Ingenuism and Venture Capital

Ingenuism Weekly 10

“The Industrial Revolution . . . is often presented as a time of horror for working men. In fact it was the age, above all, in history of matchless opportunities for penniless men with powerful brains and imaginations, and it is astonishing how quickly they came to the fore.” -Paul Johnson, The Birth of the Modern

INTERVIEWS

This week we’re launching our new bi-weekly interview series. In this first episode, Yaron Brook and Robert Hendershott discuss the question: What is Ingenuism?

Let us know what you think, and what guests you’d like to see in future episodes.

INSIGHT

Ingenuism and Venture Capital

Robert Hendershott and Don Watkins

Venture capital has played an outsized role in creating progress. In only fifty years, the modern venture industry has spawned firms that employ millions of people, create trillions of dollars of market value, and enhance the lives of billions. Venture capitalists perform magic—they give startups money, many if not most of which fail, but still create massive value. What can we learn from this?

According to Ingenuism, the core activities that create value, exploration and iterative learning, underpin venture capital success. 

VCs exist to solve a crucial problem: how to make sure the best ideas get funding. Instead of depending on an accidental match between ingenuity and money (i.e., hoping that tomorrow’s innovators happen to be born rich), VCs create an intelligent match between ingenuity and money. They use their ingenuity to fund other people’s ingenuity. 

To do this, VCs explore a variety of ambitious projects. This gives them a diversified set of asymmetric possible outcomes—they have a good chance of discovering a big winner and these successes will dwarf their failed investments. VCs are not in the business of investing in double or nothing. A VC is looking for something that is at least 10x or nothing. 

But ambitious projects are generally risky and expensive to build. VCs embrace this risk for the upside but also manage the downside. Not by trying to avoid failure but by diversifying and mitigating the cost of the inevitable failures.

VCs stage their investment in a way that maximizes the benefit of learning along the way. Initial investments are small and used to gather evidence about the start-up’s likely future path. Start-ups that make rapid early progress are judged as likely winners while start-ups that make little early progress are judged as likely disappointments, and the VC shifts resources toward the former. This way over time an increasing fraction of the VC’s money and attention end up with the eventual winners. And the VC’s shutdowns are relatively small losses.

In other words, VC’s use their ingenuity to fund other people’s ingenuity in ways that minimize waste and maximize value creation.

VCs perform magic. Through exploration and iterative learning, VCs in effect invent a crystal ball to see which of today’s start-ups will turn into the next Google or Facebook. But unlike a fantasy crystal ball, this real one is somewhat cloudy and only reveals the future market leaders over time through exploration, learning, and embracing failure.

An Ingenuist follows the same principles of Silicon Valley VCs—consistently exploring big potential opportunities, learning quickly from the experiences, and applying that knowledge to maximize progress. The results can be magical.

QUICK TAKES

Impressive, but still not as cool as free 2-day shipping

Jeff Bezos is bringing space within the reach of everyone…well, everyone with half a million dollars to spare. Of course, most technologies start out expensive before human ingenuity makes them affordable. I expect the same thing to happen to space tourism.

But the best part of this story is that Bezos and his brother will be on the first manned flight to space by his company, Blue Origin.

“I want to go on this flight because it’s a thing I’ve wanted to do all my life,” Mr. Bezos said in a video posted to Instagram. “It’s an adventure. It’s a big deal for me.”

I don’t think it’s an accident that man who built Amazon has an adventurous spirit.

“Get ready to fly fast and cheap on the only airline named after the sound of an explosion”

That was Saturday Night Live throwing shade at Boom, a startup working to bring back supersonic flight—and ultimately to make it more affordable than conventional flights.

SNL did get one thing wrong: Boom isn’t an airline. It’s an airline designer. But the big news from last week was that United Airlines plans to buy 15 Boom aircraft, meaning that supersonic flight could be a reality by the end of the decade.

Boom's planes could cut flight times in half and get you from a bagel breakfast in NYC to teatime in London in 3.5 hours. Catching a flight that quick hasn't been possible since 2003, when the iconic Concorde jet retired.

2029. The year we finally go back to the future.

Learning at the speed of thought

How exactly does connection promote progress? One major way is that it allows a discovery to propagate further and faster. In a connected world, an idea only has to be discovered once and it’s available to all people for all time. This not only raises the productive ability of everyone in a given field, but it liberates their time to focus on solving new problems.

The challenge is often figuring out the best way to propagate new knowledge so that it makes its way to the people who need it, and it doesn’t get lost in the noise. Companies that solve that challenge generate enormous value.

Exhibit A: Stack Overflow, and question and answer site for software developers, just sold for $1.8 billion.

Based in New York, closely held Stack Overflow operates a question-and-answer website used by software developers and other types of workers such as financial professionals and marketers who increasingly need coding skills. It attracts more than 100 million visitors monthly, the company says.

Specialized knowledge has traditionally been extremely costly to obtain. We have to rely on whatever teachers or colleagues or mentors happen to be available to us. In a connected world, we can all have access to the best ideas from the best mentors at virtually zero cost. Learning is increasingly becoming a solved problem.

The stagnation myth

Last week we talked about how statistics like GDP-per-capita understate progress because they capture only what we pay for things, not the value of things. Statistics claiming that we’ve stagnated for decades don’t convey an accurate picture of our actual standard of living.

But the point is even stronger than that: even the statistics understating progress don’t actually show that we’ve stagnated. I’ve been saying this for half-a-decade. But here’s left-leaning economist Noah Smith going through a massive amount of data and reaching the same conclusion: we are far better off than we were in the past—even if we aren’t as well off as we should be.

RECOMMENDATIONS

Progress Studies 101

We’ve said again and again that too few people today appreciate human progress, and take for granted the rapid improvements in life we see every day. As a result, they are blind to opportunities to expand and increase progress—and they are blind to forces that threaten progress.

That’s starting to change. A growing number of voices have started calling for and are helping to develop a new field of inquiry: progress studies.

What would such a field look like? Recently, Sagar Devkate, Rahul Garg, and Will Robbins, in consultation with progress expert Jason Crawford, have developed a progress studies self-study course. The curriculum consists of books, articles, podcasts, and videos that explore:

• How we got here

• Where we’re headed

• Where we can improve

• How you can help

For example, the “How we got here” section asks the question: What drives economic and technological progress? To answer that question you can drill down to topics such as economic history or the history of science and technology.

The recommendations on the whole excellent, though be warned: the list is extensive and can be intimidating. It would be helpful to have a short list of the most important books for those wanting to get started. I also hope that over time they will extract the key lessons from each of the works to make them easier to retain. But for anyone who wishes to jump headfirst into an examination of how progress works and why it is so vital, this is a great place to begin.

Until next time,
Don Watkins

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