Folks. There's no crisis of innovation. This would be a lot clearer if people understood how Silicon Valley has always worked:
1. Government pays for really big long-term high-risk core technology development. Things like microprocessors, the internet, voice analysis, lasers, space rockets, highways, etc.
2. These are mostly done under the rubric of defense spending. (This is important.)
3. Private sector steps in to commercialize the projects that bear fruit.
Hyperloop falls under category #1. Those projects take billions invested over decades with very uncertain prospects. Usually supported by military procurement. Yes, even highways were built ostensibly for the military. And Siri on your iPhone? Funded by the CIA.
That kind of Really Big Fundamental innovation is funded by the government. It's never been VCs. They focus on the "last mile".
Space X is a good example of that: bringing a foundation of core tech developed by NASA to market, adding commercial-oriented innovation on the scale of a few years and a couple hundred million from the private sector. But even at this stage, there's still many more hundreds of millions in government procurement (prepaid launch contracts).
The reason Hyperloops don't get funded is that the government doesn't have a military application (or pretext) for it.
Now we could go on to ask why Silicon Valley's megabucks foundation is military spending and not, say, direct government investment in sustainable public services. But then we get to some uncomfortable issues, like how the public might feel more entitled to the fruits of those investments. Whereas if core science and tech is seen as a kind of "military surplus", free or cheap for the taking, then the VC private sector gets to keep the profits from commercialization.
The idea that "military development advances technology" is very popular but not entirely accurate. The micro-processor, for example, was invented while working on a handheld calculator project, and advanced through the consumer market.
Sometimes military development advances technologies in ways that might not have happened otherwise but it's hard to compare to the way development would have gone otherwise. Take the development of aircraft from their invention through WWII. Unquestionably there was a rapid pace of development during, and due to, WWI and WWII. But there was also a rapid pace of development outside of the wars. The design of the iconic WWII fighters the Supermarine Spitfire and P51 Mustang owe much to the advancement of high performance aviation spurred by the entirely civilian Schneider Trophy competitions through the 1920s and '30s, for example.
"In the United States, the development of the computer was underpinned by massive government investment in the technology for military applications during WWII and then the Cold War. The latter superpower confrontation made it possible for local manufacturers to transform their machines into commercially viable products. It was the same story in Europe, where adoption of computers began largely through proactive steps taken by national governments to stimulate development and deployment of the technology."
You're arguing there's an interplay between the public and private sector. That's true. But you would be hard-pressed to find an example of a major core tech that developed independently of significant government investment -- particularly in the highest-risk, most capital-intensive stuff. And that's why Hyperloop doesn't get funded.
> You're arguing there's an interplay between the public and private sector. That's true. But you would be hard-pressed to find an example of a major core tech that developed independently of significant government investment
I'm not sure about the history, but perhaps the internal combustion engine?
More generally, the line of reasoning in this thread assumes "this is how things have happened" to imply "this is the _only_ way things can happen". It is entirely conceivable that the private sector would, in the absense of government funding, step up and perform/fund fundamental research. But, in the current fiscal climate where there is still, generally speaking, copious government funding available (e.g., to the military), why would a private group spend money to do that when they can let someone else (the government) take the risk (with someone else's money).
Indeed. There were 3 of the largest wars in history during the 20th century (WWI, WWII, and the Cold War). That's going to necessarily skew the statistics on development of technology in recent history.
Here's a quick overview of the history of ICs. It gives many strong examples of how DARPA propelled their development and decisively rescued the U.S. industry from Japanese competition -- definitely a large role. There's really not a lot of controversy about the massive role that DARPA and other agencies play in American high tech.
Hold on, so you're arguing that DARPA "rescuing US industry from Japanese competition" is proof that the technology absolutely required government investment to advance it?
Need I really demonstrate the fault in that logic?
I don't know if it affects this case, but I know that the Japanese government was doing a lot to prop up their companies, so it's possible that "Japanese competition" isn't entirely private sector.
[2]This is partly due to the difficulty of writing software in this highly regulated environment. Seems like some pre approved platform should help here.
I think the root cause of the problem is that innovative projects/companies don't have marketing/sales skills. There are a lot of innovation in the world and in US in particular but it's difficult to plug into the business world.
As a co-founder of an 'Instagram' business, I completely agree with everything in this article. In fact, it's one of the best things I've read in a long, long time. There is absolutely a crisis in innovation.
Unfortunately, this is the way the ecosystem is at the minute and we can only hope that when the bubble bursts the people that have made exits from these types of startups can invest or found & fund real innovation themselves.
> Government pays for really big long-term high-risk core technology development
No, taxpayers do. Without consent. Government takes money from taxpayers and pays for those long-term things regardless of whether they agree with those things or not. Democracy and elections isn't consent - may I remind you that congress approval rating is now below 10%.
Well, given the degree to which spending exceed tax revenue, marginal changes in government expenses are actually paid for by bond purchasers, not taxpayers.
It is amazing that someone is willing to pay $3 billion for SnapChat, but nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate, although many people took issue with it).
But we're still in the early days of the internet and smartphone era. It's still a gold rush where people are running after get-rich-quick ideas.
Eventually we'll hit saturation and those quick exits will become less common. That will force investors to look for new opportunities elsewhere.
> It is amazing that someone is willing to pay $3 billion for SnapChat, but nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate, although many people took issue with it).
No, it isn't.
Reports/rumors indicate that Facebook, Google and Tencent were interested in acquiring SnapChat, a real service with real users, for $3 billion or more. Facebook, Google and Tencent are multi-billion dollar businesses that have reasonable justification to be interested in a company like SnapChat, even if the amounts they were supposedly willing to pay for it may seem unjustifiably rich to many.
Hyperloop doesn't exist. It is a concept. The OP is criticizing venture capitalists for not wanting to invest in making such a concept a reality.
It's easy to criticize venture capitalists, and a good amount of criticism is valid. But the OP doesn't seem to understand how venture capital works. Venture firms are not businesses that produce capital in the same fashion as Facebook, Google or Tencent. They raise their capital from limited partners ("rich people", institutions, etc.) and are tasked with growing that capital through investment. They realistically would not be able to raise this capital if their funds were entirely unfocused and they stated an intention to bet hundreds of millions of dollars at a time on mere concepts.
Venture capital has already experienced significant changes over the past decade and there is good reason to expect that it will continue to change as trends evolve and the ongoing experiments in monetary policy play out. But anyone expecting venture capital to become the source of funding for concepts that require seed funding to the tune of hundreds of millions or billions of dollars is going to be sorely disappointed.
In short, the OP's apparent distaste for venture capitalists is misplaced. Those who expect [insert some idea] to be financed to the tune of billions of dollars might as well blame every person on the Forbes billionaires list, every CEO of a major corporation or bank, and every Western politician for the lack of funding because they're arguably just as responsible as the khaki crew on Sand Hill Road.
Also, there is a small possibility that most of the world will one day use SnapChat, making it hugely profitable. Since the Hyperloop is tied to a specific physical location, this is not really a possibility. I guess investors are betting that software businesses are easier to scale than "hardware" / construction businesses.
The company that builds an hyperloop will gain plenty of patents, capabilities and brand value along the way.Each implementation of the hyperloop will probably be a monopoly.
This opens paths for licensing the tech globally. It's not as easy as scaling software, but it's possible to scale.
>but nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate, although many people took issue with it).
Hyperloop is not a product that needs only $6 billion to get to market. It needs $6 billion to test the feasibility, and God knows how much more to commercialize it over years or decades. Worse, there is no guarantee that anything will come out of it, that you won't get ripped off (once you prove the concept, why wouldn't GE, Lockheed or any some State corporation simply build it themselves), or that it is any better than high-speed trains or airplanes.
Snapchat is one in-app ad from generating revenue to cover operations and probably 3-5 years from a $5-$15 billion IPO valuation.
I'd respect anybody who puts up the money to fund this moon-shot project, but the risk profile between Hyperloop and Snapchat is like night and day.
I'm still trying to grasp Snapchat's worth. I can't quite
figure out exactly what the patent protects(I'm no expert
though). If Facebook is will to give them 3 billion dollars, the patent must be Bullet proof? If not, we are
in a bigger Internet Bubble than the 90's. I'm still
dumbfounded they didn't accept the money. I guess I getting
old, but the right person(honest nonprofit) could help a lot of people and animals with that kind of money. Yes, I would help the poor, and start up free clinics for any animal that needs medical assistance.
I'm not saying it's impossible, but when the California High-Speed Rail project [1] goes at a third the speed using much more conventional technology and costs ten times as much, an investor's got to ask if hyperloop is too good to be true.
It's also a big high-profile project, so if your investment failed you couldn't sweep it under the rug; and mass transit is an industry that hasn't had many high profile successes in recent years.
How does a project that's been horribly managed being much worse than this suggest that this is suspect? (Unless you expect that horrible management is a given in any CA government-related project)
Because the cost is not just technological. There's also major land use issues, which get expensive in CA. His idea that putting it along the middle of the freeway will obviate these is not credible. I estimate $20bn to build it, minimum. Rocketry is simple by comparison.
I also have my estimates. And I think that one day, after I create a successful company that builds electric cars on a scale no one has tried before, and after I create a company that designs and builds rockets that deliver cargo on commercially-contracted terms, people will even take my estimates seriously.
Until then, I'll keep them to myself and not criticize others unless I have a really, really good justification.
Maybe, maybe not. I don't see how running it along the freeway is not credible.
But here's the upshot: Snapchat is a photo-sharing app that will hardly be around in 10 years; the Hyperloop would be. This seems to be lost on all those in Silicon Valley who sit for hours every day in traffic to go to their one-story prefab work box, only to then sit in the same traffic later to return to their prefab home box.
There's investment to make your money grow and investment in the future. We need less of the former and more of the latter.
Yes, but even Elon Musk admits they were very close to failure in 2008 and almost had to call it quits. No matter the track record these projects are extraordinarily risky (with a potentially massive payout).
True, but at least Hyperloop can actually be useful for someone and improve people's lives. To me, the thought that 3 billion were paid for Snapchat is not hilarious, it's horrifying.
Arguably, there is nothing more important for a human being as an sentient organism than an endorphin fix obtained from various sources: love, surprise, food, etc.
Snapchat provides that in a form of secure ephemeral messaging allowing users to share private information pseudosecurely. That is real value.
If you find human nature horrifying I can't blame you, but saying that messaging apps do not improve people's lives is intelectually dishonest.
What's intellectually dishonest is pretending that "endorphin fix" constitutes the purpose of human existence, whereas it is just a byproduct. How it is attained matters. In fact, ability to reason about that is what makes humans self-aware.
Besides, "endorphins" are just a roundabout, cowardly (and factually incorrect) way to refer to general human happiness. You're implying that Snapchats of this world make people feel happy and fulfilled. They don't. There are hundreds of these social media start-ups, yet 1 in 10 Americans takes antidepressants. (Which is a diagnosis problem, but it does illustrate how many people feel seriously unhappy.)
> Arguably, there is nothing more important for a human being as an sentient organism than an endorphin fix obtained from various sources: love, surprise, food, etc.
On one hand, the balance of values is more complex than "there is nothing more important than the endorphin fix that allows you to translate your values into pleasures for your brain". Hookers and weed give you ten times the endorphin fix Snapchat gives you, and yet there aren't too many people who would eagerly applaud investment in that.
So no, I don't think that I am intellectually dishonest in claiming that the umpteenth incremental improvement over a photo sharing app significantly improves people's lives. Snapchat isn't shaping the form of future communication, it doesn't bring people closer together any closer than IRC already does, it's not encouraging communities anymore than a dinner conversation is. It just makes sexting somewhat trendier, and twenty years from now we will look upon Snapchat the same way that we now look at elm.
On the other hand, Snapchat is not the same as "the messaging apps". I'm not claiming messaging applications in general are useless; I'm claiming that Snapchat is just a slightly trendier one. The money that were invested in it, while creating financial profit in the short term, are hardly used for any significant impact. Some people will end up with fuller pockets, big deal.
I see no problem with investing in weed and prostitution if it is beneficial for all(impossible) or most stakeholders.
Yes, Snapchat provides small incremental improvement of people's lives. But it does it for 25M users, mind that. And that incremental improvement is considered to be worth more 3B dollars. Why? Because you can attach a business model to that improvement and extract revenues. It is simultaneously filling pockets of some people and providing value for users. If you don't think that sexting is valuable, that is your personal opinion. Millions of people think otherwise.
IT is cheap to make, you only need programmers, rent a place, some hosting and done, you make a quick buck.
Building a railroad require much more concrete things, like steel, construction and utility vehicles, fuel, many workers, a place for those workers to sleep near the site, etc.
I'm amazed that you're comparing IT and a railroad. I would be glad to see a second internet bubble. It's like saying having a smartphone is more important than transporting people.
It is silly without some sort of state intervention. In Colorado the cost is nearly $2billion for light rail from Longmont to Boulder and then to Denver and some of the track already exists. (Actually the longest stretch of track already exists)
There is the cost, then there is the cost when government does it, then there is the cost when government does it and there is some sort of eminent domain issues and I think people simply multiply numbers by 5 to 10 when that happens.
Does $6 bln include the land? Seems kinda cheap if we're talking California, leave alone the fact that the price will "suddenly" go up, when a landowner discovers that his tract is included in the design.
A big part of the reason the IPO market suck, i.e. why "the stock market isn’t influenced by value today like it was thirty years ago", is taxes. Specifically, the differential tax treatment of capital gains and dividends.
A long time back, equities were viewed as a vehicle for distributing dividends. A company earns money and pays it to investors. You build the hyperloop, customers buy tickets, you give investors a cut of the proceeds. The value of HLOOP is based primarily on the expected value of this revenue stream.
Nowadays, dividends are double taxed while capital gains are only single taxed, which means that companies mostly don't bother with dividends anymore. Investors tolerate this because the differential tax rates mean that management would be throwing away their money if they issued dividends. As a result, the value of equity is the value of expected capital gains, resulting in the current situation.
> Nowadays, dividends are double taxed while capital gains are only single taxed, which means that companies mostly don't bother with dividends anymore. Investors tolerate this because the differential tax rates mean that management would be throwing away their money if they issued dividends.
Notwithstanding the fact that there are plenty of companies that pay dividends, I assume you're not familiar with REITs, preferred stock and MLPs? Dividend/distribution investing is very much alive and well.
Dividends these days occur, but they are generally a token rather than the primary means of rewarding shareholders.
REITs might work for Hyperloop specifically (depending on whether the IRS believes Hyperloop is an "investment agent specializing in real estate and real estate mortgages"), but they don't work for most companies. The fact that there are a few corporate structures that avoid overtaxing dividends doesn't change the fact that they don't work for most businesses.
> Dividends these days occur, but they are generally a token rather than the primary means of rewarding shareholders.
I would strongly suggest that you visit a site like http://www.dividendchannel.com/. Your statements that "companies mostly don't bother with dividends anymore" and "they are generally a token rather than the primary means of rewarding shareholders" are simply incorrect.
This paper suggests, though comes far from proving, that dividends do behave as if they are used for signalling (i.e., "look at us, we are healthy, see, dividends").
To qualify for the preferential tax treatment of a REIT you have to pay out 90% of their income to shareholders which means that any sort of aggressive growth or risk taking isn't possible. Plus as their name indicates, they aren't exactly useful for general businesses. I don't believe that Apple could switch to a REIT and start paying out huge dividends for example.
A stock buyback replaces dividends with capital gains directly so that's not actually an issue. AKA company can do a 5% dividend or buy back ~5% of it's stock. After the buyback the stock price should in theory not change noticeably vs the drop after a dividend however, future earnings are split among a smaller pool of stocks. Repeat for X years and you get 1.05^X years of effective growth even if earning are flat.
A lot of tech company's don't do this because they consider there stock overvalued aka P/E of 30+ and buybacks can't afford significant quantities of stock.
Yes, a stock buyback can replace dividends provided the IRS views it as "not essentially equivalent to a dividend". I.e., if you issue quarterly share buybacks, the IRS will kick your ass.
(Google the phrase in quotes, it's a legal term of art.)
In my opinion capital gains and corporate income tax should go away and everything should fall under individual. income tax. Simplifies a lot of things and avoids a lot of perverse incentives created by the existing system.
Moving corporate income tax to individual income tax would allow to postpone paying any such tax forever, allowing company-owners to skip paying the tax, but allowing them to use the (yet untaxed) funds to purchase/invest whatever they want.
No, it doesn't. The IRS is very good at taxing corporate transfers to individuals (e.g., the company paying for your house, clothes and food) as income.
If this wasn't already a solved problem, we wouldn't even need to eliminate corporate taxes to engage in the scheme you propose. Just book revenue, book your personal expenses as corporate expenses, and the company made no profit and hence needs to pay no taxes.
This is why your company generally only provides you benefits in a very narrow set of categories that happen to be tax deductible (health insurance, 401k).
Yes, the part of the income that you consume would be taxed.
The point is that pretty much all of what megacorps make for their owners is not consumed - on that scale, houses, clothes and food are a small percentage, a rounding error. Don't think about what a small business owner is doing with his profits, think about what happens to profits of Walmart or Microsoft. Not about income of the 1%, but income of the 0.1% (which is the big part).
What is a billionaire doing with his money? A major part of it is reinvested to earn even more money - that can be done through the company; so the main feedback loop of rich-gets-richer is completely untaxed. Part of it is used to fund pet projects (like Virgin Galactic or 10,000 Year Clock project) or buy companies for control/prestige purposes - not taxed. Part of the wealth is simply accumulated to be given to your heirs - if there's no capital gains tax, would an inheritance tax stand? Part of that is used to buy political and social influence by funding parties and advertisement - not taxed. Part of that is used to buy prestige - ok, buying a fancy house to show off is taxed; but buying a major football club to show off isn't.
In essence, this means that the continuing concentration of wealth is untaxed, and you're taxing only the spending of wealth, which is something that actually redistributes wealth to the rest of society. This is not sustainable; that tax policy would fuel a rising and inescapable inequality. The society is better off if billionaires spend their wealth on fancy services (giving fancy income to the service providers), instead of owning all those service providers.
How would that work? If I wanted to buy a house, and I have my corporation do that, then I live there rent free, I still have to pay taxes on the benefit given to me.
You could postpone the taxation until you actually want to use the money to benefit yourself then you are taxed. I believe you can already do it with corporations that are headquartered in low tax jurisdictions.
Many say that, in Silicon Valley, there is "no penalty for failure". I'll be a heretic for a bit, and say this is part of the reason why we don't have Hyperloop.
Software companies have huge payoff ratios. You invest $1M in 5,000 companies, and hopefully one of them is Facebook. The payoff on a big success is thousands to one. If you give $1M to some douchebag who spends it on hookers and blow, no big deal.
Infrastructure companies have much lower payoff ratios. You might invest $1B in the hope of getting back $10B. But for that to be profitable, the success probability must be at least 10%. Which means you have to be pretty sure they aren't going to just blow it all on parties.
Now, from the founder's perspective, building an infrastructure company is really hard, and blowing $1B on parties is really easy. So if there's no penalty for failure - no social cost to wasting the money, and not trying very hard to build the hardware - that's what almost everyone winds up doing. Infrastructure demands large capital investment, and large capital investment demands some form of accountability.
Never mind the failures due to coke and hookers. The big upside to the SV early stage investments is that startups that are responsibly run but don't seem to have a natural route to profitability can probably end up selling the people or tech as assets to someone else in the sector. Investors expect positive returns on some of the "near misses" in their portfolio.
By contrast, if you can't make an operating profit on the Hyperloop having paid all the research and infrastructure costs (either it doesn't reliably work, or is just widely considered too unpleasant to ride on a regular basis) you end up with miles of very visible scrap metal.
Silicon Valley did fund some "hyperloops", look no further than Musk's other two big ideas (Space X & Tesla). Look for the few VCs that are non conventional thinkers themselves. The ones that discuss the distant future as though it is right around the corner or even happening now.
As an example watch any 10 minutes of this interview with Steve Jurvetson of DFJ. You'll see why he and Musk were a good fit: http://youtu.be/O2tK0Wl2F8w
Those are not hyperloops. Both SpaceX and Tesla are built on decades of R&D and core science paid for mostly by taxpayers to the tune of hundreds of billions of dollars.
This is not to take anything away from the "layer" that Musk added to this foundation. But hyperloop does not have the same foundation. There have been space missions and electric cars before; there hasn't been anything approaching a hyperloop at scale. So the investment risk is even greater.
If SpaceX isn't a "hyperloop" project, then almost nothing would qualify. HP, Intel, Cisco, and other Silicon Valley giants -- the type of companies that the original post would probably point to in contrast to something like Snapchat -- benefited from decades of military and university research.
And if that's the case, that also suggests an answer to all of this. Spend more on basic R&D.
There's no contradiction. HP, Intel, etc. happened because they were built on a foundation of massive government investment in microprocessor tech during its early, super high risk phase, and then government procurement. Hyperloop isn't happening within the Silicon Valley model because it's core tech/infrastructure that does not have the government's interest, because our system is built around defense spending.
That's not to say the government couldn't fund it as a transportation infrastructure project, but that's not the Silicon Valley model, and the funding is much smaller and harder to come by than defense spending.
The problem isn't really just to spend "more" on R&D -- have you seen the defense budget? Hyperloop would be a blip. The problem is deeper.. it's that our system is not set up to funnel taxpayer funds into public services like this. IMHO for political reasons. Running it through the pretext of defense makes it harder for citizens to question how funds should be spent and who they should benefit.
We need political change to make sustainable public transport projects like this take priority. Just like we need it for education, social welfare, etc. It's easier to control people when you tell them the Russians/terrorists are coming so we have to take your money and fund defense.
I was going to compare it with the bullet train - but that apparently runs on standard gauge rails (just welded to the sleepers instead of bolted) - I swear they told us it was a levitated magnet in school...
So maybe you're right, the hypertube is very complicated compared to a pair of rails and an power supply cable.
Even standard HSR is a lot more complicated that that—you can't just put a bigger motor in a slow-speed train—but it certainly benefited from the large amount of commonality with lower-speed rail, and most of the higher-speed technology was developed over time, with real testing. [Note the first Shinkansen was a fair bit slower (~200km/h) than today's highest-speed models, and ramping up the speed from there occurred over many years.]
Japan is also building a real (long-distance, high-speed) maglev system. It's much more of a leap from standard rail than HSR was, but again, they're using technology which they actually have long-term real-world experience with.
Hyperloop, by contrast, doesn't even have a lab model. It's a diagram on a napkin, with some of the calculations worked out.
The press and the general public may not notice this distinction, but people investing large amounts of money most certainly will...
I think the point is that a "lab model" would be useless, since the problems change non-linearly at scale and speed... and computer simulations of fluid dynamics and physical systems are pretty good these days, since computers got so much faster (physicists add more and more complexity/realism to their modelling such that a simulation always takes ~3 days to run, however good their computer. Our computers are awesome now.)
Also, some parts of it are tested, e.g. the roller coaster magnetic thrusters/brakes.
I do understand the difference, but the point stands for all revolutionary, as opposed to incremental, technologies. We will need some, how do we fund them?
Mass transportation has always lost money. Most of the original railroads in America went bankrupt. Today, ~90% of the cost of building railroads are subsidized by the government. In Japan, they over-invested in trains and it produced a huge drag on the economy.
Most experts I've heard say the hyperloop would cost far more than the estimated $6 billion. Doing things for the first time means you're likely to go way over-budget. After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese".
Most passenger rail in Japan is private, and profitable, including both capital and operating expenses.
In the years leading up to WWII, and during it, the Japanese government nationalized many rail lines (although many stayed private as well) to form JNR, and JNR proved to be too inefficient, and built up a lot of debt. That then of course lead to the privatization of JNR in the 1980s (which included transferring JNR's debt to the new private JR companies), which was highly successful.
> In Japan, they over-invested in trains and it produced a huge drag on the economy
Japan has invested a lot in rail, but it certainly isn't a "drag on the economy". Indeed, it's arguably a boon to the economy as it's a much more efficient transit system than private vehicles on roads, and given the business model of Japanese railroads (which builds retail and housing around railroad nodes, and builds railroads to support new retail and housing), directly contributes to much more efficient urban organization.
The rail lines in Japan that lose money are rural ones in sparsely populated areas. However these account for a very small proportion of rail usage.
"Pettis likens it to the US railroad boom in late the 1800s. “Most of it was very, very wasteful and the companies eventually went bankrupt. The railroads shifted to new owners who bought at a significant discount. That meant they could lower prices immediately,” he tells Quartz. “That’s painful, but it’s economically very efficient.”
That never happened in Japan. In fact, this is why Japan’s GDP appears not to have grown in so long, says Pettis—wasteful government spending in the 1980s meant GDP “was significantly overstated.”"
Japan has many issues... but its railroads are not one of them. Indeed, note that your article points to the JNR privatization as the model to follow...
As a matter of fact, mass transport is financially viable enough that JR Tokai plans to finance their 9 trillion JPY Chuo Shinkansen maglev line without government money [1].
You should check out Mass Transit Railway from HK - code MTR in the HK stock exchange. They make tonnes of money.
Westerners have been monetizing mass transport system incorrectly. You don't make money from fares. You make money from real estate + advertising. The real estate prices around areas with MTR spikes a significant amount.
Real-estate, retail, etc, are important parts of "the model"... but note that many Japanese private railroads do not cross-subsidize, and their rail divisions are profitable on their own. [I do not know about the HK MTR.]
In that sense, the various divisions in this model are more like symbiotic organisms, with each changing the environment in ways that allow the others to be more efficient: convenient rail transit makes nearby retail and real-estate (much) more attractive, and the traffic from popular real-estate and retail increases rail usage (significantly).
>After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese".
Isn't this the exact situation patents were intended to prevent?
The hyperloop is open source though. Even if it wasn't, 20 years isn't a huge head start to work out all the bugs and build very many lines given the cost/time to build 1.
What method does the government use to subsidize NS or UP when they decide to build new tracks somewhere? The only thing I could think is eminent domain but I don't believe that's anywhere close to 90% of the cost in most areas that they build in.
All mass transportation is heavily directly subsidized by the government.
"Much is made of the $30 billion spent on Amtrak over the last 30 years, but in that same period the federal government spent $1.89 TRILLION on air and highway modes, according to the New York Times and Washington Post."
You do realize that Amtrak is not the only railroad in the nation? While mass transit is subsidized, the movement of goods via rail, which is what the focus of our rail system is, tends not to be. Also I don't believe Amtrak has laid any new rail in well, I'm not sure it ever has to be honest.
Ah, my apologies - I was linked the article from a friend and immediately thought it would be a good topic of discussion here. At least the original article was linked prominently at the top though.
I have an alternative theory. It's because important real things are heavily regulated. Government sticks its nose into everything. The internet was an exception, because they didn't realize its potential fast enough (China, on the other hand, had some time to do the homework). Whatever industry is regulated - transportation, healthcare, protection, drugs - you have high prices and a high entry barrier. By pretending to care about consumers, governments simply rob both entrepreneurs and consumers. If they truly cared, they would allow multiple consumer protection agencies on the market each helping consumers navigate the said market, but with no power to prohibit or regulate anything. Right now a government is a monopolist in consumer protection business with an ultimate power to kick anyone out of the market. That can't be good for consumers. And don't tell me people would die if there was no regulations - every day thousands die because it takes years for the FDA to approve an experimental drug, but no one seems to care.
As a side note, don't be surprised that tangible businesses with a lot of real assets make less money than some chat application. In airline industry, whose margins do you think are the lowest? Airlines. Whose margins are the highest? IT companies that run ticket reservation systems.
Don't forget it was the Government that INVENTED the internet. They also heavily funded or helped to invent cellphones technology and micro-chips not to mention the research that brought us touch screens and GPS as well. So perhaps the government isn't all bad and for things like the Hyperloop they should get involved.
I think the real issue that is being talked about in the article is that long term, large scale "moon-shot" type projects are extremely difficult to launch in the private market, but history has shown us that the government is actually much better at such long term "moon-shot" things.
Sure SpaceX is cool and makes rockets for far cheaper than the government ever did, but with out a few decades of NASA spending a ton of money trying to figure out how to get into space in the first place there would be no SpaceX.
So I think what really needs to be looked at for projects like the Hyperloop is Government / Private partnership. Maybe even let the government take a stake in the company and earn revenue in the future to offset / repay all the tax dollars invested. Because unlike private equity, cash-flow is actually quite important to the government and they they are well suited to help out in situations like this.
Did a government bureaucrat invent the internet? Or was it a person or persons who were simply financed by said bureaucrats (and not even directly by them, but rather by taxpayers' money those bureaucrats redistributed)? This is an important difference because nothing really stops private individuals finance things that may potentially be unprofitable (think Ubuntu, for instance).
When you say "but without government important initial research which is costly and unprofitable can't be done" I want you to think about many brilliant scientists from the 19th and even 20th century who did groundbreaking work entirely on their own or with the help of some private money. And also think that when government finances things, it simply says to other people "give us your money because we know better how to spend them - if you disagree, we're still gonna take your money, so you have no choice". Government doesn't convince and treat people as individuals, it commands and treats them as livestock.
>When you say "but without government important initial >research which is costly and unprofitable can't be done"
No that is not what I said at all. If your going to quote somebody quote them correctly. What I did say is that SpaceX wouldn't be possible without NASA. And not to short change SpaceX cause it's an amazing company and they do really cool stuff, it is true that they are building on-top of the tech developed by NASA, and that NASA, in the form of a very large contract to shoot rockets into space also funds (to an large extent) SpaceX. So I don't think you can really argue that point.
To your more general point... You obviously don't like the government, and honestly I don't really either, I agree with you that they are a bunch of bureaucrats and mess up a lot of stuff. But don't let you feelings about the government cloud your vision. As said in the original article for the vast majority of cases Industry does not have the appetite to fund Huge project, i.e. large capital expenditures with very long timelines to pay back the money.
Yes you could come up with cases where industry has, but the majority of these type of project have been funded by the government, and unless we change the rules by which our entire economy operates the government is likely to be the only one to continue to fund them. So rather than just hate the man (if we really want to get these type of things done) we would be better served figuring out how to work with him, or change the quick profit driven model which drives our economy... To me working with the government, as bad as it may sound, is probably an easier task.
The fundamental question is, do we want those big projects done? If we really wanted them, everyone would simply donate money voluntarily when asked, so you would have no problem financing NASA or other big things. If, however, people don't want those things or would rather prefer their money spent differently, NASA becomes an organization financed by theft. People don't want to give it money, yet you take it away from them because you think it's a good idea to go to space. It's not an economical problem, it's a moral one.
> I want you to think about many brilliant scientists from the 19th and even 20th century who did groundbreaking work entirely on their own or with the help of some private money.
Keep in mind that groundbreaking research took orders of magnitude less resources back then.
Actually, the federal government passed a law in 1998 for the specific purpose of limiting the taxability of internet services specifically in order to grow the the industry, which kind of negates your whole theory.
No, it doesn't. It's a smart move: allow the industry to grow fast, then start taxing it (as far as I remember, some states, California perhaps, recently planned to introduce internet sales tax or something like it and Amazon was outraged, no?).
The ITFA has nothing to do with sales tax. Your original argument was that government didn't get around to regulating it heavily here because it didn't realize the potential of the internet. Now you're saying that they avoided regulating it because they recognized its potential.
> In airline industry, whose margins do you think are the lowest? Airlines.
Funny, airline profits were quite good before deregulation. And even before the internet industry was like this.
> consumer protection agencies...with no power to prohibit or regulate anything.
I'm sorry, but what purpose would this server exactly? You want a free market health inspector agency without the power to shutdown restaurants violating cooking "best practices"? You mean like Yelp, where recommendations can be gamed?
> Funny, airline profits were quite good before deregulation. And even before the internet industry was like this.
Of course. And ticket prices where unaffordable to many people before deregulation. Profits were fine though - that's the way monopolies and governments make sweet love to each other at the expense of consumers.
>You want a free market health inspector agency without the power to shutdown restaurants violating cooking "best practices"? You mean like Yelp, where recommendations can be gamed?
Yes, I want people to decide for themselves whether they want to trust this consumer protection agency or trust another agency, which standards seem closer to them in particular. Also, you can pretty much game the current system too. Even worse, because health inspectors do not directly serve consumers and have no competition, they have more incentives to accept bribes or simply do a sloppy job. If governments did their job, you wouldn't need Yelp, would you? And in all honesty, I would rather trust Yelp than a government agency.
The last time infrastructure investment's been sexy was the 1800s. That was the last time you could build large scale transportation projects with private money, and that was only because there was a huge frontier to conquer. Now everything is owned by someone whose got powerful friends, rather than natives you can just shove out of the way. It took the political might of a wartime hero president to build the Interstate system.
It's utterly silly to look at the Valley's reluctance to fund the Hyperloop as some kind of failure of the sheeple. The authors should crack open a history book sometime and learn how hard stuff like this is.
This is one of the more astute comments in this thread, and I hope it gets the upvotes it deserves. Alex Tabarrok also discusses the "veto player" problem some in Launching the Innovation Renaissance (http://www.amazon.com/Launching-Innovation-Renaissance-Marke...), which is worth reading if you're interested in these issues.
Just because the internet sector is temporarily insane where gimmick apps reject $3 billion acquisitions doesn't change that most money invested in the valley goes to serious businesses doing real research and development.
Except for that gimmick apps part. Snapchat has 25M users. That is more than most countries in the world to put it in perspective. That is nothing to scoff at.
This is a very truthful article and one that should bother a lot of people
The stock market and investors "immediateness", and all the other points.
3B dollars can fund a (small) semiconductor company. And they're going for a picture sharing app (different, but worse - as in, a quirk - than Instagram)?
Can 3B dollars fund a small semiconductor company that will have a sustainable competitive advantage against Intel, AMD and TSMC? My guess is NO. Successful picture sharing apps has stable audience locked in with network effects and switching costs. That is a sustainable competitive advantage.
Why are you assigning some sort of 'perfect knowledge' or clairvoyance to VCs ? They are just like everyone else and they make irrational decisions and have inherent biases.
I didn't assign anything. You did. Stop putting words in my mouth.
My point was that if a random HN commenter is able to raise some issues about ROI of various investments then certainly VCs who do it professionally have these issues factored in. Simple as that.
Start being clear, then people might understand your confused responses.
> then certainly VCs who do it professionally have these issues factored in.
What is so certain about it? Doing something 'professionally' just means that its your job. People are capable of sucking at their job (which happens far too often IMHO).
> Can 3B dollars fund a small semiconductor company that will have a sustainable competitive advantage against Intel, AMD and TSMC?
Semiconductor does not automatically mean CPUs for the consumer market. 3B can fund a small, very profitable semiconductor company, with well-defined expertise in an important, current problem (e.g. power management, low-power RF communication etc.) from which it can grow onwards.
Unfortunately, this market is less volatile and, consequently, less attractive for people who expect immediate returns.
Exactly. Hyperloop in particular has the worst of all worlds.
1. Huge investment required up front.
2. First of its kind, so lots of risk.
3. Small potential gain relative to the investment.
In fact, Hyperloop was never proposed as a VC funded project by Musk. He's merely proposing it as an alternative to high-speed rail. Historically, public transit loses money, making it a terrible investment. However, it's a public good so governments continue to support them.
You forgot the biggest risk of all, Death. I'm all for the Hyperloop but lets be realistic, its way easier to give a few guys in a garage a hundred thousand dollars to build software for sharing pictures that's never going to hurt anyone then fork over billions for a futuristic transport that could potentially kill people.
Investors are not stupid or blind. Hyperloop is similar to the Maglev train technology developed in Germany and Japan for the last decades. The inventor of the maglev train even thought about hyperloop. But so far just one single commercial maglev train route has been build.
And the suck costs are extremely high. The six billion Musk estimated are wrong, it won't be six billion, it will much, much more than that.
Investors don't invest in hyperloops not because of the 9 theories the author is mentioning but because hyperloop are not an alternative to conventional trains.
I'm a little confused about a couple of the statements made in the article:
1. “If Kaiser Permanente releases a drug that cures all cancers, is the stock price guaranteed to go up? No, of course not. The stock price goes up or down based on supply and demand. It only responds to human action. And, therefore, the price of a stock is solely determined by how people think about the price of a stock." - Am I wrong in thinking that the price of the stock is correlated with the value of the company which is much less influenced by what stockholders think and much more based on what people think of the value of the product/service? Whoever invents the cure for cancer is going to see a huge increase in their stock price because people are going to buy their drugs, increasing revenue, profits, ROE, dividends, growth. etc. What is the author trying to say?
2. "Right now, the only sane choice is to aim for an acquisition. But mergers and acquisitions are on average $100 million a piece. There’s no way to have a company as large as Hyperloop acquired because it’s a multi billion-dollar company. You just can’t do it." What about motorola (12.5bn) youtube (1.5bn) and instagram (1bn) just to name a few? Just because a company is valued over $1bn doesn't mean there's no more room for growth and a subsequent exit?
Shotgun Investing vs. Value Investing - Doesn't the government sometimes fill the role of value investor? Especially in cases of infrastructure like the hyperloop?
Because VCs are not about changing the world, they're about quickly making lots of money on high-risk bets.
There needs to be something looking for medium sized boats of money over medium length periods of time for medium risk. Is that the stock market I guess?
Capitalism works to tackle such things, it gives you exactly what you want. Which is extremely powerful and dangerous at the same time. If people want free services to share pictures and not low priced long distance travel. They will get exactly that.
I'm not saying that people don't want cheaper long distance travel, or better medical electronics equipment etc. But sharing cat pictures seems to be a more immediate need which people want in the next 30 minutes, 15 times a day.
This is a hypothetical situation, but imagine if there is major global diabetes pandemic in the next 10 years. You will see a major demand for glucometers, and you will see tons of innovation go around it.
Plus there are other dynamics at play here like ROI, barrier to entry etc.
The notion that "capitalism... gives you exactly what you want" presumes that people know what they want. I don't think I buy that premise. People may know which they prefer of the alternatives presented to them, but by no means is that the same as knowing what they want.
The problem that's being brought up is that Capitalize focuses on serving selfish, individual, needs. Those may or may not also been good for society as a whole.
We, the people, have entered into a social contract that is enforced through government to allow us to co-exist. Given that situation, there are some things/processes/services that are good for society as a whole but don't really make sense individually. For example, vaccines are really good for society in that they reduce disease, thus freeing up resources for other individual medical needs. However, a single person wouldn't take a vaccine because it only benefits them in at least 80% of the population also takes it. Here is a situation in which a societal good is underserved in pure capitalism.
Often I see people arguing that "pure" capitalism solves all problems, but that's clearly not the case. It's a very good system, but outside influence can be needed to optimize social welfare over individual welfare.
Note, the soviet style centrally planned economy didn't work too well for them. In the absence of market indicators you are left at the judgement of a few bureaucrats.
I'm not saying capitalism is panacea, but its best of other worst options. Market indicators are not perfect, but they get close.
Ignoring for the moment that you're engaging in a false dichotomy, central planning actually worked very well for Russia in the 20th century.
Russia had fewer (if any) recessions compared to Europe and the US and faster economic growth. Now you might say that it is easy to have fast economic growth when you're playing catch up. However, plenty of third world countries demonstrate that it is not easy, and Russia managed to grow faster than capitalist economies with the same starting point.
It's true that the results are not as clear for other centrally planned economies. The point is that it's not as simple as "market good, central planning bad".
Because the gap between current capacity, and required capacity is bit more than worth risking money. There are in short variables we yet not know, which will come in force when such a project is undertaken. Personally I would have taken the leap, if given the choice, but if people are not investing in Hyperloop, than it is mainly because they are playing safe.
The only reason besides that, which pokes me in the face, to not fund this is: economics for the common man. If the case of current trains not being built to full capacity (i.e we can do 400 kmph in Bullet trains, yet in developing countries, avaerage speed is 100kmph)is proof enough, the point can be taken from the concept itself. What is more convincing then the design is the "5th dimension of transport" thing. But where does that 5th dimension exists?
A living example is in Delhi at the moment. Metro just entered Phase 3, yet the stress on Delhi's transportation system has become so large, that even with record ridership, Metro is not being able to ease that pressure. The government is going for efficiency by modernising its bus fleet into BRT corridors, still it is a temporary fix. How can we solve this?
Its not the possibility that matters here only, but the individual need and economics.
Well, Instagram and Snapchat and the like are on the extreme end of the scale; the reason they get funded is because:
* Development is cheap
* Returns are quick
That is, anyone with a PC and a server can create a Snapchat clone; anyone with an image processing library (or knowledge to create one) can create an Instagram; getting a handful of developers together is easy, and building the next big web app will take just an idea and a few dozen K to develop - low risk. If it fails, no biggie, few K lost, some personal drama. If it doesn't fail, and is lucky it'll grow for a few years in its userbase, prove itself, and increase its value to the billions the lucky few companies did.
This is a complete opposite to the truly disruptive things like Hyperloop, which, if successful, will change the world of transportation. If it fails, however, investors will have lost billions - because the start-up costs are billions, not a few K or a garage and spare time like the silicon valley startups cost.
Risk vs reward, risk-spreading. With a billion dollar, an investor can fund a hundred startups comfortably, and only one of them has to strike it big for the investor to make a profit. With bigger and potentially more influential projects like Hyperloop, the investor will have to pour all of his investment money into one project, and if it fails - and I'd say there's a decent chance that it will - that money's gone.
And Hyperloop is, I'd say, a high-risk investment; it'll take years to develop, it'll probably have a lot of problems getting the 'pipe' up, it'll have to combat the user's fears of being locked up in a high-speed pipe, it'll have to be cost-competitive with the competition, and it has to be safe; a new transportation system like this needs just one serious accident for nobody to ever use it again.
I agree and disagree. Venture capital has become somewhat more risk-averse in recent years, mainly because the costs of building software products has become so low. But there is a lot of innovation to made in the physical world, which is currently underrepresented in investment portfolios.
On the other hand, I'm not sure the hyperloop is a good fit for a VC investment. Maybe someone out there will be willing to take a huge risk with limited upside, but it does not fit VC theory, which is still a business at the end of the day. It seems like the appropriate funding channel for something like should be the government, at least in a perfect world. Otherwise, major players in the industry are the next most relevant, perhaps companies that already manage toll roads and infrastructure.
OK, so where are the examples of $6B projects being funded by private money before the dominance of SV? Surely you can provide some examples from before SV had "killed major innovation", no?
Really? You think that spending 6B on an absolutely untested idea with great risk is somehow comparable to a 3B acquisition of a mature startup that will immediatly bring business value to a company?
Company != startup. They dont have revenues, but they have 25M users audience that will be instantly monetizable as soon as it is plugged in the FB or other company advertising system. And that makes them a perfectly fine target for acquisition, even if they don't have revenues of their own. Does this address a 'mature' company concern?
It might make it a logical target for acquisition, but it doesn't follow that it's worth ~4% of Facebook's market cap when Facebook has 100x the users (including virtually all the Snapchat userbase...) and could trivially clone Snapchat's tech.
Not to mention that Facebook's own profit figures from their more diverse and mature advertising platform suggest it would take a very long time to accumulate $3bn in advertising revenues off 25m users.
If you think about it, it's amazing what we're valuing at billions of dollars these days. Twitter, $4 billion? That's for a lot of lines of code, and, sure, some server infrastructure, etc. that will be obsolete in the next few years. The same goes for Facebook, Instagram, Pinterest, almost any Silicon Valley startup we can name. Just a bunch of lines of code, not really solving any problems. But it makes money, and that's what people care about.
I totally agree, that said think about gold.. just a bunch of atoms that reflect light in such a way that our brain computes it into a 'shining' image..
I really liked this post! I sometimes feel the innovators and thinkers of this world are not getting their fair share of attention.
I also feel like companies should team up together and do crazy things share the risks as a group.
If a group of key companies team up together to make nearly impossible things they would also create a "hype" in an instant around this. It doesn't need to be the Hyperloop, it could be much much more "down to earth"
The difference between SnapChat and Hyperloop is that Snapchat has people using it today, which drives its value, Hyperloop will cost billions before anyone is using it, and people might hate it. The hyper loop could easily turn into The Homer: http://simpsons.wikia.com/wiki/The_Homer and who wants to spend $6 billion on inventing that?
This might be one of the best articles I've read on HN in a long time.
One point that really hit home with me is that we need to innovate innovation. I'm willing to bet that a huge part of our stagnation is a result of our creative outlets not being diverse enough. We seem to have become limited to our screens and our virtual worlds. And it isn't by accident. We're social creatures and social media has sucked us in. And of course the internet plus the various kinds of screens (devices) used for viewing it are very effective means of communication, advertising, etc. And we love to be entertained.
So I think the key to a wider range of innovation is to somehow reveal to the masses that there are many tangible concepts just waiting to become part of our physical world, concepts that will provide the same social, commercial, and entertaining functions as those in the virtual world. Somehow our collective focus will need to shift from virtual to physical. 3D printing is probably a good step in the right direction, but I think it will need to be combined with some kind of commodified robotics to be truly useful.
Anecdotally, this might be one of the worst articles I've read on HN in a long time filled with ad hominem attacks, crude language, misplaced anger and trite memes to stir a controversy. The point is important but the presentation is very bad.
On a related note, the shitstorms over Google's closing projects like Reader or changing the comment systems in YouTube completely eclipse announcements of developing self driving cars, new ways of wearable computing, new methods of distributing internet to 3rd world countries, and so on.
T.D : It's just a very fast train. Now why do guys like you and me know what a hyperloop is? Is this essential to our survival? In the hunter gatherer sense of the word?
Silicon Valley is about momentum investing. You or I may think that many of these companies are silly, but where the money goes, the rest of us may have to follow.
So if someone reputable started an anti gravity tech company, you would write the same blog about them?
The point is, most don't think that the design would even work. The specs defy many laws of physics. It is more of a concept or dream at this stage. It would be an extremely high risk investment - thus, no takers.
By comparison, Instagram had a proven and popular product. Why would you compare something so very different?
1. Government pays for really big long-term high-risk core technology development. Things like microprocessors, the internet, voice analysis, lasers, space rockets, highways, etc.
2. These are mostly done under the rubric of defense spending. (This is important.)
3. Private sector steps in to commercialize the projects that bear fruit.
Hyperloop falls under category #1. Those projects take billions invested over decades with very uncertain prospects. Usually supported by military procurement. Yes, even highways were built ostensibly for the military. And Siri on your iPhone? Funded by the CIA.
That kind of Really Big Fundamental innovation is funded by the government. It's never been VCs. They focus on the "last mile".
Space X is a good example of that: bringing a foundation of core tech developed by NASA to market, adding commercial-oriented innovation on the scale of a few years and a couple hundred million from the private sector. But even at this stage, there's still many more hundreds of millions in government procurement (prepaid launch contracts).
The reason Hyperloops don't get funded is that the government doesn't have a military application (or pretext) for it.
Now we could go on to ask why Silicon Valley's megabucks foundation is military spending and not, say, direct government investment in sustainable public services. But then we get to some uncomfortable issues, like how the public might feel more entitled to the fruits of those investments. Whereas if core science and tech is seen as a kind of "military surplus", free or cheap for the taking, then the VC private sector gets to keep the profits from commercialization.