
Why Silicon Valley funds Instagrams, not Hyperloops - thejerz
http://jerzygangi.com/why-silicon-valley-funds-instagrams-not-hyperloops/
======
pdq
It's quite simple, actually:

    
    
      - The capital investment required for Instagram is well under a million dollars
      - The capital investment required for Hyperloop is well over a billion dollars (R&D, Materials/Prototypes, Insurance, Land, Construction)
    

The best-case returns are:

    
    
      - 1 billion for Instagram
      - 20 billion for Hyperloop
    

Thus, the best-case ROI for both are:

    
    
      - 1000x for Instagram
      - 20x for Hyperloop
    

The timelines to get to production are:

    
    
      - less than 1 year for Instagram
      - minimum 5 years for Hyperloop
    

The only way Hyperloop will happen is if there is a way to _incrementally_ get
there. In other words, if you can make a 1/1000-size scaled-down prototype,
iterate and improve upon the design, and then scale up to a full-sized model.

~~~
richardjordan
This is wrong on many levels. Firstly funding over a billion dollars is not
remotely intimidating to the large VC funds who understand about capital
intensive businesses and managing the investment lifecycle.

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.

~~~
JonFish85
"Even then I know of no investors - ZERO - who wouldn't take a 20x return on a
billion dollar placement."

Sure, if there was any sort of guarantee it would work. When there's a serious
chance of throwing your money into a black hole where cash goes to die, then
I'm not sure the upside is worth it. And even then, if you can make 1,000
investments into Instagrams for the cost of one investment into Hyperloop, I'd
do that every time. "But they'd take 1billion -> 20billion over 1million ->
1billion every day." sounds wrong to me. If you have the $1B to invest,
wouldn't you want to spread that out, make 1,000 $1M investments? I'd imagine
your return would be better with that than an outside shot you could hit 20x
your money on one investment.

~~~
richardjordan
Right. But no investment has a guarantee of working. There aren't 1,000
Instagrams in tech. There are roughly 10-15 moonshot investments made a year
out of thousands. So you can't find 1,000 instagrams.

Investment doesn't scale like that. You can "imagine" return would be better
but it isn't is it? Look at VC returns. If you make 1,000 investments of
$1million how many do you think make it to being a billion dollars vs just
losing your money? How many of those investments need ZERO more capital along
the way - if they need more capital you either get diluted out or you're
putting a ton more cash in.

Instagram is a ridiculous outlier to build an investment strategy on. How many
other Instagrams have you heard of this year? Yeah... not 1,000.

People investing in Hyperloop type investments don't put all their money on
one investment either. If you're an investment manager at a pension fund
having to find places to park $500BILLION you cannot be managing million
dollar investments, they're meaningless. Even an Instagram doesn't move the
needle. You have to place lots of billion dollar bets.

------
pg
If the author wanted to be fair, the title should be "Why Silicon Valley funds
SpaceXes and Teslas, and not Hyperloops." And then it would be clear that the
answer is simply that Elon is working on SpaceX and Tesla, and not on the
Hyperloop.

~~~
Florin_Andrei
Silicon Valley actually funded PayPal. Elon Musk made a boatload of cash from
that, and used the mojo (part of it was his own cash, part of it was the
reputation he built with PayPal which enabled him to raise more money) to
jumpstart SpaceX and Tesla.

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.

~~~
YuriNiyazov
Except that the premise is wrong - capitalism most definitely scales at that
level. The railroads across America that were built in the 1800's were not a
mandate by the federal government, they were private enterprises.

~~~
craigyk
Am I crazy, or weren't the railroads heavily subsidized by the government? I
think this heavy flow of public capital into a small number of hands created
some of the "robber barons". In the long run it was probably the right call,
as this kind of infrastructure spending and innovation doesn't happen without
government involvement. Still, it's interesting to think how in the short-term
it led to some pretty astounding income inequality. Maybe the issue is why
didn't the government just build it themselves, sure it probably wouldn't have
been built as efficiently as the worker level, but the overall cost might not
having been much higher.

~~~
metricman
Yes, they were.

"From 1850-1871, the railroads received more than 175 million acres (71
million ha) of public land - an area more than one tenth of the whole United
States and larger in area than Texas."

[http://en.wikipedia.org/wiki/Pacific_Railroad_Acts](http://en.wikipedia.org/wiki/Pacific_Railroad_Acts)

------
tptacek
Why isn't this as simple as "the world's largest VC firms don't manage enough
money to put a dent in a Hyperloop-scale concept, and need liquidity long
before even the most optimistic projections for Hyperloop construction would
suggest a payout"?

Venture capital isn't a public service. It's small teams of investment bankers
making bets with endowments and pension funds. The investments have to fit the
model, not the other way around.

~~~
tomkarlo
Also, VCs don't fund public utilities / infrastructure, which are (at best)
generally capital-intense, low-risk but low-return projects. If a project like
the Hyperloop had to depend on private funding, it would need to return
hundreds of billions in value, and that's just not going to happen. To get
things like eminent domain, it has to be built as a public good, which means
it at the very least has to be affordable for the average citizen (in some
form.) That's why projects like high speed trains should be funded out of the
public coffer and are generally unsuitable for private investors.

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.

------
ericabiz
I think the author is on to something with the small bets, investors being
wimps, etc. And I'd add to that: The pressure with these small bets is for a
startup to produce something _fast_. The whole culture is designed around
"What can you do in a weekend, prove a market exists, and then scale manually
until your dev team can catch up?" Hence why every 3rd startup out of YC seems
to be "Uber for [laundry, house cleaning, menial tasks, etc.]" It's an easy
model to prove and scale.

A lot of ideas take longer than a few months and a few hundred thousand
dollars to prove, but investors don't want to take the risk and founders see
it as easier to build a laundry service and get paying customers in a week
than to come up with a really big idea and potentially waste millions getting
it to the point where it would be a failure or a success.

I don't think it's Instagram we need to worry about--I think it's the myriad
of startups that are getting funded to the tune of a few million in a seed or
a Series A that really aren't doing much of anything past scaling an "old-
school" business, and the investor/accelerator culture that forces these
startups to build a business in a week or two. (I say this as someone who's
running a funded startup and currently going through a top accelerator, so at
least I have a first-hand perspective.)

~~~
tptacek
It's not simply that investors don't want to take certain risks. It's that
some kinds of risks are outside their parameters. VCs are built up in our
minds as towering financial authorities, but really they're just small teams
of MBAs who are themselves raising money from foundations and pension funds,
and the fraction of that capital that they get to work with is very small; a
large pension fund wants some exposure to the market dynamics of "venture
capital", but no pension fund wants to bet the farm on a Hyperloop.

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.

~~~
crapshoot101
Again, this is a standard trope at HN,but is wrong - they are not primarily
financial it goes like hedge fund or PE guys. Most top tier firms are made up
of former entrepreneur types. And the idea that they all don't invest in
groundbreaking technology is because quite frankly a perception issue here -
is the average YC company a groundbreaking tech or closer to an Instagram? A
lot of the clean tech investing was disastrous, but that is an example where a
lot of interesting tech was backed, some of which has hit the market. Jut
because it doesn't reach the front page here does not mean it doesn't happen.

~~~
hnriot
It is not wrong. To make matters worse you'd need to look at the history books
to better appreciate what indeed actually is "groundbreaking tech" and how it
evolves. Science and technology is nudged along with micro breakthroughs. The
history books are full of what appear to be big breakthroughs but when you
look past the surface you'll discover how they really happen. Your experience
of VC firms appears to be very limited, I'm guessing though you were top in
your class (probably two years ago), and now think when you say something, it
automatically becomes "the word".

~~~
tptacek
Wow was that last sentence ever unwarranted and unproductive.

~~~
hnriot
neither, perfectly warranted, read his other comments that are written with
great authority, but often substantively wrong.

~~~
tptacek
If your points are strong, they don't need to be covered in barbs. Barbs are a
"tell"; they indicate bluster, which is what people deploy when they don't
know that they're talking about. You're making it harder to take you seriously
and should change your tactics.

------
mcphilip
For a counterargument, see
[http://greatergreaterwashington.org/post/19848/musks-
hyperlo...](http://greatergreaterwashington.org/post/19848/musks-hyperloop-
math-doesnt-add-up/)

I'm all for innovation and pursuing alternate forms of transportation, but I
don't pretend Musk's claims are above criticism.

As for the jerrygangi.com article, it grossly misrepresents Warrent Buffet's
investment strategy:

>Here’s a piece of news: real investors don’t care what industry they invest
in. Warren Buffet has invested in railroads, furniture companies, insurance
companies, and hundreds more.

This is in direct opposition to what Buffet has actually said about investing
[1]:

"Never invest in a business you cannot understand."

Using Buffet's actual statements and not some misrepresentation of his ideas,
it seems clear that Buffet would require a great deal of due diligence to
validate Musk's ideas before considering any investment.

[1][http://www.socialphy.com/posts/off-topic/9789/Warren-
Buffett...](http://www.socialphy.com/posts/off-topic/9789/Warren-Buffett-
Quotes-On-Investing.html)

~~~
saraid216
Those aren't contradictory. If you put the two statements together, the claim
is "real investors should understand more industries". You can agree or
disagree with that, but it reconciles the two pretty simply.

~~~
api
I get the impression that investment banking culture is biased against that in
the sense that it does not hire polymath geek types. It hires suits with
finance degrees, or people who have a demonstrated record building businesses.
Since we just had a huge web boom, the latter category is going to be stacked
full of people who get the web and only the web. Hence we're spacing out our
tweets, not commercializing space.

~~~
rayiner
I think the modal background for VC is still someone who came over from an
investment bank, and your statement doesn't really characterize their hiring.
Investment banks don't hire suits. They hire kids. They hire smart kids from
Harvard and Wharton, increasingly those with nerdier backgrounds, but
ultimately kids who don't know anything. Then they impart unto these kids
their incredible institutional experience with financial analysis. And from
there, those kids go forth and become VCs and PE guys and HF guys and CFOs,
but they take with them a singular focus on financial analysis.

This is why Wall Street hates Apple and loves GE and relegates VC off to the
side. And that's also why hyperloop doesn't get funded. Because the people
with billions to throw around, which the VCs don't have, can do the financial
math to realize that projects like that aren't going to be sufficiently
lucrative to justify the enormous risk.

------
richardjordan
Silicon Valley funds Instagrams not Hyperloops because it funds things where
it can manage risk in a predictable way through capital. Contrary to other
comments it's not down to scale of investment. There's a lot of investment
cash out there and it's actually VERY hard to find big investment deals - if
you have an opportunity to put a ton of cash to work it's appealing.

Hyperloop will be absolutely bogged down in political dealing, backhanders,
corrupt politicians, labor unions, incumbent industries so inefficient they'd
rather spend money on lobbying and gaming the political system than doing
something about their fading competitive position.

This is just not something that allows financial backers to have any kind of
forward visibility, even modeled, into their investment.

Silicon Valley isn't TechCrunch. That's just the noise and that kind of
startup is just what you see and hear the most.

There's not a lack of thinking big or looking outside the consumer internet
software space.

Look at how Silicon Valley bet heavily on Cleantech and got its ass handed to
it. That wasn't lack of vision. Or lack of capital. It was venturing into
investment arenas where success factors became more political than economic;
more corrupt back room dealings than efficient execution and management
skills.

------
dclowd9901
While I agree with OP on the frustration of SV not aiming its efforts at Big
Problems, I'm differing on the why (which is the standard allotment of "it's
not economically viable in the short term).

I think there simply isn't the talent or guts to take on these projects. It's
one thing to "disrupt" easy targets like paying for something or getting a
ride from here to there. They're heavily regulated industries, full of
bullshit, and ripe for the taking. All the "innovators" did was ignore the
laws that made those industries suck. It seems to be a winning strategy.

But to actually build something huge. To try to churn it through a state's
government. Get funding. Get permits. Hire competent engineers that won't kill
people. Deal with suppliers and construction. These are _massive, massive_
undertakings.

Indeed, building the proverbial hyperloop is not a "startup" endeavor. It's
not something spry, spanky groups of new college graduates can jump into with
reckless abandon.

The reason investors don't invest in a hyperloop is because there isn't a
competent body heading the effort. If Musk were to say, "I, Elon Musk, am
going to create the first hyperloop, with my new company Hyperloop Inc." he
would get so much funding, he could stuff it in his ass and fly to the moon.
Same with Boeing, Airbus or Lockheed Martin. The common denominator is the
capability.

But I have a feeling even Musk himself is too afraid of the kind of effort it
takes to build a transport between 350 miles of California.

~~~
gte910h
I honestly think for someone like him, _getting to mars_ would be easier than

>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)

------
abalone
This is a sad statement on the complete utter lack of awareness of how the
system of tech development works in the United States.

The simple reason Silicon Valley doesn't fund Hyperloops is because they cost
BILLIONS to develop over DECADES, with highly uncertain outcomes. This scale
of large-scale, long-term, technology investment risk is borne by.....
drumroll.....

TAXPAYERS. The guv'ment. Uncle Sam.

The Internet. Computers. NASA (hello SpaceX). Airplanes. Even frickin Siri was
funded by the public.

The way it works is it's done under the banner of military applications. DARPA
is a key agency in core development, but a very large part is government
procurement. Then whatever works out given away pretty much for free to
private hands.

Silicon Valley specializes in investing in the "last mile" of commercial
development. It's still risky, but orders of magnitude less than something
like developing Hyperloop from scratch.

------
rayiner
There is also the basic economic argument that much of the value of transit
cannot be captured by a private investor because of externalities. The value
of a transit line isn't just to people who ride it. This is obvious: compare
commercial real estate leases near a subway stop versus ones far away.
Governments can capture those positive externalities through general increases
in tax revenue or things like tax increment districts. Private operators are
stuck trying to recoup all their investment solely from riders.

------
rayiner
Silicon Valley doesn't have the money to fund hyperloops. Its designed around
throwing relatively small amounts here and there, not $10 billion investments
the returns from which could take a couple of decades to materialize. $10
billion is close to all the SV VC investment in a year, and realistically,
hyperloop is not happening for less than some multiple of that.

------
TheBiv
The page was nearly unusable on mobile...here is a web cache link
[http://webcache.googleusercontent.com/search?q=cache:http://...](http://webcache.googleusercontent.com/search?q=cache:http://jerzygangi.com/why-
silicon-valley-funds-instagrams-not-hyperloops/)

------
cinquemb
I ultimately think it comes down to that people don't think they need these
things because they have options now (however poor they may be compared to the
option that could be built in the future).

" _The stock market used to be a place where entrepreneurs went and raised
money for their companies. That’s what the stock market used to be. Today the
stock market is a place where hedge fund managers and quant traders are
shaving fractions of a penny off benign movements in price and volume. One of
the byproducts of going from an entrepreneurial stock market to a hyper-traded
stock market is that new companies can’t survive unless they have a market cap
of at least $10 billion dollars. Don’t even bother going public with less than
that. It’s not worth the time, or the money, or the effort._ "

I think because of the above, that sites like kickstarter and indigogo have
become sort of like the new IPO market where would be entrepreneurs and
hobbyists can raise funds to make things people want, without the huge burden
of the legal liabilities associated with typical investments. (aside: I wonder
how people could build on top of this to become sort of the quants of these
new platforms?)

To be honest, I don't think people are really craving a faster way to get to
their (shitty) jobs, and would much rather a better socioeconomic situation…
what does the hyperloop for that look like that would render the current
reality obsolete and undesirable comparatively?

------
bitwize
It's the same reason why the music industry funds Justin Biebers, not Bob
Dylans. They're looking for an extremely high profit to innovation ratio, the
one piece of shit among many similar pieces of shit that "catches on" and
turns into a money press.

That said, Hyperloop looks cool on paper but when I see all this geek
excitement over it before the engineering research has been done to make it
cost-effective I hear in the subtext a chant of "Monorail! Monorail!
Monorail!"

------
nightski
This article is so annoying I don't even know where to begin. I have a hard
time believing this is on the front page of Hacker News.

If you are going to reduce the revolution of the information age to Instagram
well then yes you might have a point. Let's ignore the most important
innovations our society has seen that have come about in the last few decades.

But the truth is, is Hyperloop even the right solution? Would it really make
our lives that much better? Do you need to travel nearly as much as you used
to? I actually actively avoid travel, communicating remotely if possible. If
Hyperloop was a UPS style service, then I could potentially see the use for
it. Get your package in hours. But as a consumer transport? I don't think it
is nearly as innovative or revolutionary as most people seem. But I am just a
software engineer, who am I to discuss these things.

------
coldtea
One reason is that what an enterpreneur will work on also depends on the
prevailing ethics and idea about his role in society of the time.

In a post-yuppie, money-grubbing enterprenerial climate, they are more likely
to invest and work on make-money-quick BS schemes, like social websites and
mobile trivialities ("like Instagram, but for goat milk drinkers").

An era which respected industry, infrastructure, and succesful industrialists,
etc, produced different results. Musk (and Jobs) were like that -- but 90% of
enterpreneurs out there today would model themeselves after Zuckenberg or
Systrom instead of them.

------
aardvark
>Furthermore, the stock market isn’t influenced by value today like it was
thirty years ago.

This simply isn't true. It was nearly 30 years ago that Warren Buffett
published his article "The Superinvestors of Graham-and-Doddsville" arguing
that the market didn't accurately value many companies, and that anyone could
become rich by taking the time to find market inefficiencies. And in the
article he described the approach he had already been using for nearly three
decades. There have always been discrepancies between stock prices and
companies' true values.

------
DennisP
Counterexamples: General Fusion and Tri-Alpha are two companies attempting to
build commercial fusion reactors that are well-financed by investors. General
Fusion got $40 million plus another round recently, and Tri-Alpha was up to
$140 million before a recent investment from someone in Russia.

But both were funded early on by billionaires, Paul Allen for Tri-Alpha and
Jeff Bezos for General Fusion. On the other hand, the focus fusion guys are
putting up better numbers than Tri-Alpha and they're still running on a
shoestring.

------
workhere-io
_In doing some research online I found out that other American inventors have
had similar designs and proposals for a decade_

Wikipedia mentions an American who proposed something like this as early as
1867, and British scientists had played with the idea even before that.
[http://en.wikipedia.org/wiki/Pneumatic_tube#In_public_transp...](http://en.wikipedia.org/wiki/Pneumatic_tube#In_public_transportation)

------
nabnob
So, how can we fix this? I like the idea of crowdsourcing funding, as with the
Ubuntu Edge ([http://www.indiegogo.com/projects/ubuntu-
edge](http://www.indiegogo.com/projects/ubuntu-edge)).

They aren't asking for funding quite on the same scale as the Hyperloop, but
it's definitely larger than the ~ $1 million required for another phone app.

------
the_watcher
The reason is simple: cost + risk. It's easier to come up with the much
smaller amount required to fund Instagram than to come up with enough to fund
the Hyperloop. Less money is at risk. It's that simple. There may be other
factors at play, but this is by far the most important.

~~~
aardvark
This. And related to risk: When a website fails, it doesn't hurt anyone; if
this tube were built, and then found to have a fatal design flaw, the
liability would be enormous.

------
fnayr
The post is obnoxious to read. You get like 4 lines at a time on a 15"
display.

I know the design is for supposed readability, but if that were the main goal,
then why have the gigantic annoying ad banner at the top that you can't close.

------
jotm
It seems to me that these days, entrepreneurs are in for the short term - they
want to blow up fast, then sell off their company for the highest price
possible. Few are in for the long term, and I don't understand why.

------
VintageCool
> In short, Silicon Valley has killed major innovation.

That's being somewhat extremist. I don't think that major innovation stopped
after the Facebook IPO. I doubt that it has even slowed down that much.

------
dmragone
You have 10 reasons. Your numbered list has 7 twice.

Also, the reason is very simple: there's no money to be made in building a
Hyperloop. There's a good reason Musk didn't (and won't) work on it.

------
chrisgd
That is why it is imperative we have a government that can make investments
into future energy and infrastructure needs even if it potentially destroys
existing companies in the long run.

