even call 20x for Hyperloop in 5 years excessively optimistic. you'd need 15-20 years.
Then you run into the whole playing of the odds. Invest in 20 companies, hope 1.5ish make great returns. Even the largest VC firms can't afford that on mulitbillion dollar industrial ventures.
There is investment for new and groudbreaking technology, but it is much MUCH slower moving. We're talking 5 years of simply drumming up investors and getting everybody onboard before any ground breaking even happens.
Also, you have to be much MUCH more connected to your industry than say, an SV programmer. There is A LOT of checkboxes one has to hit before one takes on large scale industrial ventures. This shit doesn't get a proof of concept built up in a dorm room over the weekend, and it's user base isn't going viral to signal interest in the product if there is no product to use until you're already $4,000,000,000 in the hole....
"This shit doesn't get a proof of concept built up in a dorm room over the weekend, and it's user base isn't going viral to signal interest in the product if there is no product to use until you're already $4,000,000,000 in the hole...."
Exactly. And on top of that, there is no making serious pivots. If you're an Instagram and you realize that people don't just want to share photos, they want filters, you can make that change in minimal time. In a Hyperloop situation, you're designing something that you're hoping to convince people that they want, and if you build it and no one comes, you're massively screwed.
Not to mention that Hyperloop would have a massive cost over-run--I don't care what his estimates are. The cost of land-use alone is going to be just outright insane. If you run a pilot in CA, you're going to blow through several billion just securing basic land rights, running years-long ecological and wildlife surveys, determining impacts to groundwater/rivers, etc.
Then the real work begins. This would make the Big Dig look well planned & executed.
You just described in a nutshell why it's usually governments that make big infrastructure-scale and basic research investments.
Governments either don't care about ROI at all and are motivated by other factors (war, national security, national development, political points, etc.) or can afford to look at ROI over exceedingly long time scales.
However, governments are piss-poor investors. So what we get is private capital -- which invests in a lot of tiny incremental things -- and a lumbering beast called "public capital" that invests in big things in a clumsy, ineffective way.
Your argument is spot on, however, Hyperloop is just a different game altogether. It is an infrastructure project and those projects are usually bankrolled by governments (local + federal funds). Even SapceX seems to be largely supported by NASA contracts.
The only large SV project I've heard about in recent time is Planetary Resources, the company that wants to mine asteroids. But, the returns for that expensive project would approach the 1000x that SV firms wish for.
Admittedly both of these projects are quite ambitious, but I have to think that delivering equipment to asteroids, maintaining that equipment while it works, and then returning the output of that work to Earth, seems much more involved than building and operating a 300-mile evacuated pipe on the Earth's surface.
Otherwise, this is the Occam's Razor answer to me, and I agree.
Private industry is just now beginning to fund things like Hyperloops and space ships - this was the role of nation-states in the past, because making trains and going to space was more costly and un-risk-manageable than any real business. The government doesn't have to build the trains, but they incentive the building.
Direct government construction of infrastructure is evolving, and in the coming decades, private industry will be more involved in the investment end of it too, because the price of production and the amount of public knowledge is increasing. I don't think our modern day robber barons have that much more real capital than their forefathers (comparing like people like Rockefeller to Gates), but it's cheaper to build a railroad, and there's the whole open internet and body of academic knowledge to consult.
Good analysis but I think its missing a few key factors:
1) The risk profile of each investment. It may be the case that Instagram is a riskier proposition. Specifically, the likelihood of success of Instagram once it is funded may be smaller than the likelihood of success of a funded Hyperloop project
2) There aren't enough instagrams to invest in or they are harder to identify than the hyperloop type projects
3) Even though the percentage return may be lower than the hyperloop, in absolute dollars, the hyperloop has a higher return. For investors looking to put more of their capital to work, this is attractive.
But an Instagram has a high risk of failure whereas a transportation infrastructure is a very low-risk investment. The Hyperloop would be better compared with a huge Internet infrastructure like Google Search than with Instagram.
> transportation infrastructure is a very low-risk investment.
That's a good one. Building out a technology that has never been proven in a lab, let alone at production scale, in an industry where 2x cost overruns are inevitable and 10x not uncommon, that is dominated by government spending and not private capital for infrastructure, you consider the hyperloop a low-risk investment.
It might work, despite the skepticism, but there is no sense in which it can be considered low-risk.
Yes, I was talking about expensive infrastructures in general. It would be crazy to start building the Hyperloop before some working prototypes have proven that it works. But the high-speed train has low risks of loosing money if highways and airlines are saturated (i.e. if the demand is there, which can be predicted by studies).
If the author wanted to be fair, the title should be "Why Silicon Valley funds SpaceXes and Teslas, and not Hyperloops." And then it would be clear that the answer is simply that Elon is working on SpaceX and Tesla, and not on the Hyperloop.
You've definitely got a good point there, but I think you're being a bit unfair to the author also. SpaceXes and Teslas are by far the exception to the kind of companies SV is funding. They're probably only funded because it's Elon Musk behind them.
VC/Angel in SV has made enormous strides in working out how to reduce risk in entrepreneurship and is, to be honest, fairly incredible at selecting the companies that are going to work. YC is even better than most. The problem the author is talking about is that we (well, you) have become so good at selecting the winning companies that we're possibly throwing away the real risky bets that could be even bigger wins simply because an MVP and traction can't be found before lots of cash is on the table.
Of course, the exception to the author's point is, I believe, Planetary Resources.
"They're probably only funded because it's Elon Musk behind them."
And because of significant advantages and opportunities. Tesla, for example, benefits from the department of energy loan program as well as other tax incentives (like ZEV credits, which comprised most of their revenue thusfar)
Well, those opportunities were there for anyone to take, but Musk succeeded in both electric cars (vs Fisker, Nissan, Toyota, etc) AND in space (vs Virgin, Armadillo, Scaled Composites, etc). So at this point, I'd say that funding Musk is a safer bet than funding an opportunity.
The cost of the hyperloop is equivalent to the sum of every single VC investment (including life sciences, cleantech etc. not just software) made in the last quarter.
There's nowhere near enough money in the VC world to justify the kind of investment it would require. As it happens the biggest VC rounds in recent history have gone to transportation companies like Fisker and Better Place, but even those are in the hundreds of millions rather than the billions something like Hyperloop would require.
Yes and no. Even if you're accelerating at 1 g (~10 m/s), which for a car is pretty darn fast, even if it's not test-pilot fast, you're still looking at 35 seconds to get up to Mach 1 (~350 m/s). That's going to be a distance of 1/2at^2 = ~6km/4mi as the minimum length of track for acceleration, and the same again for deceleration. Add in margins for overrun and you might be looking at 10 miles, which is not something you could just plop down in Mountain View.
Admittedly if you didn't care about human comfort and were going for 3 g (which is apparently the force of the Gravitron thrill ride I remember from my youth) it would be a lot less (2km each way). It would be unpleasant, but not hazardous, and it would certainly show a margin of safety as the stresses of acceleration would be much greater than encountered in ordinary operation.
Yeah -- but what are the chances SpaceX would exist if Musk hadn't personally invested the first $100m?
And Tesla might have been cheaper at first, but Musk led the A round and participated in every funding until the F round (!).
Without a deep pocketed founder willing to absorb years of losses, what are the chances Tesla ever makes it to market? Even so they nearly died before they shipped the roadster.
He funded his own idea. The definition of "VC funding" isn't a concrete thing. What's important is the distinction between the way companies like Tesla and SpaceX came to where they are today when compared with companies like Instagram and Facebook.
Do you have detailed knowledge of Tesla and SpaceX's funding history? It was my impression that these companies would never have happened if the initial investors didn't provide ~$100 million of capital themselves.
So it isn't fair to say that SV's venture capitalists were lining up to fund these types of companies, and it remains to be seen whether they will do so in the future.
If you look at the major private space companies though, Space X, Blue Origin, even Virgin Galactic, they all have one thing in common. A tech billionaire who decided he wanted to go to space.
It's probably because there's very little money in it from the short term... but there just isn't a whole lot of money going towards radical start ups trying to go to space or build a hyperloop.
Silicon Valley actually funded PayPal. Elon Musk made a boatload of cash from that, and used the mojo (part of it was his own cash, part of it was the reputation he built with PayPal which enabled him to raise more money) to jumpstart SpaceX and Tesla.
But anyway. I am going to say something VERY controversial. Think of it as Devil's Advocate, squared, on steroids. Here goes.
The article could be seen as a rebuke to the fundamental principles of capitalism. You could say capitalism doesn't scale - not to Hyperloop size anyway. Projects at this magnitude simply require that bigger powers get involved. E.g., the government. Sorry for using the G-word in such a refined milieu.
Quote from the article: "Unfortunately, the market does not reward cash flow because the market does not reward value and innovation. The market rewards exits." If that doesn't ring a bell, I don't know what does.
Another quote: "The next reason that we don’t have Hyperloop, but we do have Instagram, is that Fortune 100 companies have notoriously bad in-house R&D. Therefore, acquisitions are driving most of the innovation. " Again, this could be seen as further proof that profit-driven endeavors only innovate small-scale and short-term. Larger leaps are driven by different incentives (I could go on a ramble about the joy of making, but that would be preaching to the choir round these parts of town). And when it comes to truly fundamental research - well, that field is simply allergic to what they call "the industry" (a slightly derisive term, when used in this context); spend some time among theoretical physicists and you'll see what I mean.
When I was young, I've read an essay by a Russian scientist, who was arguing that the centrally planned economy allows for high-magnitude projects, precisely because large financial forces can be easily engaged at this scale. I can't say I entirely agreed with the article back then (a kid growing up in the Eastern Bloc, not really liking the system), and I would not support it indiscriminately now either.
But then there's the Hyperloop. Or any other large scale project like this. Does capitalism scale at this level? Seems like it doesn't - at least not the capitalism of the smartphone app ecosystem. Are there any built-in limits to capitalism? Looks like there are - the limits are the power and wealth of a single individual, whereas some things are too big for any given person (and yes, I am aware that multiple investors could get involved to fund this project, which merely makes the problem slightly less bad, but still leaves it laying in the gutter).
Bear in mind, as someone who grew up behind the Iron Curtain, I definitely do not advocate for the Five Year Plan economy. But I think these concerns are legitimate. And I don't have any answers. Maybe someone here does. Or someone "out there".
It feels odd to lift this to a problem with an "ism" and ignore the people behind it. The problem I have with the original article is that it seems to think that innovation and markets consist of investors, entrepreneurs and nasdaq/snp.
So here I have a "theory 10" -
THE PEOPLE go "meh" when faced with something like Hyperloop, but are excited to tell their 500 friends what they had for lunch at the push of a button. Hence the investors go "who cares?" and hence the "entrepreneurs" go "hmm, I better think about more efficient lunch sharing".
People need to be told something like "folks we're going to throw $60B of your tax money (an amount that would rid the hungry part of the planet for 2 years) at a transport system that you won't even be proud of, won't be that much faster or safer than air travel" to get a non-meh reaction to hyperloop. Even then, fast travel between SF and LA is, perhaps, a solved problem according to common folks - just fly already. Heck, you don't even have an interesting view during the trip according to the proposed designs.
On the other hand, post after post on HN talks about cool materials, 3D printing, maker culture, break through science, etc. So funded innovation is happening, it would seem. Just not in the main news very much perhaps.
And here is a "theory 11" - the common folk may actually <shock!> be satisfied with the status quo? Innovators often talk about a persistent dissatisfaction with the status quo as motivation for their work. On the "eastern" side of the planet, this dissatisfaction itself would seem to be the one that needs addressing .. i.e. being happy and contented is not the problem, but the lack of them is.
Except that the premise is wrong - capitalism most definitely scales at that level. The railroads across America that were built in the 1800's were not a mandate by the federal government, they were private enterprises.
Am I crazy, or weren't the railroads heavily subsidized by the government? I think this heavy flow of public capital into a small number of hands created some of the "robber barons". In the long run it was probably the right call, as this kind of infrastructure spending and innovation doesn't happen without government involvement. Still, it's interesting to think how in the short-term it led to some pretty astounding income inequality. Maybe the issue is why didn't the government just build it themselves, sure it probably wouldn't have been built as efficiently as the worker level, but the overall cost might not having been much higher.
"From 1850-1871, the railroads received more than 175 million acres (71 million ha) of public land - an area more than one tenth of the whole United States and larger in area than Texas."
If you can't build a PayPal, what chance do you have of building a Tesla? It makes complete sense that only the already-proven entrepreneurs are the only ones being funded for the moonshots.
I would think those two examples are more about Elon Musk putting many millions of dollars of his own capital into the companies before any other VC's jumped on board.
I don't know if it is fair to say SV funded these companies because he put in $100m of his own money into SpaceX and a sizable amount into Tesla. Even with his name on these projects, it still seems like he needed to ante up way more than most successful entrepreneurs could ever hope to invest.
SpaceX is funded mostly by taxpayers. Half their direct funding came from NASA in the form of prepayments. And of course there is the 3 TRILLION dollars in NASA development that preceded it.
Silicon Valley is kicking in a few bucks at the end. (And guess who keeps all the profits.)
Why isn't this as simple as "the world's largest VC firms don't manage enough money to put a dent in a Hyperloop-scale concept, and need liquidity long before even the most optimistic projections for Hyperloop construction would suggest a payout"?
Venture capital isn't a public service. It's small teams of investment bankers making bets with endowments and pension funds. The investments have to fit the model, not the other way around.
Also, VCs don't fund public utilities / infrastructure, which are (at best) generally capital-intense, low-risk but low-return projects. If a project like the Hyperloop had to depend on private funding, it would need to return hundreds of billions in value, and that's just not going to happen. To get things like eminent domain, it has to be built as a public good, which means it at the very least has to be affordable for the average citizen (in some form.) That's why projects like high speed trains should be funded out of the public coffer and are generally unsuitable for private investors.
Now, building a company to develop Hyperloop tech / high-speed train technology? I'm sure that's something private investment could do, but I don't think it's really SV's forte - there are other places that would be better suited to that kind of engineering.
I think the author is on to something with the small bets, investors being wimps, etc. And I'd add to that: The pressure with these small bets is for a startup to produce something fast. The whole culture is designed around "What can you do in a weekend, prove a market exists, and then scale manually until your dev team can catch up?" Hence why every 3rd startup out of YC seems to be "Uber for [laundry, house cleaning, menial tasks, etc.]" It's an easy model to prove and scale.
A lot of ideas take longer than a few months and a few hundred thousand dollars to prove, but investors don't want to take the risk and founders see it as easier to build a laundry service and get paying customers in a week than to come up with a really big idea and potentially waste millions getting it to the point where it would be a failure or a success.
I don't think it's Instagram we need to worry about--I think it's the myriad of startups that are getting funded to the tune of a few million in a seed or a Series A that really aren't doing much of anything past scaling an "old-school" business, and the investor/accelerator culture that forces these startups to build a business in a week or two. (I say this as someone who's running a funded startup and currently going through a top accelerator, so at least I have a first-hand perspective.)
It's not simply that investors don't want to take certain risks. It's that some kinds of risks are outside their parameters. VCs are built up in our minds as towering financial authorities, but really they're just small teams of MBAs who are themselves raising money from foundations and pension funds, and the fraction of that capital that they get to work with is very small; a large pension fund wants some exposure to the market dynamics of "venture capital", but no pension fund wants to bet the farm on a Hyperloop.
When you grok how venture capital actually works, it gets easier to see how much less important they are to the economy than they seem. Startups like Instagram emerge from the parameters of VC, not from the whims or me-tooiness of the VC partners.
Again, this is a standard trope at HN,but is wrong - they are not primarily financial it goes like hedge fund or PE guys. Most top tier firms are made up of former entrepreneur types. And the idea that they all don't invest in groundbreaking technology is because quite frankly a perception issue here - is the average YC company a groundbreaking tech or closer to an Instagram? A lot of the clean tech investing was disastrous, but that is an example where a lot of interesting tech was backed, some of which has hit the market. Jut because it doesn't reach the front page here does not mean it doesn't happen.
My point was that it doesn't much matter what the VC partners think, because they're simply not in a position to fund massive civil infrastructure projects. Even the former- entrepreneur- types; they're getting their money from the same places.
It is not wrong. To make matters worse you'd need to look at the history books to better appreciate what indeed actually is "groundbreaking tech" and how it evolves. Science and technology is nudged along with micro breakthroughs. The history books are full of what appear to be big breakthroughs but when you look past the surface you'll discover how they really happen. Your experience of VC firms appears to be very limited, I'm guessing though you were top in your class (probably two years ago), and now think when you say something, it automatically becomes "the word".
If your points are strong, they don't need to be covered in barbs. Barbs are a "tell"; they indicate bluster, which is what people deploy when they don't know that they're talking about. You're making it harder to take you seriously and should change your tactics.
I think the seed bubble is certainly annoying, but that's largely angel investors. It's largely folks who made a few million dollars having success in someone else's startup (Google, Facebook, whatever) and thinking they're business geniuses with lots to offer the next generation of entrepreneurs. Many of them are little more than dumb money but think they're adding a ton of value, and entrepreneurs humor them and take the checks. As a result a lot of crap gets funded early.
But VCs still play at the bigger level for more money and most of these me-too startups that get their million dollars go nowhere and get no follow on funding and die. The bubble of seed will eventually go away as these angels realize that investing is hard and they have better things to spend their money on.
As someone who has been involved in a billion dollar project that required up front investment of around $250million I can tell you that finding very large sums of investment for capital intensive businesses with good return metrics is not hard - there's a lot of money that at that scale only has limited options for putting it in play. Sovereign wealth funds alone are desperately seeking out deals at this scale.
I'm all for innovation and pursuing alternate forms of transportation, but I don't pretend Musk's claims are above criticism.
As for the jerrygangi.com article, it grossly misrepresents Warrent Buffet's investment strategy:
>Here’s a piece of news: real investors don’t care what industry they invest in. Warren Buffet has invested in railroads, furniture companies, insurance companies, and hundreds more.
This is in direct opposition to what Buffet has actually said about investing [1]:
"Never invest in a business you cannot understand."
Using Buffet's actual statements and not some misrepresentation of his ideas, it seems clear that Buffet would require a great deal of due diligence to validate Musk's ideas before considering any investment.
> "Never invest in a business you cannot understand."
Which suggests a #10 on the OP's list: investors don't understand technology very deeply or widely. The last boom was the web, so we have an over-population of investors who understand the web (to the extent that they "grok" any tech at all).
MVP and user traction makes a lot of sense for web startups. Web startups are low-capital, in many cases so low capital that they can be funded by someone working on the side as a Starbucks barista. It's popular because a tiny team or even an individual can often build something minimal, get traction, and then make what amounts to a gigantic ROI. Imagine said Starbucks barista doing a proof-of-concept that gets a million users... the ROI there for the individual is insane (like thousands of percent), and the potential ROI for the investor is quite large as well. Web startups generate a lot of very real rags-to-riches stories.
But this formula simply doesn't translate to anything that is at all capital intensive. Basement hackers are never going to prototype new mass transit solutions, try to mine asteroids, design 3d printers to print human organs, or build a fourth-generation molten salt reactor. Not gonna happen.
I believe your point about Buffett is spot on. He's mentioned 'circle of competence' philosophy a number of times. Although I'm not sure if he meant specific companies, but rather industry trajectories. I also think the post's treatment of Buffer was in poor taste.
Other than that, I was nodding my head all the way through this :).
My initial comment comes across a little too strongly against the article because it singles out one thing I found to be highly misleading. I think, ultimately, SV investors don't encourage much innovation. I wish there was more capital available to fund innovators such as Musk. However, I think the article's usage of hyperloop as an example of important ideas that don't get funding is premature, to say the least. There needs to be a lot more debate about the pros, cons, and legislative ramifications of hyperloop before championing it as something people should invest in.
Those aren't contradictory. If you put the two statements together, the claim is "real investors should understand more industries". You can agree or disagree with that, but it reconciles the two pretty simply.
I get the impression that investment banking culture is biased against that in the sense that it does not hire polymath geek types. It hires suits with finance degrees, or people who have a demonstrated record building businesses. Since we just had a huge web boom, the latter category is going to be stacked full of people who get the web and only the web. Hence we're spacing out our tweets, not commercializing space.
I think the modal background for VC is still someone who came over from an investment bank, and your statement doesn't really characterize their hiring. Investment banks don't hire suits. They hire kids. They hire smart kids from Harvard and Wharton, increasingly those with nerdier backgrounds, but ultimately kids who don't know anything. Then they impart unto these kids their incredible institutional experience with financial analysis. And from there, those kids go forth and become VCs and PE guys and HF guys and CFOs, but they take with them a singular focus on financial analysis.
This is why Wall Street hates Apple and loves GE and relegates VC off to the side. And that's also why hyperloop doesn't get funded. Because the people with billions to throw around, which the VCs don't have, can do the financial math to realize that projects like that aren't going to be sufficiently lucrative to justify the enormous risk.
> I get the impression that investment banking culture is biased against that in the sense that it does not hire polymath geek types.
But they do -- they's called "quants." They aren't as popular as they were 20 years ago, but they're still hired. And they're notoriously incapable of assessing risk versus reward.
I think "I care about an industry" versus "I understand an industry because I care about money" is one (of many) things that sets Buffett apart from your average person throwing a couple bucks at a company.
>> "This is in direct opposition to what Buffet has actually said about investing [1]"
I disagree. Buffet probably knows quite a lot about those industries. You don't need to be an expert you just need to spend some time getting to understand them well enough to make a balanced decision.
I never argued that Buffet doesn't understand railroads, furniture companies, etc. My point is that there isn't enough information about hyperloop, yet, to truly understand the risks involved in investing in it.
The issue is this: "real investors don’t care what industry they invest in"
That's a drastically bogus statement. First of all, it attempts a rather lame argument from authority ("real investors").
Second, Warren Buffett has, for about five decades, been exceptionally clear about his investing philosophy. He has written magnitudes on it. You can read it in the lines of his annual letters, and watch him explain it on countless CNBC clips. He absolutely cares what industry he invests into. One simple example: he said in the 1990s that he wouldn't invest into Microsoft, despite having become friends with Bill Gates, because he couldn't understand the tech sector well enough to pick winners. He famously stayed away from all tech stocks during the roaring '90s, with the explanation that he didn't understand any of the segments.
Silicon Valley funds Instagrams not Hyperloops because it funds things where it can manage risk in a predictable way through capital. Contrary to other comments it's not down to scale of investment. There's a lot of investment cash out there and it's actually VERY hard to find big investment deals - if you have an opportunity to put a ton of cash to work it's appealing.
Hyperloop will be absolutely bogged down in political dealing, backhanders, corrupt politicians, labor unions, incumbent industries so inefficient they'd rather spend money on lobbying and gaming the political system than doing something about their fading competitive position.
This is just not something that allows financial backers to have any kind of forward visibility, even modeled, into their investment.
Silicon Valley isn't TechCrunch. That's just the noise and that kind of startup is just what you see and hear the most.
There's not a lack of thinking big or looking outside the consumer internet software space.
Look at how Silicon Valley bet heavily on Cleantech and got its ass handed to it. That wasn't lack of vision. Or lack of capital. It was venturing into investment arenas where success factors became more political than economic; more corrupt back room dealings than efficient execution and management skills.
While I agree with OP on the frustration of SV not aiming its efforts at Big Problems, I'm differing on the why (which is the standard allotment of "it's not economically viable in the short term).
I think there simply isn't the talent or guts to take on these projects. It's one thing to "disrupt" easy targets like paying for something or getting a ride from here to there. They're heavily regulated industries, full of bullshit, and ripe for the taking. All the "innovators" did was ignore the laws that made those industries suck. It seems to be a winning strategy.
But to actually build something huge. To try to churn it through a state's government. Get funding. Get permits. Hire competent engineers that won't kill people. Deal with suppliers and construction. These are massive, massive undertakings.
Indeed, building the proverbial hyperloop is not a "startup" endeavor. It's not something spry, spanky groups of new college graduates can jump into with reckless abandon.
The reason investors don't invest in a hyperloop is because there isn't a competent body heading the effort. If Musk were to say, "I, Elon Musk, am going to create the first hyperloop, with my new company Hyperloop Inc." he would get so much funding, he could stuff it in his ass and fly to the moon. Same with Boeing, Airbus or Lockheed Martin. The common denominator is the capability.
But I have a feeling even Musk himself is too afraid of the kind of effort it takes to build a transport between 350 miles of California.
This is a sad statement on the complete utter lack of awareness of how the system of tech development works in the United States.
The simple reason Silicon Valley doesn't fund Hyperloops is because they cost BILLIONS to develop over DECADES, with highly uncertain outcomes. This scale of large-scale, long-term, technology investment risk is borne by..... drumroll.....
TAXPAYERS. The guv'ment. Uncle Sam.
The Internet. Computers. NASA (hello SpaceX). Airplanes. Even frickin Siri was funded by the public.
The way it works is it's done under the banner of military applications. DARPA is a key agency in core development, but a very large part is government procurement. Then whatever works out given away pretty much for free to private hands.
Silicon Valley specializes in investing in the "last mile" of commercial development. It's still risky, but orders of magnitude less than something like developing Hyperloop from scratch.
There is also the basic economic argument that much of the value of transit cannot be captured by a private investor because of externalities. The value of a transit line isn't just to people who ride it. This is obvious: compare commercial real estate leases near a subway stop versus ones far away. Governments can capture those positive externalities through general increases in tax revenue or things like tax increment districts. Private operators are stuck trying to recoup all their investment solely from riders.
Silicon Valley doesn't have the money to fund hyperloops. Its designed around throwing relatively small amounts here and there, not $10 billion investments the returns from which could take a couple of decades to materialize. $10 billion is close to all the SV VC investment in a year, and realistically, hyperloop is not happening for less than some multiple of that.
I ultimately think it comes down to that people don't think they need these things because they have options now (however poor they may be compared to the option that could be built in the future).
"The stock market used to be a place where entrepreneurs went and raised money for their companies. That’s what the stock market used to be. Today the stock market is a place where hedge fund managers and quant traders are shaving fractions of a penny off benign movements in price and volume. One of the byproducts of going from an entrepreneurial stock market to a hyper-traded stock market is that new companies can’t survive unless they have a market cap of at least $10 billion dollars. Don’t even bother going public with less than that. It’s not worth the time, or the money, or the effort."
I think because of the above, that sites like kickstarter and indigogo have become sort of like the new IPO market where would be entrepreneurs and hobbyists can raise funds to make things people want, without the huge burden of the legal liabilities associated with typical investments. (aside: I wonder how people could build on top of this to become sort of the quants of these new platforms?)
To be honest, I don't think people are really craving a faster way to get to their (shitty) jobs, and would much rather a better socioeconomic situation… what does the hyperloop for that look like that would render the current reality obsolete and undesirable comparatively?
It's the same reason why the music industry funds Justin Biebers, not Bob Dylans. They're looking for an extremely high profit to innovation ratio, the one piece of shit among many similar pieces of shit that "catches on" and turns into a money press.
That said, Hyperloop looks cool on paper but when I see all this geek excitement over it before the engineering research has been done to make it cost-effective I hear in the subtext a chant of "Monorail! Monorail! Monorail!"
This article is so annoying I don't even know where to begin. I have a hard time believing this is on the front page of Hacker News.
If you are going to reduce the revolution of the information age to Instagram well then yes you might have a point. Let's ignore the most important innovations our society has seen that have come about in the last few decades.
But the truth is, is Hyperloop even the right solution? Would it really make our lives that much better? Do you need to travel nearly as much as you used to? I actually actively avoid travel, communicating remotely if possible. If Hyperloop was a UPS style service, then I could potentially see the use for it. Get your package in hours. But as a consumer transport? I don't think it is nearly as innovative or revolutionary as most people seem. But I am just a software engineer, who am I to discuss these things.
One reason is that what an enterpreneur will work on also depends on the prevailing ethics and idea about his role in society of the time.
In a post-yuppie, money-grubbing enterprenerial climate, they are more likely to invest and work on make-money-quick BS schemes, like social websites and mobile trivialities ("like Instagram, but for goat milk drinkers").
An era which respected industry, infrastructure, and succesful industrialists, etc, produced different results. Musk (and Jobs) were like that -- but 90% of enterpreneurs out there today would model themeselves after Zuckenberg or Systrom instead of them.
>Furthermore, the stock market isn’t influenced by value today like it was thirty years ago.
This simply isn't true. It was nearly 30 years ago that Warren Buffett published his article "The Superinvestors of Graham-and-Doddsville" arguing that the market didn't accurately value many companies, and that anyone could become rich by taking the time to find market inefficiencies. And in the article he described the approach he had already been using for nearly three decades. There have always been discrepancies between stock prices and companies' true values.
There are limits though. I don't care how nice the camera is on my iPad, I still want to visit my family for thanksgiving.
I don't think the author deemed wikipedia, google and coursera worthless. Its asking the question of why a pitch like "facebook for horses" is more likely to get funding then a revolutionary mass transit system.
Counterexamples: General Fusion and Tri-Alpha are two companies attempting to build commercial fusion reactors that are well-financed by investors. General Fusion got $40 million plus another round recently, and Tri-Alpha was up to $140 million before a recent investment from someone in Russia.
But both were funded early on by billionaires, Paul Allen for Tri-Alpha and Jeff Bezos for General Fusion. On the other hand, the focus fusion guys are putting up better numbers than Tri-Alpha and they're still running on a shoestring.
They aren't asking for funding quite on the same scale as the Hyperloop, but it's definitely larger than the ~ $1 million required for another phone app.
The reason is simple: cost + risk. It's easier to come up with the much smaller amount required to fund Instagram than to come up with enough to fund the Hyperloop. Less money is at risk. It's that simple. There may be other factors at play, but this is by far the most important.
This. And related to risk: When a website fails, it doesn't hurt anyone; if this tube were built, and then found to have a fatal design flaw, the liability would be enormous.
The post is obnoxious to read. You get like 4 lines at a time on a 15" display.
I know the design is for supposed readability, but if that were the main goal, then why have the gigantic annoying ad banner at the top that you can't close.
It seems to me that these days, entrepreneurs are in for the short term - they want to blow up fast, then sell off their company for the highest price possible. Few are in for the long term, and I don't understand why.
That is why it is imperative we have a government that can make investments into future energy and infrastructure needs even if it potentially destroys existing companies in the long run.
