Public vs Private Investment in Zero to One Technologies…


Burke Burnett wrote an amazing comment in my book review about Peter Thiel’s from Zero to One book, enough so that it merits a new post to respond.

Burke, thanks for a thoroughly cogent comment! Keyword in your comment….

..a properly functioning state….

I would argue, that for the most part, at this time, we do not have a properly functioning state. Thiel indirectly states this (lack of progress since 1971) in his book. There is an incredible book that you simply must read. Walter MacDougal’s  “The Heavens and the Earth”, it won the Pulitzer prize, exhaustively researched, and goes to the heart of our problems today by illustrating how government technocrats used the success of Apollo to transform how government works.  The catch phrase was “Well if we can put a man on the Moon certainly we can do X, Y, or Z”.  Those using that catch phrase cared not that what they were referring to could not be accomplished using the Apollo management model and several trillion dollars later we see the results.

I can pinpoint the year when it started (the decline of the properly functioning state), which was FY-1967. This was the first year of NASA’s budget cuts and the beginning of the end of the Apollo program. Did you know that by 1969 all production had ended on the Saturn V, never to restart. All of the Apollo missions were done with that first production run. I have a copy of Boeing’s fiscal year 1966 company report. Spread throughout the glossy tome was pictures of the SST under construction, the Saturn V production line, the 747 beginnings, and a plethora of other advanced programs. Today Boeing talks about maximizing production efficiencies on 40-50 year old jet designs, such as upping the production of the 737 from 42 to 57 units a year….

The U.S. aerospace industrial complex is a shattered shell of what it used to be because the investment in new technology has simply dried up. The reason given for ending the Saturn V production was that we had a deficit and could not afford it anymore. However, I have dug into the FY-67 budget document and found that there was a shift in priorities in the government, not any decrease in spending. I did an exercise where I downloaded our federal budget history since the founding of NASA and the rest of government spending. I used NASA’s high-water year of FY 1966 and normalized that to 1. I did the comparison against 14 federal agencies. In FY 1966 there was only one agency, the DoD that took a greater fraction of government funding. Today 13 out of 14 of these agencies have a larger budget than the agency.  This is shown in table 1 here: (Note: 1983-2011 hidden)

Table 1: Normalized NASA Budget vs Other Federal Agencies
Table 1: Normalized NASA Budget vs Other Federal Agencies: 1966-2014

Additionally, Boeing, Lockheed Martin, Northrup and the other large aerospace corporations (having absorbed dozens of companies in the 1990’s) are little more than federal design bureaus, doing very little development on their own dime.  A simple illustration of this is the recent award of the Commercial Crew contracts.  60 days before the award Boeing handed out 60 day pink slips to all the people working on the CST-100.  If Boeing had failed, they would have laid off all the people and that would have been it.  Sierra Nevada Corporation, after failing to get an award has simply shifted gears and is continuing on in the development of the Dream Chaser, aptly named.

I could do this across any of the federal government’s research efforts. The simple fact is that due to the problems in the inner cities and Vietnam in the 1960’s that the democrats and republicans thought might lead to a general insurrection, federal spending priorities shifted. In the job training segment alone, that had an increase that was as much as the decrease in NASA’s budget between FY-1966 and FY 1967. We have been on this trajectory ever since.

I do think, as you do,  that the federal government properly is the macro investor for the nation. Abraham Lincoln called this “internal improvements”. In the late 1700’s it was the states that led the funding of the development of the canal system across New York state and other states. The New York legislature gave Robert Fulton a 10 year monopoly for steamship travel from New York to Albany. This allowed him to obtain the venture funding (to use the modern term) to build his first ship, which was promptly burned by the luddites. It was his second ship that changed the world. The cost of a trip from New York to Albany had been 10 dollars and it took 36 hours on the stagecoach road. The steamship cut that to 10 hours for $7 dollars. Disruptive I think is the term…  As an aside when Fulton went to James Watt for steam boilers, his company’s response was that stationary applications were the only place for steam power.

This extended to the railroads and it was the states that started the railroad rush in the 1830’s-60’s. States bought stock in railroad companies that built railroads across their state. This is why Virginia, New York and other big states rapidly expanded their rail networks. Abraham Lincoln, who had defended the railroad when a steamship (what Thiel talks about when he talks about those who block progress) deliberately ran into one of the supports for a railroad span across the Mississippi (or the Ohio, I forget). This triggered a major lawsuit, which caused the railroad lots of problems, and Lincoln successfully defended them. As president he personally put his political capital at work and pushed through the Pacific Railway Act of 1862, which led to the spanning of the continent. Many others followed. Go to Roosevelt and the Panama Canal. Coolidge pushed the passage of the National Highway Act of 1926, that built the first national highway system. The Airmail Act, Hoover Dam, WWII industrial expansion, Airport and air traffic development, The Interstate and Defense Highway Act of 1956.  All of these things were the province of government for investment, working sometimes alone and sometimes hand in hand with private enterprise to do something that private capital would not undertake.

However…..

This has always worked best when they were public/private partnerships, using the power and finance of the state, coupled with the efficiency of free enterprise. This is what Musk has done with SpaceX and Tesla. But, for every Tesla, there are ten Solyndras. These days Musk would have never been able to make this work, but with some level of private finance behind him, which he then has used to leveraged federal dollars, all of us have benefitted. However, this is the exception today rather than the rule.

The politicians are only interested in the next election (both parties) and there is not an ounce of vision between any of the snarling dogs of politics. They would much rather blow trillions a year buying votes, than invest in our future. I would maintain that in just one example, a hundred billion a year, if invested in the development of fusion and or thorium fission, would create more wealth, more jobs, and a much greater GDP increase than current spending patterns. This would improve our physical and intellectual capital and would allow the people to buy their own healthcare. We have abandoned the founding principles of the republic, which universally supported advanced technology (Franklin, Jefferson, Madison). There is far more text in the Constitution about patents than about general welfare.

If we had kept investing in nuclear power technology, space technology, and robotics, 90% of the problems that vex us today would not even be on the radar screen.  There are reasons for this slowdown that is coupled to the environmental movement as well, which at its core is dominated by luddites who simply don’t believe in the power of technology.  They are allied with the politicians, who think that they can use the coercive power of the state to create their version of a green utopia, which is neither.

I agree with you on the other paw that the vast majority of Venture Capital funds have the limitations and foci that you enumerate. This is what I was talking about when it is only a very few of the mega funds, that generates enough free cash flow to allow general partners such as Thiel, Andreeson, Jurvetson, and or Draper to risk some of their net worth in zero to one enterprises like SpaceX.

The challenge to Thiel and the others is that when we are in an era of dysfunction in the government, a portion of their wealth, if applied to the right projects (always hard to evaluate), could make the breakthroughs that the government used to, and then indeed could provide the intellectual and moral foundation to bring popular opinion over to the idea that we should go back to the government funding the future. It is a dream, but at least Thiel, and Jurvetson (I know Steve) and Thiel by reputation, at least understands it, now lets see if they are willing to risk some zeros on their bank accounts.

Addendum…

The above with governments is not just confined to the U.S. but is symptomatic of a general malaise of ideas across governments worldwide.

http://www.economist.com/blogs/freeexchange/2014/10/world-economy

I described in the last article that Thiel, and many of us would be considered technological optimists.  Absolutely!  The political class only looks at solving problems within the context of their own familiar way of doing things.  One of Thiel’s key insights is that our biggest problems right now are technological in nature and that only technology can solve them.  I happen to strongly agree with that premise, and his contrarian view is the correct one.

We recently had an interesting event at DFJ that bears on this subject, which will be the subject of at least a couple of follow on posts.

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13 thoughts on “Public vs Private Investment in Zero to One Technologies…

  1. Excellent piece Dennis. One would think if we can put a man on the Moon (past tense), then we could put a man on the Moon (present tense). Well, I guess there goes that argument.

    1. It is actually surprising and counter to a lot of the histories that I know that we have both read. They always talk about space getting cut because of the deficit, but if you actually look at the budget numbers, it was simply a shift in priorities away from space, and in my opinion, to vote buying through cash handouts…

  2. Dennis, excellent post. I might come at it from a slightly different angle on some things (ex. environment, although we sort of end up in the same place: technology is our best hope), but there is some real convergence here both in attitude and substance. More thoughts to come, but just my first take is pretty much:

    Bingo.

  3. Dennis,

    Great review of Thiel’s book. I plan to read it over the next few days.

    I am interested in angel investing in space exploation, do you have any suggestions ?

    Best,

    Vlad

  4. If i recall right selenium boondocks has some angel investor links to
    I was 9 years old in 1969, my step father was a teledyne subcontractor to so many Apollo projects,
    my take these many years is that we should care for one another but it was the war that killed apollo
    so many forums have conservative folks who decry social programs yet never blame war or defense costs for the cuts in exploration……………
    as a 30 year DOD veteran I can tell you some of our expenses are justified yet most has been squandered
    in the end if civilization can not pay for the short sidedness of the greedy of the present then we will not be able to advance to the stars….

    http://yellowdragonblog.com/2014/01/28/a-carbon-tax-fueled-social-security-sovereign-wealth-fund/

    1. You know, at one time I might have bought that it was the cost of the war but the budget data that I show does not bear this out. It was the dramatic increase in spending on social programs that took the Apollo money and then 10X on top of that. Take a look at my chart of normalized values.

      I too know of the waste in the DoD, but the truth of the matter is the same level of waste is in all government, which is why government at the federal level should be kept to a limited suite of powers and responsibilities and let the private market do the rest. This is not a libertarian statement in that “Internal Improvements” as Lincoln called them, which includes building, or at least enabling the construction of space infrastructure is part of that long term investment.

      1. let me sleep on your thoughts
        society with poverty and or at war will always be distracted from exploration
        its how democracies work
        in deep time a society that does not have poverty as a distraction will be the society that has the society and economy that will let us enable the journal

        1. ….with poverty and or at war will always be distracted from exploration…..
          _______________________________________________________________

          The Pacific Railway Act of 1862 was passed during the darkest days of the war between the states. Lincoln specifically pushed for it. This is the “National Railroad” that was the first rail link across the country.

          What happened is what I talked about in the article, and you can see it if you read the papers of the time, we turned away from building, and turned to trying to make everything right in society. If we had not made this turn, in all likelihood (in my opinion), we would not have many of the problems that plague our society today and we would have a much more equal society. The state cannot make everything right. It has to be the people, with the state in its proper position.

          Lincoln, Roosevelt, Eisenhower, and Reagan understood this..

  5. As I mentioned in my previous comment, I agree with your post replying to my first comment and find there is a good deal of common ground. But since this all started in relation to Steve Jurvetson’s Facebook post about Peter Thiel, I thought I would bring him (Thiel) back into this thread, and in so doing I aim to address his ideas, and so please be clear that I am not ascribing his perspective to yours. (You said: “I do think, as you do, that the federal government properly is the macro investor for the nation” so I understand your views are not the same as Thiel’s.) I am not putting his words into your mouth, but simply making observations and comments on his ideas – recognizing that you may agree or disagree with them.

    I’ve now had a chance to skim Thiel’s book, although I’ve seen him live and in interviews so I already had a fair understanding of his perspective. I find a lot of what he has to say important and a good read, and yet my original comment that “Like All Things Thiel, half of what he says is interesting and incisive; the other half is frustratingly wrong-headed” remains unchanged.

    I will leave aside the issue of bureaucratic dysfunctionality, since A. I’ve already acknowledged that it certainly exists; B. it also exists in the business world and is hardly exclusive to government; and C. regardless of its existence, it does not negate the essential positive role that government can, does, and must play despite those dysfunctions. Namely, in addition to those examples I already gave previously – aviation, Internet, etc – the State (specifically the federal government) is needed to provide basic and/or critical funding to projects and endeavors that simply would not happen otherwise. (It is true that this requires the presence of smart, trained experts to identify promising and important areas in which to invest public resources, and that they are not overly constrained by their bureacracies in creating the public-private partnerships that operationalize these sorts of endeavors.) Note that I am not suggesting that the State is, or should be, the innovator, but rather that it has an essential role to play in the overall innovation ecosystem, as the generator and funder of public-private sector-academia partnerships. This is really how it’s always been done – even, for example, in the case of the Apollo program in which NASA was the lead conductor. But it is certainly even more true in the case of other major innovations, such as those done by DARPA, DOE, and others. And recall also that NSF provided the initial funding to Brin and Page to develop the algorithm that was the basis for Google. I’m sure that NSF or NIH are hardly a perfect organizations, but it works pretty damn well and screwing around with it is a very bad idea. (Not saying you are suggesting that, but others, as I’m sure you are aware, are.)

    So rather than focus on institutional efficiencies or inefficiencies, I will address structural issues of funding and knowledge generation.

    First, the positive. I think it is great that Thiel recognizes we’re facing an “innovation starvation” (to use Neal Stephenson’s term), and that he and others from Founders Fund are putting their money where their mouths are in investing in Transatomic Power (even if $2m is nowhere near big enough to develop molten salt fission reactors, it’s welcome, important, and a start). I think it’s great that he essentially extols the virtues of “stay weird”: don’t follow the herd, think outside the box, and focus on becoming the next Black Swan. We need a lot more people who are willing to place big bets and be accept the high risk of failure. (And when they’re successful, they should be able to reap the rewards.)

    So I find much that is admirable about Thiel. He and his partners obviously possess an extraordinary vision and ability to see the big picture, and he should applauded for doing the kinds of risky but important investments he advocates and is actually doing. I wish him much success. There are also other great examples of these kinds of investors. Technology Review had an article last week on some people associated with SRI International to develop direct air capture for CO2:

    “[Eisenberger] and Chichilnisky reached out to billionaire Edgar Bronfman Jr. “Sometimes when you hear something that must be too good to be true, it’s because it is,” was Bronfman’s reaction, according to his son, who was present at the meeting. But the scion implored his father: “If they’re right, this is one of the biggest opportunities out there.” The family invested $18 million.” (http://www.technologyreview.com/featuredstory/531346/can-sucking-co2-out-of-the-atmosphere-really-work/)

    This is another extraordinary example of angel investing on the part of the Bronfman family, but it is A. exceptional, and thus lucky; and B. still rather small potatoes (so far) given the ginormous nature of the problem that is being addressed. While this DAC technology is certainly by no means sure to be successful, it is exactly the sort of “do Big Things” that are not done enough because of its inherently very risky nature, and ipso facto something that the State is best placed to fund at the scale and scope needed. (Of course, if private capital wants to put skin in the game, so much the better – but again, it simply doesn’t happen to the extent necessary, and when it does it can be seen as a lucky exception to the rule.)

    Before coming back to Thiel, I will bring back in one of your comments here: “But, for every Tesla, there are ten Solyndras.” Yes. For sure. And I know that Solyndra has been used as a political weapon to criticize this sort of State role in tech innovation, but I argue that this is “acceptable failure” – the fact that many or even most public investments will not succeed needs to be understood and accepted. In the VC world a 1 in 10 success rate is considered fantastic – assuming proper levels of accountability and transparency (i.e. lack of cronyism) why should a similar success/failure rate not be similarly acceptable by the State? I’m not happy about Solyndra either, but I see it as a “normal failure”, not that it was inherently unacceptable in principle.

    Thiel and like-minded libertarians, because of their ideological disposition to limit the State’s role to only the basic minimum functions, is put in the difficult position of proposing an alternative funding mechanism for funding long-term, risky investments that the private sector (understandably) avoids. His solution seems to be monopolies that, because of their dominant economic position, are poised to capture monopoly rents, some of which can be used as largesse to fund these types of uncertain, speculative investments with long (or possibly no) payout timelines.

    I find his assertion that competition is the antonym of capitalism both puzzling and disturbing. Certainly this formulation flies in the face of accepted economic definitions of capitalism in which competition is the name of the game. I find no other way to interpret this except as a radically normative statement positing his libertarian ideology: that no progress will come about except through the concentration of economic power. There is no necessary role for the State, but rather, innovation should be structured by encouraging the accumulation of monopolistic rents that will be used by visionaries for funding risky but potentially transformative technologies. I don’t see how this is not tantamount to advocating plutocracy, which, among other things, is not exactly Adam Smith’s brand of capitalism. It’s a vision that’s either utopian or dystopian – or both, depending on one’s position in society.

    Thiel also fails to acknowledge the role of basic science in generating the kind of new knowledge that is either immediately or eventually required to spur the kinds of more radical technological innovations that are needed.

    The generation of knowledge that may or may not have immediate application is inherently inefficient. Some of this knowledge may never be used at all (probably a high proportion, in fact). But if it does not exist – if it is not generated in the first place – certainly it presents a serious constraint on possible future innovation, by limiting the baseline information available to innovators to know what has and hasn’t been tried before, or what possible solutions or knowledge may exist that can be applied to a given problem.

    There is a generally unappreciated role of what has been called “undiscovered public knowledge” in advancing innovation. From an AW article this past week on Lockheed’s skunk works fusion project:

    “Scanning the literature for fusion-based space propulsion concepts proved disappointing. “That started me on the road and [in the early 2000s], I started looking at all the ideas that had been published. I basically took those ideas and melded them into something new by taking the problems in one and trying to replace them with the benefits of others. So we have evolved it here at Lockheed into something totally new, and that’s what we are testing.” (http://aviationweek.com/technology/skunk-works-reveals-compact-fusion-reactor-details)

    Presumably most of this published information was publically funded in one form or another – either through NASA, NSF, or state-funded universities.

    Funding of this basic science is something that the private sector is simply not geared to do. Much of it has a very high potential to not be of any useful application ever – and yet if it does not exist, it is a limiting factor in what ultimately drives economic growth (the so-called “technological factor of production”, beyond the classic formulation of “land, labor, and capital”).

    Until relatively recently, both political conservatives and liberals accepted that the State has a legitimate role in funding this generation of basic scientific knowledge that exists outside the sphere of what the private sector is willing or able to do. Yes – it is expensive and inefficient, and yet if it is not done, innovation is seriously and fundamentally constrained. I find the loss of this bipartisan agreement on properly funding academic research profoundly destructive and sad. We need to get this consensus back, somehow.

    So I find Thiel’s opposition to academia quite scary and nihilistic. He simply fails to understand its proper and necessary role in a functional civilization. Thiel is obviously a very smart man, and so I find that his failure of understanding seems to be something that can only be ascribed to something derived ideologically rather than empirically.

    I realize that Thiel is decidedly not a fan of Microsoft (“investing in Microsoft is a nihilistic bet against tech innovation”), but they were (and arguably still are) just the sort of natural monopoly that he pegs his hopes on to invest in radical innovations. How he squares this inconsistency with reality, I really don’t understand. Google is certainly gearing itself to be a different kind of company in setting up Google X. But while as a human being and as a Google investor I have fond hopes that they will do some cool stuff, it has to be said that Google X has been rather underwhelming thus far. In fact, upon reading about their one announced operational project, I first thought it was an April Fool’s joke (http://www.technologyreview.com/view/529591/whats-a-moon-shot-worth-these-days/). I do expect they will come around with a lot more compelling projects than this in the future, but so far, Bell Labs or Xerox Parc they ain’t. And so valorizing “natural monopolies” as the main funding source for future radical, disruptive, transformative technologies seems like a bit of wishful thinking.

    In closing, I’ll say that there is a legitimate debate to be had on how to pay for the kind of State funding for education and tech R&D that I (and people like Mazzucato) advocate. (Note that this includes space stuff, which is an area that we seem to align precisely in terms of present desirable policy.) But that discussion starts to get very complicated (and contentious) very fast, but suffice to say that A. it doesn’t cost an arm and a leg relative to other types of spending; and B. no smart person thinks it can be done simply by “soaking the rich” (as Thiel has said). That’s really a strawman argument. It’s probably obvious that I am not a Republican, and while I’m in favor of modest tax increases (not just on the rich), I think it is also going to be necessary to adjust spending on in other areas – namely smarter and leaner defense spending, and yes, smarter and leaner entitlement programs (some of which are tantamount to inter-generational transfers of wealth). I am a pragmatist. But all that is a story for another day and probably another venue.

    Thanks for letting me share my perspective (long-winded though it is), and I look forward to any comments you may have.

    1. Oh lord this is quite a tome, next time please try to cut it down a bit. I am going to try and distill this..

      Funding of this basic science is something that the private sector is simply not geared to do.

      Until the explosion of the technocratic state this is exactly what happened. From Bell labs, to universities around the country, for almost 150 years we lived without the dominance of the federal government in research. Indeed president Eisenhower warned about this in his farewell speech, just as stridently as he did about the military industrial complex. His words…

      Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

      In this revolution, research has become central, it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

      Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

      The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded. Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.

      This feared scenario is playing out before our eyes today.

      Until relatively recently, both political conservatives and liberals accepted that the State has a legitimate role in funding this generation of basic scientific knowledge that exists outside the sphere of what the private sector is willing or able to do.

      Relatively recently is in the last several decades. Prior to the 1940’s, with an explosion in the 1960’s, it was almost unheard of for the federal government to fund a lot of basic research. The problem is that with the check comes the strings. That is a big problem and it is at least contributory to our trillion dollar plus student debt load today.

      Also, Thiel is not being inconsistent at all with the Microsoft thing. Most large companies stop innovating and start protecting their turf. GE, IBM, AT&T, are all examples. Microsoft has not brought anything new to the market in decades. They resisted the internet, helped IBM destroy early networking systems, and have done extremely little innovation in the realm of their bread and butter operating systems and office applications.

      There is a difference as well, that you are kinda combining in the investment of infrastructure (Lincoln’s Internal Improvements) and R&D. I have made a lot of my career on picking up discarded government R&D and making something of it. You need look no farther than the Apollo program to look at a disaster in R&D spending.

      Where I think that Thiel is going, and this missive and others is that I do think that it is possible to get to the Moon and set up an economically viable industrial outpost for $5 billion.

      Now fusion is an area where I think that government resources should be applied. I think that about some aspects of space as well such as ISS, especially since it is there. However, public private partnerships are also incredibly important.

      As for Thiel’s bias against academia, it probably is from experience. I value my degree and the work that I put into it, and disciplined learning has many benefits. I am just not sure that the current collegiate matriculation qualifies anymore…

      As for this paper, we are leveraging a lot of NASA science missions here and I am not opposed to these types of science missions. However, developing industry on the Moon or a colony on Mars is not NASA’s job.

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