Posts from economics

What Is Going To Happen In 2018

This is a post that I am struggling to write. I really have no idea what is going to happen in 2018.

  • Will the crypto markets continue in their bull cycle? I have no clue. I was showing my daughter’s friend an app that helps people save and invest and he said to me “I don’t need that, I just buy some ETH every week.” I said “that’s a good plan until it isn’t.” I just don’t know when buying crypto will stop being a good idea. It was a great idea in 2017.
  • Will the economy extend its eight year expansion? I have no clue. The longest post WWII economic expansion was 10 years from 1991 to 2001. Can this one beat that one? Maybe. Will this one also burst over the collapse of another tech bubble? Maybe. But again, I have no idea when that might come.
  • Will the corporate tax cuts that are coming from Trump’s tax bill lead to increased hiring and investments, or will companies simply hoard that cash or pay it out in dividends? Likely a bit of both. But I think Wall Street has largely priced in the increased earnings so I’m not sure the tax bill will be a boon for the stock market in 2018.
  • Will the current Internet oligopoly (Amazon, Apple, Facebook, Google) continue to take share from the rest of the sector, or will one or more start to falter? I’d like to see the latter, but I suspect it will be more of the former.
  • Will the rise of massive growth funds (SOFTBANK, Sequoia, etc) lead to the best and brightest tech companies delaying IPOs even longer? The logical answer is yes, but I think the answer may be no. We see an increasing desire of founders in our portfolio to take their companies public.
  • Will the tech backlash that I wrote about yesterday continue to escalate? Yes.
  • Will we see more gender and racial diversity in tech? Yes.
  • Will Trump be President at the end of 2018. Yes.
  • Will the GOP lose control of Congress in the midterm elections. Yes.
  • Will we avoid war with North Korea? I sure hope so.

So there you have it. Ten questions. A few predictions. A lot of unknowns. That is how I am going into 2018.

Happy New Year Everyone.

What Happened In 2017

As has become my practice, I celebrate the end of a year and the start of a new one here at AVC with back to back posts focusing on what happened and then thinking about what might happen.

Today, we focus on what happened in 2017.

Crypto:

I went back and looked at my predictions for 2017 and I completely whiffed on the breakout year for crypto. I did not even mention it in my post on New Year’s Day 2017.

Maybe I got tired of predicting a breakout year for crypto as I had mentioned it in my 2015 and 2016 predictions, but whatever the cause, I completely missed the biggest story of the year in tech.

If you look at the Carlota Perez technology surge cycle chart, which is a framework I like to use when thinking about new technologies, you will see that a frenzy develops when a new technology enters the material phase of the installation period. The frenzy funds the installation of the technology.

2017 is the year when crypto/blockchain entered the frenzy phase. Over $3.7bn was raised by various crypto teams/projects to build out the infrastructure of Internet 3.0 (the decentralized Internet). To put that number into context, that is about equal to the total seed/angel investment in the US in 2017. Clearly, not all of that money will be used well, maybe very little of it will be used well. But, like the late 90s frenzy in Internet 1.0 (the dialup Internet) provided the capital to build out the broadband infrastructure that was necessary for Internet 2.0 (the broadband/mobile Internet), the frenzy in the crypto/blockchain sector will provide the capital to build out the infrastructure for the decentralized Internet.

And we need that infrastructure badly. Transaction clearing times on public, open, scaled blockchains (BTC and ETH, for example) remind me of the 14.4 dialup period of the Internet. You can get a taste of what things will be like, but you can’t really use the technology yet. It just doesn’t work at scale. But it will and the money that is getting invested via the frenzy we are in is going to make that happen.

This is the biggest story in tech in 2017 because transitions from Internet 1.0 to Internet 2.0 to Internet 3.0 cause tremendous opportunity and tremendous disruption. Not all of the big companies of the dialup phase (Yahoo, AOL, Amazon, eBay) made a healthy transition into the mobile/broadband phase. And not all of the big companies of the broadband/mobile phase (Apple, Google, Facebook, Amazon) will make a healthy transition into the decentralized phase. Some will, some won’t.

In the venture business, you wait for these moments to come because they are where the big opportunities are. And the next big one is coming. That is incredibly exciting and is why we have these ridiculous valuations on technologies that barely/don’t work.

The Beginning Of The End Of White Male Dominance:

The big story of 2017 in the US was the beginning of the end of white male dominance. This is not a tech story, per se, but the tech sector was impacted by it. We saw numerous top VCs and tech CEOs leave their firms and companies over behavior that was finally outed and deemed unacceptable.

I think the trigger for this was the election of Donald Trump as President of the US in late 2016. He is the epitome of white male dominance. An unapologetic (actually braggart) groper in chief. I think it took something as horrible as the election of such an awful human being to shock the US into deciding that we could not allow this behavior any more. Courageous women such as Susan Fowler, Ellen Pao, and many others came forward and talked publicly about their struggles with behavior that we now deem unacceptable. I am not suggesting that Trump’s election caused Fowler, Pao, or any other woman to come forward, they did so out of their own courage and outrage. But I am suggesting that Trump’s election was the turning point on this issue from which there is no going back. It took Nixon to go to China and it took Trump to end white male dominance.

The big change in the US is that women now feel empowered, maybe even obligated, to come forward and tell their stories. And they are telling them. And bad behavior is being outed and long overdue changes are happening.

Women and minorities are also signing up in droves to do public service, to run for office, to start companies, to start VC firms, to lead our society. And they will.

Like the frenzy in crypto, this frenzy in outing bad behavior, is seeding fundamental changes in our society. I am certain that we will see more equity in positions of power for all women and minorities in the coming years.

The Tech Backlash:

Although I did not get much right in my 2017 predictions, I got this one right. It was easy. You could see it coming from miles away. Tech is the new Wall Street, full of ultra rich out of touch people who have too much power and not enough empathy. Erin Griffith nailed it in her Wired piece from a few weeks ago.

Add to that context the fact that the big tech platforms, Facebook, Google, and Twitter, were used to hack the 2016 election, and you get the backlash. I think we are seeing the start of something that has a lot of legs. Human beings don’t want to be controlled by machines. And we are increasingly being controlled by machines. We are addicted to our phones, fed information by algorithms we don’t understand, at risk of losing our jobs to robots. This is likely to be the narrative of the next thirty years.

How do we cope with this? My platform would be:

  1. Computer literacy for everyone. That means making sure that everyone is able to go into GitHub and read the code that increasingly controls our lives and understand what it does and how it works.
  2. Open source vs closed source software so we can see how the algorithms that control our lives work.
  3. Personal data sovereignty so that we control our data and provision it via API keys, etc to the digital services we use.
  4. A social safety net that includes health care for everyone that allows for a peaceful radical transformation of what work is in the 21st century.

2017 brought us many other interesting things, but these three stories dominated the macro environment in tech this year. And they are related to each other in the sense that each is a reaction to power structures that are increasingly unsustainable.

I will talk tomorrow about the future, a future that is equally fraught with fear and hope. We are in the midst of massive societal change and how we manage this change will determine how easily and safely we make this transition into an information driven existence.

Decentralized Self-Organizing Systems

Mankind has been inventing new ways to organize and govern since we showed up on planet earth. Our history is a gradual evolution of these organization and governance systems. Much of what we are using right now was invented in ancient Greece and perfected in western Europe in the 17th, 18th, and 19th centuries.

I have been thinking for some time that we are on the cusp of something new. I don’t know exactly what it will be but I think it will be inspired by the big technological innovations of the late 20th century and early 21st century and it will be based on decentralized and self-organizing systems.

The Internet is, at its core, a scaled decentralized system. Its design has been a resounding success. It has scaled elegantly and gradually to well over 2bn users over fifty years. No central entity controls the Internet and it upgrades itself and scales itself slowly over time.

Open source software development communities are also an important development of the past fifty years. These communities come together to create and maintain new software systems and are not financed or governed by traditional corporate models. The goals of these communities are largely based on delivering new capabilities to the market and they don’t have capitalist based incentive systems and they have shown that in many instances they work better than traditional corporate models, Linux being the best example.

And, for the past decade or so, we have seen that modern cryptography and some important computer science innovations have led to decentralized blockchain systems, most notably Bitcoin and Ethereum. But there are many more to study and learn from. These blockchain systems are pushing forward our understanding of economic models, governance models, and security models.

I think it is high time that political scientists, philosophers, economists, and historians turn their attention to these new self-organizing and self-governing systems. Maybe they have and I am not familiar with the work. If so, please point me to it. If not, maybe this post and others like it will be an inspiration for the liberal arts to catch up to the computer scientists and mathematicians or at least work closely with them to figure out what is next, to articulate it and put it in the context of other governance and economic systems. From that work can come progress that mankind needs to move beyond the current systems, which work, but have many flaws and are becoming stale and in need of an upgrade.

Superstar Firms

Watching Amazon take home two Oscars last night brought home the point that they are a juggernaut, a massive business capable of throwing its weight behind all sorts of new businesses.

It turns out these superstar firms, not robots, may be the most important economic issue right now.

This piece from the Economist argues that taxing robots is a bad idea but figuring out how to deal with these superstar firms who are accumulating much of the profits in our economy is a good idea. Here’s the money quote:

A new working paper by Simcha Barkai, of the University of Chicago, concludes that, although the share of income flowing to workers has declined in recent decades, the share flowing to capital (ie, including robots) has shrunk faster. What has grown is the markup firms can charge over their production costs, ie, their profits. Similarly, an NBER working paper published in January argues that the decline in the labour share is linked to the rise of “superstar firms”. A growing number of markets are “winner takes most”, in which the dominant firm earns hefty profits.

Something to ponder.

The Robot Tax And Basic Income

In my work to prepare for the Future of Labor conversation we had at NewCo Shift a few weeks ago, I talked to a number of experts who are studying job losses due to automation and thinking about what might be done about it. Two ideas that came up a number of times were the “robot tax” and the “basic income.”

The ideas are complementary and one might fund the other.

At its simplest, a “robot tax” is a tax on companies that choose to use automation to replace human jobs. There are obviously many variants of this idea and to my knowledge, no country or other taxing authority has implemented a robot tax yet.

A “basic income” is the idea that everyone receives enough money from the government to pay for their basic needs; housing, food, clothing so that as automation puts people out of work we don’t see millions of people being put out on the street.

What is interesting about these two ideas is that some of the biggest proponents of them are technology entrepreneurs and investors, the very people who are building and funding the automation technologies that have the potential to displace many jobs.

It is certainly true that we don’t know that automation will lead to a jobs crisis. Other technological revolutions like farming and factories produced as many new jobs as they wiped out and incomes increased from these changes. Automation could well do the same.

But smart people are wondering, both privately and publicly, if this time may be different. And so ideas like the robot tax and the basic income are getting traction and are being studied and promoted.

The latest proponent of a robot tax is Bill Gates who said this about it:

You ought to be willing to raise the tax level and even slow down the speed. That’s because the technology and business cases for replacing humans in a wide range of jobs are arriving simultaneously, and it’s important to be able to manage that displacement. You cross the threshold of job replacement of certain activities all sort of at once.

There is a lot of economic surplus that could come from automation. Let’s look at ride sharing. Today I pay something like $15 to go from my home to my office in the morning. Something like $10 of that ride is going to the driver. If the ride is automated, either the price goes to $5, saving me $10 a ride which then is surplus to me, or the profit that Uber is making goes up significantly, which is surplus to them. Some of both is likely to happen. This surplus could be taxed, either at the company level or the individual level, so that the cost of the ride doesn’t go down nearly as much and the driver can continue to compete with the robot or the driver can collect some basic income, funded by the robot tax, while they find a new line of work.

At least that is the idea.

I would not characterize myself as a proponent of a robot tax or a basic income. But I find these ideas interesting and worth studying, debating, discussing, and testing at a small scale to understand their impacts. We should absolutely be doing that.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.

The “Losing Jobs To China” Discussion

I am bothered by the ongoing discussion about how the US has allowed China (and other lower cost countries) take our manufacturing jobs. That is true, of course. But it does not address the larger context which is that manufacturing is becoming more and more automated and many of these jobs will not exist at all anywhere in a few more decades.

We are now well into a transition from an industrial economy to an information economy. It seems to me that part of that transition was the move of industrial jobs to lower and lower cost regions in an ongoing march to reduce costs. But that march may end with massive automation and very little labor in the manufacturing process. That means that these low cost regions that “stole our jobs” will also lose these jobs eventually.

The US and a number of other countries around the world are building new information based economies. That is the long term winning strategy.

So while we can critique our leaders (business and political) for giving up on the manufacturing sector a bit too early, I think the US has largely played this game correctly and will be much better off than the parts of the world that have taken the low cost manufacturing jobs from us.

But we don’t hear any of our political leaders explaining this. I wish they would.

What Happened In 2015

Last year in my What Just Happened post, I said:

the social media phase of the Internet ended

I think we can go further than that now and say that sometime in the past year or two the consumer internet/social/mobile gold rush ended.

Look  at the top 25 apps in the US:

top 25 apps

The top 6 mobile apps and 8 of the top 9 are owned by Facebook and Google. 10 of the top 12 mobile apps are owned by Apple, Facebook, and Google.

There isn’t a single “startup” on that list and the youngest company on that list is Snapchat which is now over four years old.

We are now well into a consolidation phase where the strong are getting stronger and it is harder than ever to build a large consumer user base. It is reminiscent of the late 80s/early 90s after Windows emerged as the dominant desktop environment and Microsoft started to use that dominant market position to move up the stack and take share in all of the important application categories. Apple and Google are doing that now in mobile, along with Facebook which figured out how to be as critical on your phone as your operating system.

I am certain that something will come along, like the Internet did in the mid 90s, to bust up this oligopoly (which is way better than a monopoly). But it is not yet clear what that thing is.

2015 saw some of the candidates for the next big thing underwhelm. VR is having a hard time getting out of the gates. Wearables and IoT have yet to go mainstream. Bitcoin and the Blockchain have yet to give us a killer app. AI/machine learning has great potential but also gives incumbents with large data sets (Facebook and Google) scale advantages over newcomers.

The most exciting things that have happened in tech in 2015 are happening in verticals like transportation, hospitality, education, healthcare, and maybe more than anything else, finance, where the lessons and playbooks of the consumer gold rush are being used with great effectiveness to disrupt incumbents and shake up industries.

The same is true of the enterprise which also had a great year in 2015. Slack, and Dropbox before it, shows how powerful a consumerish approach to the enterprise can be. But there aren’t many broad horizontal plays in the enterprise and verticals seems to be where most of the action was in 2015.

I’m hopeful that 2015 will also go down as the year we buried the Unicorn. The whole notion that getting a billion dollar price tag on your company was something necessary to matter, to be able to recruit, to be able to get press, etc, etc, is worshiping a false god. And we all know what happens to those who do that.

As I look back over 2014 and 2015, I feel like these two years were an inflection point, where the underlying fundamentals of opportunity in tech slowed down but the capital rushing to get invested in tech did not. That resulted in the Unicorn phase, which if it indeed is over, will be followed by an unwinding phase where the capital flows will need to line up more tightly to the opportunity curve.

I’m now moving into “What Will Happen” which is for tomorrow, so I will end this post now by saying goodbye to 2015 and hopefully to much of the nonsense that came with it.

I did not touch on the many important things that happened outside of tech in 2015, like the rise of terrorism in the western world, and the reaction of the body politic to it, particularly here in the US with the 2016 Presidential campaign getting into full swing. That certainly touches the world of tech and will touch it even more in the future. Again, something to talk about tomorrow.

I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.