Why Silicon Valley Funds Instagrams, Not Hyperloops

[tw]

Originally Posted by Lamplighter

I stopped reading the link, and LOL'ed when I read his complaint about hedge funds making huge profits based microsecond-trading of minute (tiny) stock price differences (e.g., Chicago vs New York exchanges).

Many trading firms spent big bucks on Manhattan real estate to get their computers located as close as possible to stock exchange computers. To shave microseconds data transfers via fiber optics. Because these computer trading ventures estimated something like $10,000 per minute for every millisecond cut from that communication time (numbers are only examples and probably wrong since I forget the exact figures).

As a result, the NYSE made a rule that all such traders must have at least so many feet of fiber between their computers and stock exchange computers so that all fiber optic communications take at least a same number of microseconds.

How does this make America wealthier, more innovative, or stronger? It doesn't. Just another example of companies more interested in profits rather than the product or productivity.

Another example is IPOs. Powers that be tell us how bad Facebook's IPO was because that stock dropped in value after the IPO release. Reality, that was good or best for the public - the common man. IPOs that increase in value on the market only enrich the bankers and other insiders at the expense of the public. Facebook did good by offering a stock at a price that would then stay lower for the next year. Because Facebook reaped more capital, the little investor got an opportunity to make a good investment (the common man is not permitted to invest in the IPO), and bankers, stock brokers, hedge funds, and other insiders did not reap 50% of the IPO's capital.

Twitter, on the other hand, sold for something like $26 and closed on the market for something like $50. IOW Twitter screwed us by enriching the finance people with almost half the capital investment - for doing nothing but being privileged insiders.

Both are examples of harm to America because the insiders believe profits - not the product - are more important.

[mbpark]

I can tell you exactly why.

Venture Capitalists are expected to have high rates of returns on their investments. Many of the investors in the VC funds are high net worth individuals who are looking for a 20% return. Many of the funded tech companies lose money. 90% or so go out of business. The firms like Instagram make up for the failures of hundreds of other companies. The goal of any funded firm is to make that 20% margin and get out, either by IPO or sales, and bring in a new management team to run it to predictable (read: boring) margins.

The evaluation system for new products focuses on two areas, which are minimizing risk and maximizing profit. Anything involving the environment, human safety, and/or transportation is ridiculously expensive now. Human Subject Research costs a lot of cash for lawyers, risk management, and information security (Note: I have helped fill out grant applications for the latter).

Your average university or academic medical center does not have the cash to pay for the research that goes on. Grant money is hard to find. There are, however, many large corporations that leverage universities and academic medical centers for research. More on that later.

Anything involving environmental studies or human safety has been safely legislated out of the possibility of existing. The cost of bringing new innovations to market in these areas is prohibitively expensive. The expectation of making returns on this is lower than that of pharmaceuticals these days. The amount of safety regulations for drugs has added such high overhead that it's now less profitable. If there is even the potential for death or injury, forget it. Look at the cash Wyeth and J&J paid out for their mistakes. No CEO wants that.

Considering the stock market (i.e. traditionally lower yield investments for those with not as much cash as the VCs) is based almost entirely on Earnings Per Share, and a large amount of the pension cash in the US is invested in the market, there is a proclivity to avoid risk. Reporting low earnings and underperforming will cause big funds like Calpers, Vanguard, and Fidelity to drop your company, and you will probably be fired.

Hence, non-profit universities, who are more efficient because they have a lower-cost labor force and less of the stress of reporting quarterly results, have been able to make a dent. The only difference between a university and a VC firm is that the university demands a lower percentage on its returns . There is still an expectation of profit and good publicity (papers, conferences, products, patents, treatments). If anyone tells you otherwise, they haven't worked with a research group recently.

All companies now have a process for evaluation of products that safely removes any risk from decisions made. We've managed to cocoon ourselves away from any potential risk. We've also managed to use litigation both offensively and defensively.

For high net worth investors today, it's all about low-risk, high-yield investments with a quick exit strategy to maximize profits and amortize portfolio losses to their advantage.

For everyone else, it's a cargo cult of trying to imitate what they do with stocks and investments. Has this built an unsustainable model? Yes it has. How will it end? I don't know, but I hope we can unwind it with minimal damage.

For the people that make decisions, it's about avoiding and mitigating risk and maximizing earnings so that your company can get a high EPS and you can continue to keep your job.

For those of us who understand technology and business, it's all very clear.

And FWIW, Carly Fiorina is safely away from ruining/running large companies. Anyone who tells you they can predict the future from a spreadsheet should be.

Be Well (Demolition Man reference). We're getting closer to the culture in that movie than you think.