Why Silicon Valley funds Instagrams, not Hyperloops

When you put together very large sums of investment you don't have a 100x expectation for return. The institutionals which will take on later stages of this financing just want to outperform the other investment options they have for that amount of casH (not that many).

Your 20Bn upside for Hyperloop is very low. If done to scale and over the long haul it's a very big opportunity. Even then I know of no investors - ZERO - who wouldn't take a 20x return on a billion dollar placement.

Finally. Instagram. Really? An outlier like that is what you're going to base your idea of investment on. Look at VC returns. They take a portfolio strategy for a reason.

It's a common misunderstanding that VCs want to put small amounts of money to work for huge returns. They'd much rather put much bigger amounts of money to work. It's how they're structured. Do they want the odd moonshot Instagram in their? Sure. They'll take it. But they'd take 1billion -> 20billion over 1million -> 1billion every day.

Then you run into the whole playing of the odds. Invest in 20 companies, hope 1.5ish make great returns. Even the largest VC firms can't afford that on mulitbillion dollar industrial ventures.

There is investment for new and groudbreaking technology, but it is much MUCH slower moving. We're talking 5 years of simply drumming up investors and getting everybody onboard before any ground breaking even happens.

Also, you have to be much MUCH more connected to your industry than say, an SV programmer. There is A LOT of checkboxes one has to hit before one takes on large scale industrial ventures. This shit doesn't get a proof of concept built up in a dorm room over the weekend, and it's user base isn't going viral to signal interest in the product if there is no product to use until you're already $4,000,000,000 in the hole....

Governments either don't care about ROI at all and are motivated by other factors (war, national security, national development, political points, etc.) or can afford to look at ROI over exceedingly long time scales.

However, governments are piss-poor investors. So what we get is private capital -- which invests in a lot of tiny incremental things -- and a lumbering beast called "public capital" that invests in big things in a clumsy, ineffective way.

The only large SV project I've heard about in recent time is Planetary Resources, the company that wants to mine asteroids. But, the returns for that expensive project would approach the 1000x that SV firms wish for.

Otherwise, this is the Occam's Razor answer to me, and I agree.

Private industry is just now beginning to fund things like Hyperloops and space ships - this was the role of nation-states in the past, because making trains and going to space was more costly and un-risk-manageable than any real business. The government doesn't have to build the trains, but they incentive the building.

Direct government construction of infrastructure is evolving, and in the coming decades, private industry will be more involved in the investment end of it too, because the price of production and the amount of public knowledge is increasing. I don't think our modern day robber barons have that much more real capital than their forefathers (comparing like people like Rockefeller to Gates), but it's cheaper to build a railroad, and there's the whole open internet and body of academic knowledge to consult.

1) The risk profile of each investment. It may be the case that Instagram is a riskier proposition. Specifically, the likelihood of success of Instagram once it is funded may be smaller than the likelihood of success of a funded Hyperloop project

2) There aren't enough instagrams to invest in or they are harder to identify than the hyperloop type projects

3) Even though the percentage return may be lower than the hyperloop, in absolute dollars, the hyperloop has a higher return. For investors looking to put more of their capital to work, this is attractive.

But anyway. I am going to say something VERY controversial. Think of it as Devil's Advocate, squared, on steroids. Here goes.

The article could be seen as a rebuke to the fundamental principles of capitalism. You could say capitalism doesn't scale - not to Hyperloop size anyway. Projects at this magnitude simply require that bigger powers get involved. E.g., the government. Sorry for using the G-word in such a refined milieu.

Quote from the article: "Unfortunately, the market does not reward cash flow because the market does not reward value and innovation. The market rewards exits." If that doesn't ring a bell, I don't know what does.

Another quote: "The next reason that we don’t have Hyperloop, but we do have Instagram, is that Fortune 100 companies have notoriously bad in-house R&D. Therefore, acquisitions are driving most of the innovation. " Again, this could be seen as further proof that profit-driven endeavors only innovate small-scale and short-term. Larger leaps are driven by different incentives (I could go on a ramble about the joy of making, but that would be preaching to the choir round these parts of town). And when it comes to truly fundamental research - well, that field is simply allergic to what they call "the industry" (a slightly derisive term, when used in this context); spend some time among theoretical physicists and you'll see what I mean.

When I was young, I've read an essay by a Russian scientist, who was arguing that the centrally planned economy allows for high-magnitude projects, precisely because large financial forces can be easily engaged at this scale. I can't say I entirely agreed with the article back then (a kid growing up in the Eastern Bloc, not really liking the system), and I would not support it indiscriminately now either.

But then there's the Hyperloop. Or any other large scale project like this. Does capitalism scale at this level? Seems like it doesn't - at least not the capitalism of the smartphone app ecosystem. Are there any built-in limits to capitalism? Looks like there are - the limits are the power and wealth of a single individual, whereas some things are too big for any given person (and yes, I am aware that multiple investors could get involved to fund this project, which merely makes the problem slightly less bad, but still leaves it laying in the gutter).

Bear in mind, as someone who grew up behind the Iron Curtain, I definitely do not advocate for the Five Year Plan economy. But I think these concerns are legitimate. And I don't have any answers. Maybe someone here does. Or someone "out there".

Anyway, that's all I had to say.

VC/Angel in SV has made enormous strides in working out how to reduce risk in entrepreneurship and is, to be honest, fairly incredible at selecting the companies that are going to work. YC is even better than most. The problem the author is talking about is that we (well, you) have become so good at selecting the winning companies that we're possibly throwing away the real risky bets that could be even bigger wins simply because an MVP and traction can't be found before lots of cash is on the table.

Of course, the exception to the author's point is, I believe, Planetary Resources.

There's nowhere near enough money in the VC world to justify the kind of investment it would require. As it happens the biggest VC rounds in recent history have gone to transportation companies like Fisker and Better Place, but even those are in the hundreds of millions rather than the billions something like Hyperloop would require.

It's probably because there's very little money in it from the short term... but there just isn't a whole lot of money going towards radical start ups trying to go to space or build a hyperloop.

Silicon Valley is kicking in a few bucks at the end. (And guess who keeps all the profits.)

Now, building a company to develop Hyperloop tech / high-speed train technology? I'm sure that's something private investment could do, but I don't think it's really SV's forte - there are other places that would be better suited to that kind of engineering.

When you grok how venture capital actually works, it gets easier to see how much less important they are to the economy than they seem. Startups like Instagram emerge from the parameters of VC, not from the whims or me-tooiness of the VC partners.

But VCs still play at the bigger level for more money and most of these me-too startups that get their million dollars go nowhere and get no follow on funding and die. The bubble of seed will eventually go away as these angels realize that investing is hard and they have better things to spend their money on.

As someone who has been involved in a billion dollar project that required up front investment of around $250million I can tell you that finding very large sums of investment for capital intensive businesses with good return metrics is not hard - there's a lot of money that at that scale only has limited options for putting it in play. Sovereign wealth funds alone are desperately seeking out deals at this scale.

Which suggests a #10 on the OP's list: investors don't understand technology very deeply or widely. The last boom was the web, so we have an over-population of investors who understand the web (to the extent that they "grok" any tech at all).

MVP and user traction makes a lot of sense for web startups. Web startups are low-capital, in many cases so low capital that they can be funded by someone working on the side as a Starbucks barista. It's popular because a tiny team or even an individual can often build something minimal, get traction, and then make what amounts to a gigantic ROI. Imagine said Starbucks barista doing a proof-of-concept that gets a million users... the ROI there for the individual is insane (like thousands of percent), and the potential ROI for the investor is quite large as well. Web startups generate a lot of very real rags-to-riches stories.

But this formula simply doesn't translate to anything that is at all capital intensive. Basement hackers are never going to prototype new mass transit solutions, try to mine asteroids, design 3d printers to print human organs, or build a fourth-generation molten salt reactor. Not gonna happen.

Other than that, I was nodding my head all the way through this :).

I disagree. Buffet probably knows quite a lot about those industries. You don't need to be an expert you just need to spend some time getting to understand them well enough to make a balanced decision.

>the kind of effort it takes to build a transport between 350 miles of California

And I'd far prefer him to do that too (the mars)

I don't think the author deemed wikipedia, google and coursera worthless. Its asking the question of why a pitch like "facebook for horses" is more likely to get funding then a revolutionary mass transit system.