On giant piles of cash, and their origins

The trouble with venture capital is that it has gotten too big.

source: Unsplash https://unsplash.com/photos/100-us-dollar-bill-BRl69uNXr7g

Technological innovation requires capital. A lot of capital. A giant pile of cash.

There are, to a first approximation, only three places you can find of a giant pile of cash. There’s government money. There’s venture capital. And there’s big corporate R&D.

Of the three, I would argue that government is clearly the best. The reason is simple: government funding doesn’t come attached to some rich asshole who inevitably screws things up later.

Venture capital, for this same reason, is quite clearly the worst. Andy Baio’s, “The Quiet Death of Ello’s Big Dream” is worth reading on this point. VC funding comes attached to VC revenue expectations. It makes unreasonable demands. Sometimes they work out for the investors. They very rarely work out for everyone else.

Big corporate money is somewhere in the middle. I’d classify it as eh, fine I guess, so long as the marketplace is otherwise well-regulated and those large corporations are constrained. (Which, heh, ofcoursewedon’thaverightnow.)

The examples of big corporate money that spring immediately to mind are Bell Labs and Xerox PARC. There was indeed a time when big companies invested a ton in basic science and R&D, with no immediate plans to turn the results into products. And, as Ian Betteridge pointed out last month, this was because the big companies were rightly concerned about the antitrust cops. A nervous monopolist is a (relatively) well-behaved monopolist.

Still, there’s a bit of elegance to the big-pile-of-government-money approach. I first took notice of this with the passage of the Inflation Reduction Act (IRA). Fifteen years ago, everyone kind of thought that the only way to jumpstart the clean energy transition was to institute a carbon tax or cap-and-trade/cap-and-dividend system. (Basically, do some fancy tricks that the economists suggested, then let the market work its magic.) Cap-and-Trade failed for a whole lot of reasons, but one of the biggest was that the proposal was complex and boring in a way that appealed to the economists but were impossible to message. Most people were left thinking “this is probably gonna turn into weird corporate bullshit, right?”

The IRA, by contrast, was just a big pile of money attached to industrial policy — directional instructions for how to spend the pile. That’s effectively all it could be, because of some vagaries in the Senate rules that let you avoid the filibuster and pass budget bills with a 51-vote majority. And while that big pile of money isn’t perfect, it is funding a lot of good things.

And of course we can scan back in history for plenty of other examples. The semiconductor industry and the internet were both built out of government grants and defense contracts. We have sputnik and the space race to thank for the computer age. The Human Genome Project was government funding. So was the National Nanotechnology Initiative. Some of these were big hits, some were glancing misses. But the general model of promising avenue —> government sets up a big pile of money —> research and development flourishes in that area is pretty well established. It works.

The are, as far as I can tell, only three downsides to the government-pile-of-money approach:

1. You’ll need to make the money back through taxes on the industries that develop as a result. And they won’t want to pay those taxes. And these industries will be popular, with a lot of capital to spend on pressuring government to give them special deals and tax breaks. So maintaining the equilibrium of establish big pile of government money —> industries flourish —> they pay taxes, which lets you set up the next big pile of government money is going to take constant effort to maintain. (This is an abbreviated version of Marianna Mazzucato’s The Entrepreneurial State. Her book is excellent, btw.)

2. The big pile of government money is tied up in bureaucracy, which means it isn’t especially nimble or responsive. This can be fixed through public-private partnerships and other administrative design choices. But it’s bound to be frustrating and sometimes wasteful. (Imagine if, circa 2022, the Biden administration had set up a $30 billion fund for, like, metaverse research.) And that waste and frustration will be fodder for ideological opponents to the whole endeavor.

3. The big pile of government money doesn’t glorify entrepreneurs and innovators as the very-special-boys who are heroically building the future. And that doesn’t feel very gratifying. They would much prefer an equilibrium where government provides the big pile of money, but then no one talks about it. Or gives the government any credit. Or taxes the windfall profits. It is not, in other words, a story that plays well at Davos. If those entrepreneurs get rich enough, they’ll develop elaborate philosophical justifications for why the most important cause in the world is that everyone clap louder for them.

But those three downsides just mean that the system will require political maintenance. It works quite well, but it isn’t self-sustaining. And this observation extends beyond science and technology. The big-pile-of-government-money is a return to how we approached public problems through much of the 20th century, before it was rejected as “tax-and-spend” liberalism and replaced by neoliberalism’s faith-based market fundamentalism.

The basic proposition is as follows: we should provide public funding for public goods. Those public goods will make us a better, more productive society. And then we refill the public coffers through a system of taxation. The same approach can be applied to other public goods:

• There is no magic-unicorn funding model that will save journalism. It’s going to require public subsidy.

• The crises facing the U.S. education system can mostly be reduced to the simple fact that we no longer fund public education like we used to. The idea that we are going to somehow innovate our way into a system that is both higher-quality and cheaper is as fantastical as it is flawed.

• Ditto for higher education. If you think higher education is a public good, then you should demand public subsidy of higher ed. (Including, but not limited to, student debt cancellation.) If you do not think higher eduction is a public good, then that’s fine too. But you ought to go ahead and say as much.

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The VC approach is the prevailing model today. And I have become increasingly convinced that many of the problems with the current state of Silicon Valley are rooted in the venture capital-class simply acquiring too much capital. VC is fine (good, even!) when it is relatively small. But when VC is the primary source of funding new science and technology breakthroughs, the whole system gets skewed.

As it stands today, the primary direction-setter for new advances in science and technology is “what do folks like Marc Andreessen and Peter Thiel and Gary Tan and Sam Altman find exciting?”

The problem isn’t just that these guys are ideological fellow-travelers, hell bent on a shared political project that socializes all risk while privatizing all gain. (though, I mean… that would kinda be enough of a problem on its own.)

It’s also that their eye for science, technology, and even consumer products just kinda sucks. Building toward their vision of the future means we’re going to end up with a lot of silly investments in pretend-cities and eugenics vaporware. It means we’ll have abundant funding for hail-mary attempts at developing cold fusion and geo-engineering, and practically nothing for helping cities remain habitable under extreme weather conditions.

(Read Karen Hao, I’m begging you!: We’re sapping all the remaining water from the desert to cool AI data centers. It’s good for Microsoft’s stock performance. It is counterproductive to the climate emergency.)

This kind of VC-thinking works fine under limited conditions, and pretty terribly everywhere else.

Take Sam Altman. Altman is not an engineer. He is not a scientist. He has no real training in either. He is an entrepreneur, with a flair for optimistic tech futurism. He places bets on where technology is headed, and then attempts to bend society in a direction that makes those bets pay off.

The previous generation of venture capitalists were, for the most part, actual engineers and scientists. They had spent time in the lab. They had experience being “close to the metal.” They made some real money early, then started to point that money in the direction of funding audacious high-risk/high-reward projects that didn’t fit anywhere else. The sector was small, compared to government money and corporate R&D money.

Folks like Altman approach the future much like bad sci-fi. They begin from a prediction of where they’d like to end up, and then work backwards. Altman has faith that we’re going to end up at world-changing Artificial General Intelligence. That means we’ll need transformative breakthroughs in chip production and energy production. Ergo, he invests in cold fusion companies and sets out to raise $7 trillion to build his own manufacturing empire.

That’s actually a fine approach, as private investment strategies go. (Hey, you’ve got a prediction for where the world is heading, and you want to make a bunch of correlated bets that support the prediction? Go ahead and spend your own money that way. God bless.) But when it becomes the primary source of funding for basic science and/or applied technologies, then the whole system gets warped in the direction of a few billionaires’ speculative fantasies.

Venture Capital is not inherently better than government funding. That’s a myth that was popularized during the neoliberal era. It has now become impossible to sustain. (Just look at all the stupid bullshit they fund and all the nice things that they ruin!)

Big Tech only got so big because we stopped enforcing antitrust 20+ years ago. If the current reemergence of antitrust enforcement has staying power, that will be good for society and also good for Big tech funding of basic research.

But, most of all, we should get back to enthusiastically celebrating large piles of government money, paired with substantial taxes on the companies that flourish as a result. Government money isn’t perfect. It can be slow and inefficient. But nothing is perfect. And of all the potential big-pile-of-money sources, it is the one that does the most good, while putting power in the hands of people who are at least supposed to have the best interests of the public in mind.