
Why Silicon Valley Funds Instagrams, Not Hyperloops - Bahamut
http://pathfinderapp.co/posts/why-silicon-valley-funds-instagrams-not-hyperloops
======
abalone
Folks. There's no crisis of innovation. This would be a lot clearer if people
understood how Silicon Valley has always worked:

1\. Government pays for really big long-term high-risk core technology
development. Things like microprocessors, the internet, voice analysis,
lasers, space rockets, highways, etc.

2\. These are mostly done under the rubric of defense spending. (This is
important.)

3\. Private sector steps in to commercialize the projects that bear fruit.

Hyperloop falls under category #1. Those projects take billions invested over
decades with very uncertain prospects. Usually supported by military
procurement. Yes, even highways were built ostensibly for the military. And
Siri on your iPhone? Funded by the CIA.

That kind of _Really Big Fundamental_ innovation is funded _by the
government_. It's never been VCs. They focus on the "last mile".

Space X is a good example of that: bringing a foundation of core tech
developed by NASA to market, adding commercial-oriented innovation on the
scale of a few years and a couple hundred million from the private sector. But
even at this stage, there's still many more hundreds of millions in government
procurement (prepaid launch contracts).

The reason Hyperloops don't get funded is that the government doesn't have a
military application (or pretext) for it.

Now we could go on to ask _why_ Silicon Valley's megabucks foundation is
military spending and not, say, direct government investment in sustainable
public services. But then we get to some uncomfortable issues, like how the
public might feel more entitled to the fruits of those investments. Whereas if
core science and tech is seen as a kind of "military surplus", free or cheap
for the taking, then the VC private sector gets to keep the profits from
commercialization.

~~~
InclinedPlane
The idea that "military development advances technology" is very popular but
not entirely accurate. The micro-processor, for example, was invented while
working on a handheld calculator project, and advanced through the consumer
market.

Sometimes military development advances technologies in ways that might not
have happened otherwise but it's hard to compare to the way development would
have gone otherwise. Take the development of aircraft from their invention
through WWII. Unquestionably there was a rapid pace of development during, and
due to, WWI and WWII. But there was also a rapid pace of development outside
of the wars. The design of the iconic WWII fighters the Supermarine Spitfire
and P51 Mustang owe much to the advancement of high performance aviation
spurred by the entirely civilian Schneider Trophy competitions through the
1920s and '30s, for example.

~~~
abalone
"In the United States, the development of the computer was underpinned by
massive government investment in the technology for military applications
during WWII and then the Cold War. The latter superpower confrontation made it
possible for local manufacturers to transform their machines into commercially
viable products. It was the same story in Europe, where adoption of computers
began largely through proactive steps taken by national governments to
stimulate development and deployment of the technology."

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

You're arguing there's an interplay between the public and private sector.
That's true. But you would be hard-pressed to find an example of a major core
tech that developed _independently_ of significant government investment --
particularly in the highest-risk, most capital-intensive stuff. And that's why
Hyperloop doesn't get funded.

~~~
privong
> You're arguing there's an interplay between the public and private sector.
> That's true. But you would be hard-pressed to find an example of a major
> core tech that developed independently of significant government investment

I'm not sure about the history, but perhaps the internal combustion engine?

More generally, the line of reasoning in this thread assumes "this is how
things have happened" to imply "this is the _only_ way things can happen". It
is entirely conceivable that the private sector would, in the absense of
government funding, step up and perform/fund fundamental research. But, in the
current fiscal climate where there is still, generally speaking, copious
government funding available (e.g., to the military), why would a private
group spend money to do that when they can let someone else (the government)
take the risk (with someone else's money).

~~~
InclinedPlane
Indeed. There were 3 of the largest wars in history during the 20th century
(WWI, WWII, and the Cold War). That's going to necessarily skew the statistics
on development of technology in recent history.

------
nostromo
It is amazing that someone is willing to pay $3 billion for SnapChat, but
nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate,
although many people took issue with it).

But we're still in the early days of the internet and smartphone era. It's
still a gold rush where people are running after get-rich-quick ideas.

Eventually we'll hit saturation and those quick exits will become less common.
That will force investors to look for new opportunities elsewhere.

~~~
anigbrowl
True, but at least Snapchat already works and has users. I like Elon Musk but
I LOLed when I saw his estimate of $6 billion.

~~~
kamaal
I am not sure why that is hilarious.

India just sent a probe to Mars at $69 Million. Musk has himself built a
rocket company with a million dollar scale investment.

There is no reason to dismiss, especially when he has a track record of
delivering great stuff on time and in budget.

~~~
anigbrowl
Because the cost is not just technological. There's also major land use
issues, which get expensive in CA. His idea that putting it along the middle
of the freeway will obviate these is not credible. I estimate $20bn to build
it, minimum. Rocketry is simple by comparison.

~~~
jwr
I also have my estimates. And I think that one day, after I create a
successful company that builds electric cars on a scale no one has tried
before, and after I create a company that designs and builds rockets that
deliver cargo on commercially-contracted terms, people will even take my
estimates seriously.

Until then, I'll keep them to myself and not criticize others unless I have a
really, really good justification.

~~~
im3w1l
We are talking about no one will invest in hyperloop. If it is because people
suspect Musk's cost estimates are off then that is worth bringing up.

------
yummyfajitas
A big part of the reason the IPO market suck, i.e. why "the stock market isn’t
influenced by value today like it was thirty years ago", is taxes.
Specifically, the differential tax treatment of capital gains and dividends.

A long time back, equities were viewed as a vehicle for distributing
dividends. A company earns money and pays it to investors. You build the
hyperloop, customers buy tickets, you give investors a cut of the proceeds.
The value of HLOOP is based primarily on the expected value of this revenue
stream.

Nowadays, dividends are double taxed while capital gains are only single
taxed, which means that companies mostly don't bother with dividends anymore.
Investors tolerate this because the differential tax rates mean that
management would be throwing away their money if they issued dividends. As a
result, the value of equity is the value of expected capital gains, resulting
in the current situation.

~~~
7Figures2Commas
> Nowadays, dividends are double taxed while capital gains are only single
> taxed, which means that companies mostly don't bother with dividends
> anymore. Investors tolerate this because the differential tax rates mean
> that management would be throwing away their money if they issued dividends.

Notwithstanding the fact that there are plenty of companies that pay
dividends, I assume you're not familiar with REITs, preferred stock and MLPs?
Dividend/distribution investing is very much alive and well.

~~~
yummyfajitas
Dividends these days occur, but they are generally a token rather than the
primary means of rewarding shareholders.

REITs might work for Hyperloop specifically (depending on whether the IRS
believes Hyperloop is an "investment agent specializing in real estate and
real estate mortgages"), but they don't work for most companies. The fact that
there are a few corporate structures that avoid overtaxing dividends doesn't
change the fact that they don't work for most businesses.

~~~
7Figures2Commas
> Dividends these days occur, but they are generally a token rather than the
> primary means of rewarding shareholders.

I would strongly suggest that you visit a site like
[http://www.dividendchannel.com/](http://www.dividendchannel.com/). Your
statements that "companies mostly don't bother with dividends anymore" and
"they are generally a token rather than the primary means of rewarding
shareholders" are simply incorrect.

~~~
yummyfajitas
Since 1980 (the earliest year I could find data for), there has been a drastic
decrease dividends.

[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979501](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979501)

This paper suggests, though comes far from proving, that dividends do behave
as if they are used for signalling (i.e., "look at us, we are healthy, see,
dividends").

------
apsec112
Many say that, in Silicon Valley, there is "no penalty for failure". I'll be a
heretic for a bit, and say this is part of the reason why we _don 't_ have
Hyperloop.

Software companies have huge payoff ratios. You invest $1M in 5,000 companies,
and hopefully one of them is Facebook. The payoff on a big success is
thousands to one. If you give $1M to some douchebag who spends it on hookers
and blow, no big deal.

Infrastructure companies have _much_ lower payoff ratios. You might invest $1B
in the hope of getting back $10B. But for that to be profitable, the success
probability must be at least 10%. Which means you have to be pretty sure they
aren't going to just blow it all on parties.

Now, from the _founder 's_ perspective, building an infrastructure company is
really hard, and blowing $1B on parties is really easy. So if there's no
penalty for failure - no social cost to wasting the money, and not trying very
hard to build the hardware - that's what almost everyone winds up doing.
Infrastructure demands large capital investment, and large capital investment
demands some form of accountability.

~~~
notahacker
Never mind the failures due to coke and hookers. The big upside to the SV
early stage investments is that startups that are responsibly run but _don 't_
seem to have a natural route to profitability can probably end up selling the
people or tech as assets to someone else in the sector. Investors expect
positive returns on some of the "near misses" in their portfolio.

By contrast, if you can't make an operating profit on the Hyperloop having
paid all the research and infrastructure costs (either it doesn't reliably
work, or is just widely considered too unpleasant to ride on a regular basis)
you end up with miles of very visible scrap metal.

------
aclements18
Silicon Valley did fund some "hyperloops", look no further than Musk's other
two big ideas (Space X & Tesla). Look for the few VCs that are non
conventional thinkers themselves. The ones that discuss the distant future as
though it is right around the corner or even happening now.

As an example watch any 10 minutes of this interview with Steve Jurvetson of
DFJ. You'll see why he and Musk were a good fit:
[http://youtu.be/O2tK0Wl2F8w](http://youtu.be/O2tK0Wl2F8w)

~~~
abalone
Those are not hyperloops. Both SpaceX and Tesla are built on decades of R&D
and core science paid for mostly by taxpayers to the tune of hundreds of
billions of dollars.

This is not to take anything away from the "layer" that Musk added to this
foundation. But hyperloop does not have the same foundation. There have been
space missions and electric cars before; there hasn't been anything
approaching a hyperloop at scale. So the investment risk is even greater.

~~~
andrewfong
If SpaceX isn't a "hyperloop" project, then almost nothing would qualify. HP,
Intel, Cisco, and other Silicon Valley giants -- the type of companies that
the original post would probably point to in contrast to something like
Snapchat -- benefited from decades of military and university research.

And if that's the case, that also suggests an answer to all of this. Spend
more on basic R&D.

~~~
abalone
There's no contradiction. HP, Intel, etc. happened because they were built on
a foundation of massive government investment in microprocessor tech during
its early, super high risk phase, and then government procurement. Hyperloop
isn't happening within the Silicon Valley model because it's core
tech/infrastructure that does not have the government's interest, because our
system is built around defense spending.

That's not to say the government couldn't fund it as a transportation
infrastructure project, but that's not the Silicon Valley model, and the
funding is much smaller and harder to come by than defense spending.

The problem isn't really just to spend "more" on R&D -- have you seen the
defense budget? Hyperloop would be a blip. The problem is deeper.. it's that
our system is not set up to funnel taxpayer funds into public services like
this. IMHO for political reasons. Running it through the pretext of defense
makes it harder for citizens to question how funds should be spent and who
they should benefit.

We need _political_ change to make sustainable public transport projects like
this take priority. Just like we need it for education, social welfare, etc.
It's easier to control people when you tell them the Russians/terrorists are
coming so we have to take your money and fund defense.

------
JDDunn9
Mass transportation has always lost money. Most of the original railroads in
America went bankrupt. Today, ~90% of the cost of building railroads are
subsidized by the government. In Japan, they over-invested in trains and it
produced a huge drag on the economy.

Most experts I've heard say the hyperloop would cost far more than the
estimated $6 billion. Doing things for the first time means you're likely to
go way over-budget. After someone builds a hyperloop though, and works out all
the kinks, there will be investors for the 2nd one. It's a case of "the second
mouse gets the cheese".

~~~
snogglethorpe
> _Mass transportation has always lost money_

Most passenger rail in Japan is private, and profitable, including both
capital and operating expenses.

In the years leading up to WWII, and during it, the Japanese government
nationalized many rail lines (although many stayed private as well) to form
JNR, and JNR proved to be too inefficient, and built up a lot of debt. That
then of course lead to the privatization of JNR in the 1980s (which included
transferring JNR's debt to the new private JR companies), which was highly
successful.

> _In Japan, they over-invested in trains and it produced a huge drag on the
> economy_

Japan has invested a lot in rail, but it certainly isn't a "drag on the
economy". Indeed, it's arguably a boon to the economy as it's a much more
efficient transit system than private vehicles on roads, and given the
business model of Japanese railroads (which builds retail and housing around
railroad nodes, and builds railroads to support new retail and housing),
_directly_ contributes to much more efficient urban organization.

The rail lines in Japan that lose money are rural ones in sparsely populated
areas. However these account for a very small proportion of rail usage.

~~~
JDDunn9
"Pettis likens it to the US railroad boom in late the 1800s. “Most of it was
very, very wasteful and the companies eventually went bankrupt. The railroads
shifted to new owners who bought at a significant discount. That meant they
could lower prices immediately,” he tells Quartz. “That’s painful, but it’s
economically very efficient.” That never happened in Japan. In fact, this is
why Japan’s GDP appears not to have grown in so long, says Pettis—wasteful
government spending in the 1980s meant GDP “was significantly overstated.”"

[http://qz.com/94692/abenomics-will-fail-if-japan-doesnt-
addr...](http://qz.com/94692/abenomics-will-fail-if-japan-doesnt-address-its-
debt-problem-heres-one-way-it-should-start-doing-that/)

~~~
snogglethorpe
Japan has many issues... but its railroads are not one of them. Indeed, note
that your article points to the JNR privatization as the model to follow...

------
mistermumble
Link for those who want to see the original article:

[http://jerzygangi.com/why-silicon-valley-funds-instagrams-
no...](http://jerzygangi.com/why-silicon-valley-funds-instagrams-not-
hyperloops/)

~~~
hfz
Now I wonder why it's on Pathfinder on the first place and why it's stealing
traffic from the original source.

------
snitko
I have an alternative theory. It's because important real things are heavily
regulated. Government sticks its nose into everything. The internet was an
exception, because they didn't realize its potential fast enough (China, on
the other hand, had some time to do the homework). Whatever industry is
regulated - transportation, healthcare, protection, drugs - you have high
prices and a high entry barrier. By pretending to care about consumers,
governments simply rob both entrepreneurs and consumers. If they truly cared,
they would allow multiple consumer protection agencies on the market each
helping consumers navigate the said market, but with no power to prohibit or
regulate anything. Right now a government is a monopolist in consumer
protection business with an ultimate power to kick anyone out of the market.
That can't be good for consumers. And don't tell me people would die if there
was no regulations - every day thousands die because it takes years for the
FDA to approve an experimental drug, but no one seems to care.

As a side note, don't be surprised that tangible businesses with a lot of real
assets make less money than some chat application. In airline industry, whose
margins do you think are the lowest? Airlines. Whose margins are the highest?
IT companies that run ticket reservation systems.

~~~
j1z0
Don't forget it was the Government that INVENTED the internet. They also
heavily funded or helped to invent cellphones technology and micro-chips not
to mention the research that brought us touch screens and GPS as well. So
perhaps the government isn't all bad and for things like the Hyperloop they
should get involved.

I think the real issue that is being talked about in the article is that long
term, large scale "moon-shot" type projects are extremely difficult to launch
in the private market, but history has shown us that the government is
actually much better at such long term "moon-shot" things.

Sure SpaceX is cool and makes rockets for far cheaper than the government ever
did, but with out a few decades of NASA spending a ton of money trying to
figure out how to get into space in the first place there would be no SpaceX.

So I think what really needs to be looked at for projects like the Hyperloop
is Government / Private partnership. Maybe even let the government take a
stake in the company and earn revenue in the future to offset / repay all the
tax dollars invested. Because unlike private equity, cash-flow is actually
quite important to the government and they they are well suited to help out in
situations like this.

~~~
snitko
Did a government bureaucrat invent the internet? Or was it a person or persons
who were simply financed by said bureaucrats (and not even directly by them,
but rather by taxpayers' money those bureaucrats redistributed)? This is an
important difference because nothing really stops private individuals finance
things that may potentially be unprofitable (think Ubuntu, for instance).

When you say "but without government important initial research which is
costly and unprofitable can't be done" I want you to think about many
brilliant scientists from the 19th and even 20th century who did
groundbreaking work entirely on their own or with the help of some private
money. And also think that when government finances things, it simply says to
other people "give us your money because we know better how to spend them - if
you disagree, we're still gonna take your money, so you have no choice".
Government doesn't convince and treat people as individuals, it commands and
treats them as livestock.

~~~
j1z0
>When you say "but without government important initial >research which is
costly and unprofitable can't be done"

No that is not what I said at all. If your going to quote somebody quote them
correctly. What I did say is that SpaceX wouldn't be possible without NASA.
And not to short change SpaceX cause it's an amazing company and they do
really cool stuff, it is true that they are building on-top of the tech
developed by NASA, and that NASA, in the form of a very large contract to
shoot rockets into space also funds (to an large extent) SpaceX. So I don't
think you can really argue that point.

To your more general point... You obviously don't like the government, and
honestly I don't really either, I agree with you that they are a bunch of
bureaucrats and mess up a lot of stuff. But don't let you feelings about the
government cloud your vision. As said in the original article for the vast
majority of cases Industry does not have the appetite to fund Huge project,
i.e. large capital expenditures with very long timelines to pay back the
money.

Yes you could come up with cases where industry has, but the majority of these
type of project have been funded by the government, and unless we change the
rules by which our entire economy operates the government is likely to be the
only one to continue to fund them. So rather than just hate the man (if we
really want to get these type of things done) we would be better served
figuring out how to work with him, or change the quick profit driven model
which drives our economy... To me working with the government, as bad as it
may sound, is probably an easier task.

~~~
snitko
The fundamental question is, do we want those big projects done? If we really
wanted them, everyone would simply donate money voluntarily when asked, so you
would have no problem financing NASA or other big things. If, however, people
don't want those things or would rather prefer their money spent differently,
NASA becomes an organization financed by theft. People don't want to give it
money, yet you take it away from them because you think it's a good idea to go
to space. It's not an economical problem, it's a moral one.

------
vinceguidry
The last time infrastructure investment's been sexy was the 1800s. That was
the last time you could build large scale transportation projects with private
money, and that was only because there was a huge frontier to conquer. Now
everything is owned by someone whose got powerful friends, rather than natives
you can just shove out of the way. It took the political might of a wartime
hero president to build the Interstate system.

It's utterly silly to look at the Valley's reluctance to fund the Hyperloop as
some kind of failure of the sheeple. The authors should crack open a history
book sometime and learn how hard stuff like this is.

~~~
jseliger
This is one of the more astute comments in this thread, and I hope it gets the
upvotes it deserves. Alex Tabarrok also discusses the "veto player" problem
some in _Launching the Innovation Renaissance_
([http://www.amazon.com/Launching-Innovation-Renaissance-
Marke...](http://www.amazon.com/Launching-Innovation-Renaissance-Market-
ebook/dp/B006C1HX24?ie=UTF8&tag=thstsst-20&linkCode=as2&camp=1789&creative=390957)),
which is worth reading if you're interested in these issues.

~~~
vinceguidry
Purchased, thanks.

------
rjurney
Just because the internet sector is temporarily insane where gimmick apps
reject $3 billion acquisitions doesn't change that most money invested in the
valley goes to serious businesses doing real research and development.

~~~
seeingfurther
This is probably the most accurate on point statement in the thread.

~~~
vdaniuk
Except for that gimmick apps part. Snapchat has 25M users. That is more than
most countries in the world to put it in perspective. That is nothing to scoff
at.

------
raverbashing
This is a very truthful article and one that should bother a lot of people

The stock market and investors "immediateness", and all the other points.

3B dollars can fund a (small) semiconductor company. And they're going for a
picture sharing app (different, but worse - as in, a quirk - than Instagram)?

~~~
vdaniuk
Can 3B dollars fund a small semiconductor company that will have a sustainable
competitive advantage against Intel, AMD and TSMC? My guess is NO. Successful
picture sharing apps has stable audience locked in with network effects and
switching costs. That is a sustainable competitive advantage.

~~~
raverbashing
"that will have a sustainable competitive advantage against Intel, AMD and
TSMC? My guess is NO"

Maybe, but these are not the only semiconductor companies in existence.

And there's a whole lot of (semiconductor) products beyond what those produce.

But to compete agains them, yes, you would at least have to double that value,
but probably more.

Or you just design and subcontract manufacturing to them.

~~~
vdaniuk
Dont you think that all that considerations are factored in the VC process?

~~~
ksk
Why are you assigning some sort of 'perfect knowledge' or clairvoyance to VCs
? They are just like everyone else and they make irrational decisions and have
inherent biases.

~~~
vdaniuk
I didn't assign anything. You did. Stop putting words in my mouth.

My point was that if a random HN commenter is able to raise some issues about
ROI of various investments then certainly VCs who do it professionally have
these issues factored in. Simple as that.

~~~
ksk
>Stop putting words in my mouth

Start being clear, then people might understand your confused responses.

> then certainly VCs who do it professionally have these issues factored in.

What is so certain about it? Doing something 'professionally' just means that
its your job. People are capable of sucking at their job (which happens far
too often IMHO).

------
pa5tabear
Payback. Risk. Magnitude. Is there really any more to it than that?

~~~
tansey
Exactly. Hyperloop in particular has the worst of all worlds.

1\. Huge investment required up front.

2\. First of its kind, so lots of risk.

3\. Small potential gain relative to the investment.

In fact, Hyperloop was never proposed as a VC funded project by Musk. He's
merely proposing it as an alternative to high-speed rail. Historically, public
transit loses money, making it a terrible investment. However, it's a public
good so governments continue to support them.

~~~
wavesounds
You forgot the biggest risk of all, Death. I'm all for the Hyperloop but lets
be realistic, its way easier to give a few guys in a garage a hundred thousand
dollars to build software for sharing pictures that's never going to hurt
anyone then fork over billions for a futuristic transport that could
potentially kill people.

------
tehabe
Investors are not stupid or blind. Hyperloop is similar to the Maglev train
technology developed in Germany and Japan for the last decades. The inventor
of the maglev train even thought about hyperloop. But so far just one single
commercial maglev train route has been build.

And the suck costs are extremely high. The six billion Musk estimated are
wrong, it won't be six billion, it will much, much more than that.

Investors don't invest in hyperloops not because of the 9 theories the author
is mentioning but because hyperloop are not an alternative to conventional
trains.

------
roymurdock
I'm a little confused about a couple of the statements made in the article:

1\. “If Kaiser Permanente releases a drug that cures all cancers, is the stock
price guaranteed to go up? No, of course not. The stock price goes up or down
based on supply and demand. It only responds to human action. And, therefore,
the price of a stock is solely determined by how people think about the price
of a stock." \- Am I wrong in thinking that the price of the stock is
correlated with the value of the company which is much less influenced by what
stockholders think and much more based on what people think of the value of
the product/service? Whoever invents the cure for cancer is going to see a
huge increase in their stock price because people are going to buy their
drugs, increasing revenue, profits, ROE, dividends, growth. etc. What is the
author trying to say?

2\. "Right now, the only sane choice is to aim for an acquisition. But mergers
and acquisitions are on average $100 million a piece. There’s no way to have a
company as large as Hyperloop acquired because it’s a multi billion-dollar
company. You just can’t do it." What about motorola (12.5bn) youtube (1.5bn)
and instagram (1bn) just to name a few? Just because a company is valued over
$1bn doesn't mean there's no more room for growth and a subsequent exit?

Shotgun Investing vs. Value Investing - Doesn't the government sometimes fill
the role of value investor? Especially in cases of infrastructure like the
hyperloop?

Any clarification would be appreciated.

------
bane
Because VCs are not about changing the world, they're about quickly making
lots of money on high-risk bets.

There needs to be something looking for medium sized boats of money over
medium length periods of time for medium risk. Is that the stock market I
guess?

------
kamaal
Capitalism works to tackle such things, it gives you exactly what you want.
Which is extremely powerful and dangerous at the same time. If people want
free services to share pictures and not low priced long distance travel. They
will get exactly that.

I'm not saying that people don't want cheaper long distance travel, or better
medical electronics equipment etc. But sharing cat pictures seems to be a more
immediate need which people want in the next 30 minutes, 15 times a day.

This is a hypothetical situation, but imagine if there is major global
diabetes pandemic in the next 10 years. You will see a major demand for
glucometers, and you will see tons of innovation go around it.

Plus there are other dynamics at play here like ROI, barrier to entry etc.

~~~
Osiris
The problem that's being brought up is that Capitalize focuses on serving
selfish, individual, needs. Those may or may not also been good for society as
a whole.

We, the people, have entered into a social contract that is enforced through
government to allow us to co-exist. Given that situation, there are some
things/processes/services that are good for society as a whole but don't
really make sense individually. For example, vaccines are really good for
society in that they reduce disease, thus freeing up resources for other
individual medical needs. However, a single person wouldn't take a vaccine
because it only benefits them in at least 80% of the population also takes it.
Here is a situation in which a societal good is underserved in pure
capitalism.

Often I see people arguing that "pure" capitalism solves all problems, but
that's clearly not the case. It's a very good system, but outside influence
can be needed to optimize social welfare over individual welfare.

~~~
kamaal
Note, the soviet style centrally planned economy didn't work too well for
them. In the absence of market indicators you are left at the judgement of a
few bureaucrats.

I'm not saying capitalism is panacea, but its best of other worst options.
Market indicators are not perfect, but they get close.

~~~
nhaehnle
Ignoring for the moment that you're engaging in a false dichotomy, central
planning actually worked very well for Russia in the 20th century.

Russia had fewer (if any) recessions compared to Europe and the US and faster
economic growth. Now you might say that it is easy to have fast economic
growth when you're playing catch up. However, plenty of third world countries
demonstrate that it is _not_ easy, and Russia managed to grow faster than
capitalist economies with the same starting point.

It's true that the results are not as clear for other centrally planned
economies. The point is that it's not as simple as "market good, central
planning bad".

------
rikacomet
Because the gap between current capacity, and required capacity is bit more
than worth risking money. There are in short variables we yet not know, which
will come in force when such a project is undertaken. Personally I would have
taken the leap, if given the choice, but if people are not investing in
Hyperloop, than it is mainly because they are playing safe.

The only reason besides that, which pokes me in the face, to not fund this is:
economics for the common man. If the case of current trains not being built to
full capacity (i.e we can do 400 kmph in Bullet trains, yet in developing
countries, avaerage speed is 100kmph)is proof enough, the point can be taken
from the concept itself. What is more convincing then the design is the "5th
dimension of transport" thing. But where does that 5th dimension exists?

A living example is in Delhi at the moment. Metro just entered Phase 3, yet
the stress on Delhi's transportation system has become so large, that even
with record ridership, Metro is not being able to ease that pressure. The
government is going for efficiency by modernising its bus fleet into BRT
corridors, still it is a temporary fix. How can we solve this?

Its not the possibility that matters here only, but the individual need and
economics.

------
Cthulhu_
Well, Instagram and Snapchat and the like are on the extreme end of the scale;
the reason they get funded is because:

* Development is cheap * Returns are quick

That is, anyone with a PC and a server can create a Snapchat clone; anyone
with an image processing library (or knowledge to create one) can create an
Instagram; getting a handful of developers together is easy, and building the
next big web app will take just an idea and a few dozen K to develop - low
risk. If it fails, no biggie, few K lost, some personal drama. If it doesn't
fail, and is lucky it'll grow for a few years in its userbase, prove itself,
and increase its value to the billions the lucky few companies did.

This is a complete opposite to the truly disruptive things like Hyperloop,
which, if successful, will change the world of transportation. If it fails,
however, investors will have lost billions - because the start-up costs are
billions, not a few K or a garage and spare time like the silicon valley
startups cost.

Risk vs reward, risk-spreading. With a billion dollar, an investor can fund a
hundred startups comfortably, and only one of them has to strike it big for
the investor to make a profit. With bigger and potentially more influential
projects like Hyperloop, the investor will have to pour all of his investment
money into one project, and if it fails - and I'd say there's a decent chance
that it will - that money's gone.

And Hyperloop is, I'd say, a high-risk investment; it'll take years to
develop, it'll probably have a lot of problems getting the 'pipe' up, it'll
have to combat the user's fears of being locked up in a high-speed pipe, it'll
have to be cost-competitive with the competition, and it has to be safe; a new
transportation system like this needs just one serious accident for nobody to
ever use it again.

------
pytrin
I agree and disagree. Venture capital has become somewhat more risk-averse in
recent years, mainly because the costs of building software products has
become so low. But there is a lot of innovation to made in the physical world,
which is currently underrepresented in investment portfolios.

On the other hand, I'm not sure the hyperloop is a good fit for a VC
investment. Maybe someone out there will be willing to take a huge risk with
limited upside, but it does not fit VC theory, which is still a business at
the end of the day. It seems like the appropriate funding channel for
something like should be the government, at least in a perfect world.
Otherwise, major players in the industry are the next most relevant, perhaps
companies that already manage toll roads and infrastructure.

------
icebraining
OK, so where are the examples of $6B projects being funded by private money
before the dominance of SV? Surely you can provide some examples from before
SV had "killed major innovation", no?

------
volandovengo
i couldn't help but think about this article when news broke of the 3 billion
dollar snapchat offer.

~~~
vdaniuk
Really? You think that spending 6B on an absolutely untested idea with great
risk is somehow comparable to a 3B acquisition of a mature startup that will
immediatly bring business value to a company?

~~~
auctiontheory
You can call me a old fuddy-duddy, but I'm just not sure that a company with
zero revenue qualifies as "mature."

~~~
vdaniuk
I've specifically said 'mature startup' to address this type of concern.

~~~
adamnemecek
I can't say that that really addresses that concern.

~~~
vdaniuk
Company != startup. They dont have revenues, but they have 25M users audience
that will be instantly monetizable as soon as it is plugged in the FB or other
company advertising system. And that makes them a perfectly fine target for
acquisition, even if they don't have revenues of their own. Does this address
a 'mature' company concern?

~~~
notahacker
It might make it a logical target for acquisition, but it doesn't follow that
it's worth ~4% of Facebook's market cap when Facebook has 100x the users
(including virtually all the Snapchat userbase...) and could trivially clone
Snapchat's tech.

Not to mention that Facebook's own profit figures from their more diverse and
mature advertising platform suggest it would take a _very_ long time to
accumulate $3bn in advertising revenues off 25m users.

------
b0z0
If you think about it, it's amazing what we're valuing at billions of dollars
these days. Twitter, $4 billion? That's for a lot of lines of code, and, sure,
some server infrastructure, etc. that will be obsolete in the next few years.
The same goes for Facebook, Instagram, Pinterest, almost any Silicon Valley
startup we can name. Just a bunch of lines of code, not really solving any
problems. But it makes money, and that's what people care about.

~~~
danhak
The value of the companies you mention doesn't come from the code. It comes
from people's attention.

That said, I'm not sure I disagree with your point.

------
embro
I really liked this post! I sometimes feel the innovators and thinkers of this
world are not getting their fair share of attention.

I also feel like companies should team up together and do crazy things share
the risks as a group.

If a group of key companies team up together to make nearly impossible things
they would also create a "hype" in an instant around this. It doesn't need to
be the Hyperloop, it could be much much more "down to earth"

------
programminggeek
The difference between SnapChat and Hyperloop is that Snapchat has people
using it today, which drives its value, Hyperloop will cost billions before
anyone is using it, and people might hate it. The hyper loop could easily turn
into The Homer:
[http://simpsons.wikia.com/wiki/The_Homer](http://simpsons.wikia.com/wiki/The_Homer)
and who wants to spend $6 billion on inventing that?

------
nraynaud
As seen from Europe, it reminds me of Russians Bonds (I think my grandfather
still have some) and Eurotunnel. Didn't go too well.

------
tfb
This might be one of the best articles I've read on HN in a long time.

One point that really hit home with me is that we need to innovate innovation.
I'm willing to bet that a huge part of our stagnation is a result of our
creative outlets not being diverse enough. We seem to have become limited to
our screens and our virtual worlds. And it isn't by accident. We're social
creatures and social media has sucked us in. And of course the internet plus
the various kinds of screens (devices) used for viewing it are very effective
means of communication, advertising, etc. And we love to be entertained.

So I think the key to a wider range of innovation is to somehow reveal to the
masses that there are many tangible concepts just waiting to become part of
our physical world, concepts that will provide the same social, commercial,
and entertaining functions as those in the virtual world. Somehow our
collective focus will need to shift from virtual to physical. 3D printing is
probably a good step in the right direction, but I think it will need to be
combined with some kind of commodified robotics to be truly useful.

~~~
vdaniuk
Anecdotally, this might be one of the worst articles I've read on HN in a long
time filled with ad hominem attacks, crude language, misplaced anger and trite
memes to stir a controversy. The point is important but the presentation is
very bad.

------
eliben
On a related note, the shitstorms over Google's closing projects like Reader
or changing the comment systems in YouTube completely eclipse announcements of
developing self driving cars, new ways of wearable computing, new methods of
distributing internet to 3rd world countries, and so on.

------
data_app
Great post. Thanks for writing this - you have guts! Many here think the same
way but too afraid to say so.

~~~
vdaniuk
You really need that sarcasm tag.

------
vdaniuk
So what is the level of majority of arguments in the linked article?
DH0-DH1[1]. Is this really an article worthy of attention for HN audience?

[1] As per
[http://www.paulgraham.com/disagree.html](http://www.paulgraham.com/disagree.html)

------
tehwalrus
It's almost like we need to go borrow investors from the past - investing in
railroads.

I like the analysis though, sad I didn't see it in August. We need a new
startup incubator called "Sleepers and Ballast" instead of "Y Combinator".

------
k_os
T.D : Do you know what a hyperloop is?

N : A sort of train that moves in vacuum

T.D : It's just a very fast train. Now why do guys like you and me know what a
hyperloop is? Is this essential to our survival? In the hunter gatherer sense
of the word?

------
seeingfurther
It's because PG values hyper growth in the early days of a startup.

------
auctiontheory
Silicon Valley is about momentum investing. You or I may think that many of
these companies are silly, but where the money goes, the rest of us may have
to follow.

------
mimog
Those aren't theories they are hypotheses

------
daddykotex
I like the Activity Graph on the right :D

------
dmourati
Torch icon, didn't read.

------
goggles99
So if someone reputable started an anti gravity tech company, you would write
the same blog about them?

The point is, most don't think that the design would even work. The specs defy
many laws of physics. It is more of a concept or dream at this stage. It would
be an extremely high risk investment - thus, no takers.

By comparison, Instagram had a proven and popular product. Why would you
compare something so very different?

