SITALWeek #363
Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.
Click HERE to SIGN UP for SITALWeek’s Sunday Email.
In today’s post: companies that invest through economic downturns come out better on the other side; an accelerated clean energy transition could save $10T; using unconventional biomarkers for early disease detection; unions are likely to accelerate automation; wired for pessimism; VR simulations of complex, personal situations; are profits and equity necessary to incentivize the risk-taking needed to improve the world?; and, much more below...
Stuff about Innovation and Technology
Downturn Investors Thrive
According to Gartner, companies that invested throughout the 2007-2009 great recession and financial crisis subsequently saw their earnings double from 2009 to 2015. In contrast, their counterparts that chose not to invest saw no change in their income. Adaptability is one of the most important traits of a successful organization, particularly as the pace of change/disruption accelerates. We’ve gone as far as saying adaptability is the new “margin of safety”, and last week I wrote more about the risks of too much resilience with too little investing in a business during economic downturns. The companies that create the most value over the next 5-10 years are likely the ones that are able to continue investing today, taking advantage of the situation as much as possible. From last week:
Frequently, playing it too safe removes an organization’s ability to adapt and evolve because there isn’t enough slack in operations to react to changing circumstances. In other words, in solving for negative-tail risks, companies tend to also eliminate positive-tail events – becoming overly resilient eliminates optionality. Humans tend to have much more vivid imaginations about what can go wrong than what can go right. We have a hard time seeing the blue sky scenarios of nonlinear, positive outcomes. However, history teaches us that things can go very right sometimes. Indeed, we know from history that optimism always wins in the long term. The only way to capture that upside is to make sure your company, like any biological organism, has plenty of food, oxygen, and room to grow. No one can predict where the economy will be next quarter, next year, or at any point in the future. The people who are the worst at predicting the future in approximate order from terrible to very bad are: Federal Reserve and government employees, economists, investors (private and public), CEOs, and then all of the other ~8B people on planet Earth. Perhaps one of the worst things a CEO can do is believe a VC or a Fed employee knows enough about the future that it influences their own corporate strategy. Once you truly embrace that you cannot predict the future, the best path forward is running an organization (or a portfolio) with the right balance of Resilience and Optionality. In part of your business try not to lose, but in the other parts make sure you can still win. Many companies are overreacting to the negative news cycle and cutting off their ability to react to a world that, perhaps, is not falling apart.
Going Green to Save Green
A paper co-authored by SFI’s J. Doyne Farmer argues that the faster the economy goes green, the cheaper it will be, and, contrary to conventional wisdom, reaching 100% renewable energy by 2050 would save $10T. The authors of the paper (PDF) base their arguments on cost curves for green technology and calculate the savings without invoking any sort of subjective assessment of damage from climate change.
H2 From Thin Air
Hydrogen fuel is gaining a little traction as an attractive, zero-emission energy source that can potentially be generated cost-effectively via clean energy. However, some of the world’s best sunny/windy locations for green power generation lack water for transformation into hydrogen. A new prototype aims to fix that with direct-air electrolyzers that can operate efficiently in arid climates with low humidity. Researchers estimate that there are 13T tons of water in the air around us. The solar-to-hydrogen efficiency of the device is over 15% compared to the 1% efficiency of alternatives like photocatalysts for solar-powered water splitting. The prototype consisted of five connected electrolyzers, each a few square centimeters in size, and produced 745 liters of hydrogen per square meter of electrolyzer per day, enough to heat a home. If they can successfully scale the prototype, it could be a boon for clean hydrogen production in arid locations.
Vocal Diagnostics
Among the growing list of biomarkers that can be observed by AI to diagnose diseases is your voice. Researchers are collecting data to help AI diagnose conditions such as vocal fold paralysis, Alzheimer’s disease, Parkinson’s disease, depression, pneumonia, and autism. Combined with data collected on how we tap our phones and walk, as well as a host of other biomarkers, such as blood oxygen, pulse, HRV, sleep quality etc., we are entering an era of early diagnosis for a slew of diseases.
Unions vs. Robots
Unionization efforts seem to be on the rise as the economy shifts from production to services (e.g., unionization efforts at Starbucks and Amazon), or maybe it’s just the headlines for such efforts that are on the rise. Regardless, whenever I read about potential strikes, like last week’s US rail labor negotiations, I get the sense that we are in this awkward period where labor’s collective negotiating power is manifesting a wave of automation. Currently, many economies are short workers due to labor-force dropouts from the pandemic and an aging population. These circumstances are effectively forcing automation to happen faster, becoming existential for the economy to continue functioning. In the meantime, many jobs will see higher wages and better working conditions as companies vie for remaining workers. In other words, the free market should be doing a much better job of taking care of employees in times of structurally tight labor, which they could probably do better and more cost effectively than via union involvement, but maybe I am overly idealistic about that. However, over the longer term, the free market is working as hard as it can to replace humans with software and robotics. Ten years from now, it’s hard to imagine a railroad operating with as many employees as they have today given that trains should be one of the easiest transportation networks to automate (see #318 and #353). There will be pockets of unmet labor demand for jobs that are not easily automated (e.g., electricians, plumbers, nurses, etc.), and these types of jobs will have bargaining power in the years to come.
For Innovation Timing is Everything
Five years ago (before SITALWeek was publicly available), I wrote about the automated food startups Eatsa and Zume, both of which have now morphed into different businesses. Conceptually, automation in fresh food and beverage prep makes sense. I’ve written about Flippy and Chippy, which automate fryer cooking, and, two weeks ago, I explored how Starbucks would do better with automated drink prep. Often, we see the right idea at the wrong time in startups. Sometimes the stars never align, but, typically, a good idea eventually finds the right circumstances to flourish. The combination of labor shortages, improvements in AI, digital ordering, payments via smartphone, and inflation in general may finally soon be creating the right set of fertile conditions. The San Francisco Standard reports on Mezli, a fully automated (zero people) shipping-container-sized food-bowl maker that optimistically believes the time is coming for such a concept. I’m partial to the concept of robots working alongside humans as a bridge to the fully automated economy rather than something like this 100% robotic solution. The Mezli concept makes sense in a food truck environment, but it doesn’t quite seem to fit into existing quick-serve restaurant formats. Most of the examples of automation we see today still feel too early, but 10-20 years from now the timing should catch up with the innovation.
Miscellaneous Stuff
Brain’s Pessimistic Default
The mouse brain uses a peptide called neurotensin to encode each memory as good or bad: “as the brain judges new experiences in the moment, neurons adjust their release of neurotensin, and that shift sends the incoming information down different neural pathways to be encoded as either positive or negative memories. The discovery suggests that in its creation of memories, the brain may be biased toward remembering things fearfully — an evolutionary quirk that may have helped to keep our ancestors cautious.” The default (lower energy) state is fear-associated negative encoding, while tagging an experience as positive requires the synthesis and secretion of neurotensin (which is produced in the thalamus and then routed to the amygdala). While it’s obviously not clear if these findings translate to the human brain (which also uses neurotensin, but its role[s] may not be the same), the finding dovetails with our propensity for pessimism and tendency to overweight bad experiences when making decisions and considering future outcomes. Even if these findings don’t map entirely to humans, it’s a good reminder that evolution may have programmed us with a bias against optimism, an outlook that has increasingly become an endangered species in today’s social-media-powered world.
Analog VR
There’s a show on HBO called The Rehearsal. It’s a bit hard to explain, but I’ll give it a go without trying to ruin anything if you haven’t seen it: show-creator Nathan Fielder, a performance artist of sorts, ostensibly wants to help people with difficult life situations by creating elaborate and highly detailed reenactments to practice how things might play out. The show evolves in a way that’s hard to articulate as the lines blur between what’s real vs. what’s a rehearsal, and who the show is actually about. I suspect it ultimately might be about the viewer. Fielder hasn’t made any effort to explain the show, which, like any great performance art, allows interpretations to reflect the frame of mind of the viewer more than the artist. For me, watching these elaborate and emotional simulations with real people pretending to be other people (or maybe some of them were real and being themselves, it’s hard to say) exemplified two key forces in the world today: First, it’s becoming more difficult to separate truth from fiction; our grip on any sort of a collective reality has become more tenuous, in large part because certain technologies (like social media and invasive advertising) have hijacked our evolutionarily-ingrained information processing to fuel fear and isolation (see Surveillance Troubles Paradise and The Meta-mess) and run riot with subjective reality (the idea that multiple conflicting viewpoints can all be considered true is something that took hold in the 1970s and, as David Bowie predicted, has been amplified by the Internet). Second, virtual and augmented reality lay bare the fact that our own concept of reality is nothing more than a neural simulation (see Virtual Reality Informs Consciousness). From this point of view, The Rehearsal is ultimately like an analog version of VR – an attempt to simulate a complex situation in realistic detail. That is precisely what VR/AR will allow: realistic simulations of real-life situations with seemingly real people played by AI actors. Here is a review of the show:
Many think of the world as a conspiracy now. Or a bad dream from which you hope to finally awake. Or a collective hallucination. Or a simulation rendered by your descendants in the future, or a movie, or a made-up cultural scene. As art and pop have grown closer to life, becoming more literal, more grounded in reality, the popular narratives for making sense of life have grown far more outlandish.
But [Fielder] also goes much further than artists have lately by upping the stakes at every opportunity, making conceptual art on a far grander and more ambitious scale — controlling time and the seasons, the weather, making it snow, commissioning multiple sets, sets of sets, hiring doppelgängers, becoming different people, building a whole world, and worlds within the world, synthesizing reality and fiction many times over — and pushing his ideas to breaking point, crossing the line into the overcast morally ambiguous gloom that art should. Nothing I’ve seen in a gallery this year has come close. It’s the greatest conceptual artwork of 2022.
Are we heading towards an equally malleable and amorphous everyday reality?
Stuff about Geopolitics, Economics, and the Finance Industry
Can Nonprofits Take Risks?
Patagonia made headlines last week as the founder moved his family’s ownership of the clothing and lifestyle brand into a nonprofit. The approximate $100M/yr in profits will now go into a foundation funding environmental causes. Back in #216, I covered Patagonia’s no-growth company philosophy, with the founder characterizing growth as the scourge of the planet. It’s much more common to hear CEOs repeat the opposite, business-school-ingrained mantra: “If you’re not growing, you’re dying”. Certainly, capitalism’s focus on growth made sense as the population grew alongside globalization and accommodative monetary policies. It was also a perfect storm for growth post WWII, especially following the invention of the PC and the dawn of the Information Age in the 1980s. However, the next few decades might be a little different. Globalization seems to have crested (global trade peaked over a decade ago and many of the labor and cost arbitrages are tapped out), and perhaps monetary expansion has hit a wall as well (TBD, after we work through the pandemic missteps and see where inflation settles). And, as I’ve covered ad nauseum, the population is aging and birth rates are decelerating. Are we to believe that no growth is the new growth? Or, as I’ve put it before, the economy seems to be moving into a more zero-sum stage, i.e., a distributive era per Brian Arthur where emphasis shifts from growing the pie to changing the size of everyone’s slice. Should we let go of the capitalistic notion of existential growth? The counter argument is that capitalism remains the best way to raise the quality of life for the most people over time. The problem has been a lack of accountability for the negative externalities that have come with certain capitalistic efforts to improve our lot in life.
Would a company whose primary stakeholder is a nonprofit fare worse than one who is helmed by a profit-focused capitalist? I am not aware of many examples of companies controlled by nonprofits, but Bose comes to mind (the company and most of its profits were left to MIT by the founder, although it is run independently). Bose has suffered from the innovation and vertical integration (and, it's fair to say the anti-competitive nature) of Apple’s AirPods strategy. Would Bose have fared better if it were run by owners who more directly benefited from its profit growth? Not knowing all the details, I can only speculate. We can run various thought exercises about private companies that are founder-owned and whether or not those companies would have been as successful if their profits went to nonprofits instead of employees and owners. Decision making seems more complex to me when your stakeholder is a nonprofit. For example, if there is a question to invest in a new product or a new production facility that comes with some risk, an equity-driven company might take the risk, while a nonprofit might prefer the safety of the cash flow to support its causes. I’m intrigued to see how Patagonia fares – it certainly seems like a unique example of a company that can do just as well with this sort of structure since it has the pre-existing (and atypical) goal of not growing its relevance to its customers or the world. The heart of the question is whether or not equity (and its long-term appreciation) is important to the risk-taking that’s necessary to create increased value for all. If so, then this move by Patagonia should not be largely replicated by other founders. If not, then all companies should effectively be nonprofits. Like most things, the answer here seems to lie somewhere in the middle – allowing employees to benefit from equity growth while also giving back much more to the world at large would be the best of both worlds.
✌️-Brad
Disclaimers:
The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC. This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry.
I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital, LLC has no control. In no event will NZS Capital, LLC be responsible for any information or content within the linked sites or your use of the linked sites.
Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results.
Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.