Thoughts in Between

by Matt Clifford

TiB 189: Fragile supply chains; Sequoia and the tech cycle; Knowledge and trust; and more...

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Efficiency vs resilience, supply chain edition

In Quick Links last week I posted this thread by Flexport CEO Ryan Petersen on some of the practical problems creating chaos in global supply chains - as well as this tweet that suggests it had an immediate impact. Petersen has an excellent follow up thread this week that tries to explain the root cause of the type of problems that are increasingly endemic along supply chains. His argument is that they stem from the relentless pursuit of "Return on Equity" (RoE):

To show great ROE almost every CEO stripped their company of all but the bare minimum of assets. Just in time everything. No excess capacity. No strategic reserves. No cash on the balance sheet. Minimal R&D.

In short, "we stripped the shock absorbers out of the economy in pursuit of better short term metrics".

The trade-off between efficiency and resilience is an idea we explored before, in TiB 112, in the context of government responses to the pandemic. It's one of my favourite TiB segments and worth a re-read. Back then I suggested that Singapore's otherwise (and unsurprisingly) competent reaction to COVID was undermined by its pursuit of a hyper-efficient labour market: the failure to account for migrant workers - a source of great efficiency as measured by GDP-per-capita - as citizens created a vulnerability that the virus exploited.

This is important because it suggests that the fragility created by the pursuit of efficiency applies as much to countries as companies. Petersen argues that the solution is "founder-led companies", which are uniquely able to "stand up to the immense pressure from the dogmas of modern finance [to maximise RoE]". (Zuckerberg's very expensive pursuit of the metaverse is a good example, perhaps). But what's the equivalent for countries? We lack good mechanisms to encourage long-term-ism in government and the consequences can be severe.

Permanent capital and production capital

Sequoia Capital, the most celebrated and probably most successful venture capital firm, announced this week that it is changing structure. It will become a single permanent capital vehicle that allocates cash to Sequoia sub-funds pursuing different strategies (e.g. early-stage, growth, etc). Given how un-innovative VC is in general (we first talked about this back in TiB 2), it's an interesting move. Sequoia argues that it reflects that the best tech companies compound for many decades and the new structure allows them to hold their winners for longer.

Most commentary has focused on the implications for VC, but the best take is Ben Thompson's essay, which discusses the change in the context of the macro tech cycle, using Carlotta Perez's Technological Revolutions and Financial Capital as a framework (see TiB 97 for previous coverage and/or Jerry Neumann's superb summary). Thompson's argument is that Sequoia's evolution demonstrates that we're now in the "deployment" (i.e. more mature) phase of the current cycle, where "financial capital" (like VC) gives way to "production capital" (like Big Tech's huge capex budgets, enabled by reinvested profits):

Instead of LP’s investing in funds that make speculative investments in risky endeavors, Sequoia wants to keep long-term positions in companies that have proven business models and are embarking on the decade (or longer) process of... expanding their markets to the entire world

Do read the whole thing. I'd add that permanent capital makes a lot of sense for VCs with a (quasi-)permanent advantage. Investors are (broadly) happy to let Warren Buffet reinvest Berkshire Hathaway's vast profits rather than distribute them because they believe Berkshire's internal opportunities are better than those generally available in the market. The same ought to be true for the best VCs; the Berkshire of venture is waiting to be built.

Is "do your own research" a viable strategy?

This conversation between philosopher C Thi Nguyen and Sean Carroll might be the best podcast episode I've listened to this year. Nguyen is primarily a philosopher of games, and if you're interested in games, gamification, epistemology, echo chambers (on which Nguyen has an excellent paper) or societal trust, there'll be something for you. (A transcript is available at the link if you prefer reading to listening).

One of my favourite segments starts around 19 minutes in when Carroll and Nguyen talk about the problem of verifying knowledge (or, put differently, how viable is "do your own research" as an epistemological strategy?). Nguyen says:

Professional mathematicians have admitted sheepishly to the world that a proof of a really important mathematical theorem might be understood by 10 people, and the whole rest of the community just has to trust it, ’cause you’re not going to spend a year learning the proof

(For more on this, see this excellent thread on how mathematical research works, which I linked to a couple of months ago)

I suggested back in TiB 106 that the fact that we're all "dangling at the end of a supply chain" (Kieran Healey's phrase) rather undermines any effort to become a Sovereign Individual. In the same way, dangling at the end of what Nguyen calls "a fractal chain of trust" makes becoming a Sovereign Intellectual impossible too. Is there a better solution than what Scott Alexander has called epistemic learned helplessness or just granting credence to every conspiracy theory that comes your way? No one seems to have one (Nguyen included); that seems like a big problem.

Quick links

  1. "Play dumb, get rich". Fascinating / hilarious look at how five of the stupidest investment strategies of 2021 yielded incredible returns.
  2. How to get more venture customers. Excellent reading list compiled by Neil Hacker on a favourite TiB topic: market design for innovation.
  3. What if everyone wins the lottery at once? It's bad, apparently. Interesting study based on a Spanish lottery design where many people in a town win big prizes at the same time.
  4. Save Granny, Keep Mum (at work). What happens to mothers' employment when grandparents die?
  5. Not Hotel California. What's happening to post-pandemic rents on the West Coast?

BONUS: Long time readers will remember I previously co-ran reading groups in 2019 and 2020. Some people who met at those are running a new one on Conceptualising Utopia. I'm not an organiser, but am planning to attend.

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Until next week,

Matt Clifford

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