NYT: Venture Capitalists Return to Backing Science Start-ups #energy #venture

It’s good to see capital coming back into energy and industrials. This time around, the money is smarter—focusing on smaller pilot projects, leveraging software, and partnering strategics with different return expectations:

After years of shying away from science, engineering and clean-technology start-ups, investors are beginning to take an interest in them again, raising hopes among entrepreneurs in those areas that a long slump is finally over. But these start-ups face intense pressure to prove that their science can turn a profit more quickly than hot tech companies like Snapchat and Uber.

Overall, industrial and energy start-ups attracted $1.24 billion in venture capital financing in the first half of 2014, more than twice as much as in the period a year earlier, according to statistics from the National Venture Capital Association. Still, investment remains well below peaks reached in 2008, when industrial and energy start-ups attracted $4.64 billion.

The full article can be found here.

Standford CS183—Possibly the best class on start-ups ever is back

Stanford’s CS183 course is back and open to the public.

The first class was taught by Peter Thiel, and the class notes written by Blake Masters were so popular, they’ve become a book, Zero to One, co-written by Thiel and Masters.

The new class is titled CS183b How to Start a Startup and is being taught by Sam Altman, who runs Y-Combinator. The Paul Graham class is a good place to start.

It’s Not Bits vs. Atoms

We wanted flying cars, instead we got 140 characters. —Peter Thiel

Peter Thiel was recently quoted as saying you can either invest in bits or atoms, his opinion being that there are too many bits companies right now (WhatsApp, SnapChat, etc.) and not enough atoms companies (Tesla, SpaceX). Generally speaking, I would agree—a lot of capital is pouring into digital (mobile and social in particular) and not enough into infrastructure (water, energy, transportation).

However, these two sectors are not mutually exclusive. The most interesting start-ups seem to sit at the intersection of the two—they use bits to manipulate atoms. Think about Lyft or Uber, which have changed our model for transportation and may ultimately change the structure of car ownership. The same can be said about AirBnB, which is disrupting the hotel industry. These all are enablers to a more asset-light life.

The really interesting questions are how you use bits and what is their inherent ability to scale to address the large, complex problems of atoms, which tend not to scale. In energy, smart grids have this potential. The companies that combine bits and atoms to build smart feedback loops (a Nest thermostat with mostly bits but also some atoms, for example) are the ones that may end up having the biggest, most advantageous effect on energy consumption.

The hardest problems are always atoms—they exist in reality (climate change, food production, etc.). The bits are just tools to solve these problems. At the end of the day, bits without atoms are really not that interesting.

Margins vs. Cashflow

Working through a business model problem—incredibly small margins but has opportunity for significant cash-flow.

One of the best indicators you can look at in value investing is EBIT / Enterprise Value. EBIT is Earnings Before Interest and Taxes (amount of cash the business generates before financing/tax) and Enterprise Value is the amount you’d have to pay for the entire business today (including debt). If margins are small but the EBIT/EV is high (say 30-40%) that seems like a good business even if margins are small (3-5%).

The market penalizes small margins, the perception being the larger the margin the more defendable the business is. This seems largely right, but there are giant companies (typically commodity firms) built on small margins. At the end of the day you get paid in dollars not in margins. So IF, and probably a big IF, you think you can defend your small margins over the long term (i.e. Amazon investing in innovation) then you can build great, low margin businesses.

Or at least I think so?

“Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.” “What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.” “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”

Why smart driving cars are a big deal #transportation #smartdriving

The question will be how you can end around the infrastructure and a regulatory framework nearly a 100 years in the a making. The Internet was an entirely new thing that existed outside of the status quo and thus could advance, largely unhindered, as fast as possible. You can imagine the looming regulatory changes this is going to require.

The self-driving car benefits from Moore’s Law, which explains that computers get dramatically cheaper over time, and Metcalfe’s Law, which describes the increasing power of networks as they get bigger and more connected. Both of these laws are now at work on one of the biggest expenses and most powerful forces in our world: transportation.

This is a bigger shift than the smart phone, and it might happen nearly as fast.

Acceleration — The World has a Wicked Second Derivative

A derivative is a mathematical tool to measure the rate of change. In physics, this takes the form of change in distance over time, or what we call speed. And if you take the derivative of the derivative, you get acceleration — the second derivative. We tend to think in straight lines, but the world is accelerating — i.e., it has a wicked second derivative.

Technology & Information

An analysis of the history of technology shows that technological change is exponential, contrary to the common-sense “intuitive linear” view. So we won’t experience 100 years of progress in the 21st century — it will be more like 20,000 years of progress (at today’s rate). —Ray Kurzweil, Law of Accelerating Returns

chart03

Moore’s Law is what is often cited in describing technological change (note the above graph is logarithmic, not linear), but what is astonishing is that it’s not just silicon chips. The exponential growth in the density of transistors, which drives storage and computation, has been accelerating for nearly a hundred years. The trend is not just about silicon; it’s a line that runs from the first electromechanical technologies through silicon and on next to biological and quantum computers.

This report is a snapshot of what the information revolution means to the average American on an average day, who consumes 34 gigabytes and 100,000 words of information. —University of California

The consequence of this, as Eric Schmidt has said, is that “every two days now we create as much information as we did from the dawn of civilization up until 2003. That’s something like five exabytes of data.” Think about that: every two days, we create more information than humanity did during its entire history. That’s the problem with exponential growth — you start with a couple of rabbits, and a year later there are hundreds running around.

Adoption Rates

And we’re adopting this technology even faster. The Internet was adopted faster than the mobile phone, which was faster than the computer, which was faster than VCRs.

History of Products and Their Adoption Rates

Think about the Nest thermostat — they created a $3 billion company in a couple years. Consumers adopted the product incredibly quickly, leading to rapid growth and creating immense value.

This is going to continue. Costs for gene sequencing are dropping faster than they did for computers. Biological and quantum computers are becoming a reality — we’ll compute in DNA and other universes. Solar installation is growing exponentially as well and driving an energy transition.

Consequences

There’s a cultural consequence to this as well — events happen faster and news spreads more quickly and widely before it is digested and discarded. There is no information arbitrage anymore — news and economic data circle the globe in milliseconds. There is no dampening effect, which leads to reactionary moves and quicker corrections — short-term shocks and retracements.

This affects businesses as well. A company like GroupOn can export its business model around the world in a matter of months. It’s how a company like Zara reacts to consumer demands by re-tooling, re-designing, and producing new designs in their stores in a matter of weeks, not seasons.

And there are consequences for governments that can’t react to this change. Regulation is design for last-generation technology, or worse yet, a couple generations ago. And it leads to such inanities as the banning of home genetics kits by the FDA.

This type of change isn’t a new phenomenon. Reuters started by sending pigeons to London to report on World War I, which greatly sped up the dissemination of news. What is different now is the pace of change — the acceleration — the second derivative.

Skills that Matter

I think this environment rewards two people — the long-term thinkers and the editors.

The long-term thinkers will excel because an abundance of change leads to overreaction. Those that can see the big picture, the long history, and who can navigate the short-term changes, will create a lot of value. Perspective is important in a world where we’re consuming 34 gigabytes of information a day.

You can’t stop the onslaught, and thus your only hope is to contain it. To do this, we need to learn how to edit, to reduce, to find the most valuable streams. All this change has created a lot of noise — we need better filters. The people that learn to use the filters and the companies that build them will also create a lot of value. Editing may be the skill of the next century.

Lastly, we need to be open to change. We may yearn for nostalgia, but it’s dangerous not to evolve — evolution, by definition, kills those who don’t adapt.

Limits

These trajectories do have limits though. We live on a finite planet with finite resources. There is a physical upper limit that needs to be managed. The balance between our appetite and the limits of the planet is delicate.

We also have mental limits. Our bodies and our brains were not designed for a world that is changing faster than we can adapt to it. This causes stress as we are overwhelmed by choice and change.

The acceleration of technology can also lead us to imagine a techno-utopian view of the world, one where we don’t have to think about or solve the complicated problems as technology will solve them for us. But this technological change is just a change of tools; it’s not an ideal.

Harness the Force

Lastly, back to physics, if we take this acceleration and multiply it by mass, we get force: Force = Mass x Acceleration or F=MA, Newton’s second law of motion. This force can be good or bad — it could be a baseball that hits you in the head or it could be the a rocket engine that lifts us to other planets. Acceleration is important: it’s the variable that matters, it’s what creates force. Our job is to not get knocked over by the acceleration but to harness it and create a positive force.

Further Reading

The Age of the Infovore: Succeeding in the Information Economy
Present Shock: When Everything Happens Now
Law of Accelerating Returns

De-materialization — The Move to an Asset-Light Life

My new pattern requires renting cars at the airports as needed. I am progressively ceasing to own things, not on a political-schism basis,…but simply on a practical basis. Possession is becoming progressively burdensome and wasteful and therefore obsolete. — R. Buckminster Fuller, Operations Manual to Spaceship Earth

Fuller was a bit ahead of his time, but he was right to observe that the world has a lot of excess capacity: our cars sit unused for most of the day, our houses sit empty while we are away at work or socializing, just to name a few obvious examples. What companies like Lyft and AirBnB do is provide a platform for that spare capacity to be put to work. Technology is adding to and facilitating this process in ways large and small. For example, I loaned someone a book off my Kindle the other day — it was quick and easy, and further simplifying the process, the book will be automatically returned after a set amount of time.

Median income is down 7%, and median net worth is down 28% over the last 10 years (BLS) while costs have risen, but these business models, which offer access to goods and services without the substantial investment required for an outright purchase, have been successful during the downturn. The same thing is going on in the corporate world as US companies have been functioning with less capital and fewer people since 2008. Companies are also utilizing less space per employee as more people work from home. Similarly, there has been a rise of co-working spaces, a form of shared office space, as various companies, often (but not always) aligned around a single field or ideology, pool resources to time-share space rather than outright owning it.

The top three expenses for young people are housing, transportation, and education. The rental markets are strong, and the demand is increasingly concentrated in the form of micro-apartments in major cities. Home ownership has not bounced back from the housing bubble. On the transportation side, the number of people who have driver’s license is steadily decreasing, and the number of miles traveled per year is at a multi-decade low in the US. And with the rise of open online courses and other technologies, the traditional degree is under threat, a trend that will continue with the ongoing increase in the cost of physically attending brick-and-mortar universities. It would cost me twice as much today to get my degree from an in-state school, a cost that I simply could not have borne.

While this phenomenon is driven by the economy, I think that there is a generational effect here as well. When you grow up posting, sharing, and tweeting, you are used to being constantly connected, often to people you don’t actually know. All of a sudden, it doesn’t seem so strange to loan someone your car or rent them a room in your condo. There’s definitely a cultural spillover from growing up connected to sharing physical goods and spaces.

It’s interesting to think about what’s next. What big asset do you own that you don’t have to? Where else is there spare capacity? What is the most valuable thing you own, and would you share it with someone else? It’s fascinating to watch how mobile technology is manifesting change in the physical world, attacking everything from taxi to hotel business models. But that’s not a bad thing for society at large (the individual taxi driver or hotel owner is a different story, of course). At the end of the day, if it leads to more efficiency and less stuff, it will be a huge win.