SITALWeek

Stuff I Thought About Last Week Newsletter

SITALWeek #365

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.

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In today’s post: I dive into the early 1990s and look at how today resembles that period of wild possibilities at the dawn of the Internet; killer apps for VR in fitness and pain management continue to emerge; what can we learn from the disruption of Adobe's business?; software is coming for the manager position; leather from mushrooms; I explain why a little bit of inflation is hope for the future rather than something to be feared; and, much more below...

Stuff about Innovation and Technology
VR Fitness
Games and fitness continue to be the leading apps for VR/AR, and last week Zuckerberg teased a mixed-reality fencing game on the pending Oculus Quest Pro. It’s a short video demonstrating passthrough VR, which takes a live shot of the world around you and overlays elements. Essentially, you have an iPhone-equivalent device strapped an inch from your eyes that’s filming the world in front of you and adding virtual bits. While the passthrough video strategy might mitigate some nausea that people experience with VR, the system is still inferior to AR devices that allow your eyes to receive photons from the real world instead. In other VR fitness news, popular Gym Class Basketball VR, which enables you to work up a sweat in a pickup game with up to eight other geographically dispersed players, raised $8M in VC funding in August. I think 2023/2024 for mixed reality will be very similar to 2007 for smartphones – bringing us the 1.0 version that will give us a glimpse of what will ultimately become a 1B+ unit market in a decade’s time. I am still a little skeptical of passthrough VR, but I am looking forward to trying it out with more apps available next year. The idea of turning your living room (or any space) into a studio for playing, working, and creating is going to be a blast. Imagine playing “the floor is lava” with AR (or passthrough VR) when your brain is convinced your floor is actual lava! Given the way our brains process virtual inputs, simulating the sight and sound of lava in your house might actually save on heating bills!

VR Analgesia
In other VR news, patients undergoing surgery require far less anesthesia when they are using VR. MIT Technology Review reports: “The VR group requested significantly lower levels of the sedative propofol—in this case used to numb the pain in the hand—than the non-VR group. They received 125.3 milligrams per hour, in comparison to an average of 750.6 milligrams per hour.” This finding is consistent with other studies indicating that pain perception is mitigated during VR, including sports.

Back to the Future: Revisiting the Birth of the “Information Superhighway”
I am interested in the early 1990s for a variety of reasons, but primarily because it represents the time period just before Netscape 1.0 and the Internet began to blossom. All of the pieces of the puzzle were there – the future Internet was tangibly in the air – but people couldn’t quite grasp or articulate it (Wired Magazine didn’t publish its first issue until 1993). Back then, it took minutes to download a single image, and communication was largely text-based on early bulletin boards (BBS). In the US, Prodigy, AOL, and CompuServe were providing walled-garden dial-up services and just beginning to contemplate adding the world wide web as a feature. Combined, these services saw 25% y/y growth to 5M users in 1994 against a backdrop of 60M PCs. From a 1994 NYT article:
Consumer on-line systems, which typically charge fees of $10 to $30 a month, use point-and-click computer mouse software to give users relatively simple and immediate access over phone lines to a variety of services. These typically include news, online, shopping, financial and stock market data, electronic mail, libraries of software and technical information, entertainment listings, games, advertising and discussion groups. Some of these consumer services already offer, and others plan to offer, access to the Internet, a world-wide network of some 2.2 million host computers that provide information and services to an estimated 25 million people.

What fascinates me is that we are at a social/technological pivot point with AI and mixed reality that feels very similar to that period 30 years ago when we were struggling to articulate (let alone anticipate) what was about to happen. Just a couple years later, in 1994 and 1995, a slew of brilliant people had a lightbulb moment and started what would become the first wave of massive Internet companies like eBay, Yahoo, and Amazon. So, it was with great interest that I recently came across a 1994 PBS documentary series called Future Quest hosted by Jeff Goldblum. I am not sure how I missed this program back then, but it was probably because I was too busy playing Ultima VII, dialing up to AOL, and just starting to traverse the web using Netscape 1.0 on my homemade PC. What’s interesting about the show is the wide array of guests – from scientists to entrepreneurs, authors, comedians, etc. Of course, nearly all their predictions were wrong, with the unsurprising exception of a few stand-up comedians who had a bead on the impending paradigm shift. Paula Poundstone wondered “if my computer tells me the Earth is flat in the future, how will I know if that’s reliable?” Dennis Miller accurately predicted the wild nichification and fragmentation of all content. The comedians interviewed all fretted about the isolation potential. In aggregate, the pessimists and cynics on the show were more wrong than the optimists (who were also wrong, but at least they understood the staggering order of magnitude of the impending changes!). My takeaway is that we frequently struggle to see just how good and how big things will be in the future. There are a remarkable number of parallel predictions today about AR/VR and the metaverse that are skeptical of its impact, largely owing to the cost of the devices, the size of the market, the timing of the market, and what the applications will be. I think we are now back to that early-1990s moment of wildly swirling uncertainty before a veritable technological explosion. And, as the economy continues its analog-to-digital shift, the next 30 years will experience a similar 10x, 100x, or 1000x expansion of opportunity. Future Quest is currently streaming for free on Tubi in the US, and watching it is quite the time travel experience.

Managerial AI
Chipotle is one of the leading-edge adopters of new technology to improve restaurant efficiency and customer experience. The chain is trialing new kitchen management software, which “uses artificial intelligence and machine learning to inform staff of ingredient levels in real time, telling workers how much prep is needed and when to start cooking. It also automates real-time production planning for each restaurant.” When combined with data from digital orders and store traffic, you can see a near future where the high-cost store managers are replaced by software. Chipotle isn’t discussing that potential, but it’s not too hard to imagine how one person might be able to oversee multiple restaurants by leveraging such technology. Chipotle will also be rolling out Chippy, the tortilla-making frybot, soon. All of these digital enhancements are increasingly existential in the face of a declining labor force and rising input prices (see the final section of today’s newsletter for more).

Consumerization Enables Disruption
Adobe announced their intention to acquire rival design software maker Figma for $20B a few weeks ago. Adobe’s upstart competitor Canva was also at one point valued at $40B last year (before the bubble burst in VC). Last week, Bending Spoons, a video-editing suite of apps with over 90M monthly active users, raised $340M in funding. That’s a lot of competition for Adobe, the formerly dominant provider of photo/video editing tools that investors once viewed as having a nearly unassailable monopoly. So, what happened? What series of events allowed a parallel set of tools to evolve and encroach on the incumbent? I postulate three possible explanations, each with their own lessons. First, Adobe provides great tools, but they have also taken advantage of their customers by ratcheting prices and pushing unnecessary bundling. That strategy worked fine for them as they moved from one-time sales to subscriptions, but, at some point, they seem to have created an umbrella so large that competitors could sneak under with better value propositions. I wouldn’t go so far as to say that Adobe is a zero-sum or negative-sum business, but I think it’s fair to say that they don’t maximize their non-zero-sum potential for customers. Second, as workflows become more digital – and work is increasingly remote and distributed – the nature of collaboration changes. This requires a different approach to software, specifically concerning cloud-based design tools, file collaboration, etc. Third, and this is perhaps the most broadly applicable takeaway to other industries, the business/professional end market has been dwarfed by consumer/amateur users. Social networking made everyone a film director. Ecommerce made every small business owner a marketing machine. Adobe’s tools are not as approachable for someone with little experience as are some of the newer apps for editing photos/videos or designing digital ads, etc. While Adobe was innovating at the professional platform level, a host of companies emerged to target markets that were 100x or 1,000x larger. Those outsized markets allowed for faster iteration of product features, lower costs, and new ways of doing design. Eventually, consumer-focused products can become more sophisticated and overtake the professional versions. This consumerization of markets previously limited to a smaller set of professional workers has happened before and it is destined to happen again. Many established businesses aren’t capable of making the leap (even if they want to) because focusing on casual users requires a completely different set of DNA. As I wrote about previously, the next wave of disruption is already on the horizon for an array of design applications with transformer AI tools, such as runwal.ml, that allow ideas to manifest in real time without any design software between the user and the creation. These new ways of transforming the connection between humans and software will be disrupting nearly every industry in the coming years.

Miscellaneous Stuff
Fungal Leatherette
Mycelium-based leather substitutes leverage fungi to create synthetic, yet realistic, alternatives to animal-hide materials. Startups like MycoWorks engineer mycelium cells to create intertwined 3D structures in a controlled indoor environment (as opposed to a native subterranean habitat, where the cells form root-like structures from which spring the fruiting bodies we know as mushrooms). The end product can be made in a variety of colors and textures. Other natural materials under consideration as leather alternatives include cacti and pineapples. The product is part of a broader trend of "manufacturing" products from biological inputs.

Stuff about Geopolitics, Economics, and the Finance Industry
Complexity, Unpredictability, Ants, Comedy, and Magic
Checkout my conversation with Sean DeLaney on the What Got You There Podcast, which includes a few philosophical topics I don’t frequently discuss. The interview is also available on YouTube. Sean does a great job preparing for guests, and his back catalog of interviews features many fascinating people and ideas.

In other podcast news, checkout the latest episode of The Acquired Podcast on VC firm Benchmark. Benchmark partner Bill Gurley first tipped me off to Complexity by Mitch Waldrop (which at the time I write this is on sale for $2.99 on Amazon Kindle; if you have not read it I highly recommend it), a key genesis of Complexity Investing. As part of NZS Capital’s sponsorship of The Acquired Pod, our investment team will be doing a second Zoom Q&A on complex adaptive systems and investing on October 10th (register here).

The Morality of Interest Rates and Unemployment
Due to a combination of pandemic deaths and stifled immigration, the US population aged 20-64 declined by several hundred thousand people in 2021, and growth for that age bracket isn’t expected to recover for several years. This loss, combined with the millions of early retirements and people who have chosen to not re-enter the labor force, is no doubt one of the reasons for our current low unemployment. Additionally, there are nascent signs of a potential resurgence in manufacturing jobs as new capacity is built (or moved back from overseas) on the margin. Even without major contributions from reshoring, the NYT reports that US manufacturing is 67,000 jobs ahead of pre-pandemic levels. Essentially, low unemployment is a structural result of demographics, pandemic deaths, pandemic policy hangovers, restrictive immigration policy, and deglobalization. The Fed’s interest rate increases will have no impact on demographics (although with weddings at a level not seen since 1984, we might have more kids entering the labor force 20 years from now! See also the 30-something Sneaker Wave for more demographics). Fed rate hikes also won't impact immigration policy, nor will they light a black flame candle to resurrect the pandemic-dead. In contrast, what Fed policy might do is curtail reshoring investment while also disadvantaging US manufacturing with a treacherously strong dollar. The US spent over 30 years shipping a major part of its economy to China and other low-cost locations, and we have greatly benefited from the resulting deflationary labor-cost arbitrage. However, as we found out during the pandemic (and now with the Russian invasion of Ukraine), globalization greatly increased the fragility of Western supply chains and national security. We have the opportunity over the next decade to bring automation-heavy manufacturing strength back to the West, but it will come with higher inflation alongside lower unemployment than the recent past. US monetary policy would do well to integrate our new demographic reality, as the diminished labor force, combined with the need for restoring/expanding manufacturing, might keep inflation higher for a number of years (the reality is it’s too complex to predict, but higher inflation now carries a greater probability than before due to demographics and deglobalization indicators). In this scenario, inflation is not an evil, inexplicable force; rather, it represents hope that investment today will create a more resilient economy in the future. Alternatively, we could roll out a much more progressive immigration policy like Canada, which recently saw its largest quarterly population growth since 1957 (0.7% for the last quarter and 1.8% for the last 12 months).

Many drivers of inflation will self-correct over the medium term, and, over the long term, technology will continue to be an overwhelming deflationary force. Forty years ago, during the Volcker era, there were only 1M total computers in the entire world, and none of them were connected to each other. If a CEO was trying to get a handle on their business, employees would need to call or physically visit local branches, prepare reports and memos by hand and then present them in person or by phone or mail (fax machines weren’t even in broad use at the time). Today, the world is connected by over 4B smartphones and enterprise software that gives real-time sales information. Decisions are being made much faster today than ever before, which implies the economy and markets will self-correct more quickly. The downside of on-demand data is that we are increasingly trusting algorithms with decisions, which risks amplifying and/or over-correcting certain cycles (see Magic AI-Ball). It’s possible that today’s layoffs, capex cuts, and other investing decreases are being made too quickly in the face of an economy that will heal many of its own issues. And, of course, with the Fed still largely operating under the 1980’s analog model of looking in the rearview mirror at stale data, they risk compounding the significant negative consequences of higher rates. There is also a certain morality that we cannot ignore here: if people want to work, there is demand for labor (especially from long-term reshoring and new green infrastructure projects), and markets will self-correct thanks to the speed of information flow, then why should the Fed put millions of people out of work through restrictive interest rate policies? (The Fed estimates they will be forcing 1.2M job losses between now and the end of 2023, which, in addition to causing unnecessary personal strife, won’t do much to curtail inflation if it forces an uptick in unemployment/welfare subsidies; and, there is no evidence that runaway inflation is likely to endure in the current era of real-time information). We became accustomed to low inflation during globalization and the Information Age, but perhaps a little bit more inflation is a sign of good things to come rather than a harbinger of end times. To the extent the very low inflation of the last decade represented a certain paralysis of growth, modestly higher inflation going forward is a signal of hope for the future. So, is a little bit more inflation really so dangerous that we should send the US back in time and prohibit the investments needed to build a more resilient, self-sustaining, greener economy long term? If we shine a light on the inflationary bogeyman, it's perhaps not the evil specter (especially on a relative basis) that the Fed makes it out to be.

✌️-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.

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