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Higher rates will lead to the next generation of great tech startups (chamathreads.substack.com)
52 points by metaphor 57 days ago | hide | past | favorite | 62 comments

I thought the Silicon Valley cycle was more like:

1.) Near the end of the boom cycle, the smart tech investors stop playing the game as valuations get out of wack and puts money into reserves.

2.) The dumb tech investors, that joined at the later stages of the boom, play as long as they can and then the write downs start happening.

3.) The incumbent tech companies also start slowing down and letting go of people indiscriminately and the top talented engineers now become free agents who sell their highly appreciated stock options.

4.) No longer beholden to golden handcuffs, the free agents are free to execute on their side projects while living off their stock option cash-outs and severance. And many perhaps even convince former coworkers who are bored and struggling through multiple rounds of indiscriminate layoffs as well as other engineers laid off from the competition and other flailing startups to join them on this new "cool idea".

5.) The next generation is born as the business plans and prototypes around those "cool ideas" start to come together and the smart VC money sees more realistic valuations.

I do wonder how much this next generation of innovation will be captured by Silicon Valley investors. A lot of "cool ideas" are either not particularly monetizable, or about stopping existing monetization of products. For instance, turning social media into something closer to non-profit, akin to how Wikipedia works, would be a huge benefit to society.

Not clear if the next generation is formed from from over paid "free-agents" executing on their side projects.

Of the 30K FAANMG employees laid off thus far in Silicon Valley, it will just take a handful of them to lead the next generation. Not to mention the fully vested, two decades of FAANMG experience veterans now free to try their hand at full time angel investing.

That last part is key!

How are sequoia funds doing these days? If your point would be correct it would suggest these types of old VCs have already gotten their money out in some insider trading phase.

They didn’t. And they just lost $400m on just FTX. Their portfolio is massively down too. How is SoftBank doing? The biggest of them all? They are at record losses.

Despite your Marxists leanings, life is not about exploitation and rich vs poor. It’s an easy assumption to make, but it’s completely wrong.

Since this cycle lasted so long there has been dumb money in the game for awhile (i.e. SoftBank, Tiger). Actually since so many pension funds and endowments were chasing yield, as you mention even some of the smart money like Sequoia succumbed and became dumb money to make fees.

I don't think this makes a rigorous or compelling case on better startups being formed during above-average rate periods, at all. There doesn't seem to be enough data in the article to show correlation, even less causation, between high-rate environments and the emergence of better startups. The rise of the great wave of startups like Apple, Microsoft, etc. probably had very little to do with interest rates.


> Second, complementing this new energy model is a shift away from Moore’s Law and CPUs to the proliferation of GPUs. This would support scaling Moore’s Law through parallelism, which favors applications of machine learning and AI. As a result, the marginal cost of compute will go to zero.

And here I am looking at the sticker prices of cloud GPU computer and going: really. I won't deny there's an era of AI products and apps coming with the emergence of OpenAI, Huggingface, etc but I'm not sure the societal or economic value will outweigh the costs, or that marginal costs will go to zero.

I mean, yea, training AI models will go the way of traditional software, where marginal cost of distribution tends to zero: you build/train once (or a constant number of times), and you distribute infinitely. But the ground-level reality seems that many startups will foot higher compute bills than ever to get started.

Cloud GPU costs are way higher than actual GPU costs though.

The marginal cost of energy is NOT going to zero. Have you seen today's power bills?

Unless there's a way to exact energy from nothing, energy will Always require input to produce output. That would lead to waste as well. So it can never be zero.

Solar panels, green energy ain't free, they cost minerals to create and maintain.

Even if we massively lowered the cost and made it almost free, it wouldn’t make that much of a difference because we would all just increase usage until energy became the limiting factor again

Maybe with fusion, but that's a long ways off. The article talks about a much shorter term, and explicitly mentions current-gen energy tech. As I said in the sibling comment the bills of GPU-based compute do not suggest to me they are trending towards zero, either.

Yup neither of these predictions make sense. No historic parallel and no curent or near future market reality supports it.

Even if someone figures out net positive fusion. You still have to build these facilities and they sure as hell are not going to be cheap. Fusion even if possible is highly questionable to ever be cost effective.

The wholesale power price in my country is consistently negative during the day time.

I think we have maybe 60% coal/gas power overall.

That's pretty interesting. Australia only has current (high) electricity prices because the government keeps adding legislation to prevent too high increases.

Aka, it's artificially lower than what energy companies would price. Well, given they got a monopoly, that's good.

At least on the higher latitude parts of the east coast it seems inevitable that feed-in tariffs will go to zero over time, even during some of the wettest/cloudiest years we've had there's so much excess supply.

Could do an interconnect to WA, we've talked about it for a long time, would extend out the solar over-generation period by 3-4 hours on each side of the country, but it's pricey, especially compared to local storage and power storage costs in general going down so it may be a white elephant before we even get it built.


Hmm, this actually leads me to wonder would there be future in scalable loads? Or technologies supporting these? Basically developing software and hardware that can scale up and down based on power costs even real time. So if you can wait on your computation you could save money by suspending it periodically.

What articles like these fail to mention or take into account is how much of this funding is via government grants and how that springboards the whole ecosystem. The early silicon valley was more supported by government grants than private funding.

The modern day examples of that is Tesla and SpaceX.

I’m not sure energy costs will go to zero soon. We need to reduce our dependence on fossil fuels, and a major component appears to be that we need to internalize the cost of co2, for example by way of taxing co2. This may result in increased cost for energy until the market with renewables and storage capacity saturates, which may take a while.

Also, computing itself may not get much cheaper, there are concerns that Moores law is slowing down. Perhaps the cost of computing will plateau for a while.

The marginal cost of energy isn’t going to zero anytime soon.

However, higher interest rates do lead to the next generation of great tech startups, and I recorded a video last months explaining why startups are a GREAT class of investment in this environment: https://m.youtube.com/watch?v=4qFuZcaNuRI

Would love feedback from those who had time to watch it

People in this thread should refresh themselves on the concept of marginal cost before commenting

I’d assume the definition of entropy is more germane to the ludicrousness of zero marginal cost energy. Keep in mind the author is Chamath, the SPAC dude.

I am hoping higher rates will change the style of startups: https://app.pressnt.net/post/77/

This (your?) writing style is certainly entertaining, but it's also hard to understand and sadly light on detail and explanatory power.

It's deliberately light on detail because (in the absence of feedback) I'm not at all sure it isn't just Old Man Yells At Cloud.

Shorter prediction: at higher interest rates, having low turnover but insane margin is worthwhile[0]; at low/no interest rates, having insane turnover but low margin is worthwhile[1]. These two distinct paths to profit encourage very different styles.

Does that make more sense?

[0] so an average startup looks like a "heist team" that uses specialised, even abstruse, technology to reach liquidity; the "sure, it was an unholy lashup of common lisp and javascript, but it sold" syndrome

[1] so an average startup looks like a "hustle" that depends more on network effects and ecosystem than key competencies; the "we're X for Y" syndrome

That makes perfect sense, but it would have been even better if the why could be explained (in an easier to understand fashion, in the blog post :) )

It seems like I always see articles with titles like "(whatever is happening in the financial world today) will lead to the next generation of startups". It's a truism.

X and Y happened at the same time in the past. X is happening again. Does X cause Y, so that Y becomes expected?

I will leave this question open, trusting it doesn't need an answer.

No obvious but you're ignoring evidence in the article and simply a generalized notion of the situation

Where was the first great wave? In the last decade, what tech company has gone public and been consistently profitable besides AirBnB?

Most of the value was captured by Apple, Amazon, Google and Microsoft. They are smart enough to capture any incoming technology wave. Mobile, cloud computing and now AI. Startups get crumbs.

Startups can’t compete on those vectors. The capital requirements to compete in hardware and cloud are immense .

Hardware is hard. As much as I hate to admit it. Musk pulled it off twice even though I think Tesla is going to be crushed by the incumbents.

Besides the Tesla infotainment system is second rate compared to a low end Nissan Sentra with AirPlay/Android Auto


> consistently profitable.

They lost money the last two quarters.

FYI to people unaware, the author of this piece, Chamath is an opportunist and possibly commits fraud.



This is what happens when some idiot gets lucky getting hired by FB. No one liked him there. This guy literally failed his way to “success.”

Also huge early adopter of bitcoin

Is that supposed to be a bad thing?

Well, it’s probably how he built a lot of his wealth. Then he moved on to SPACs.

I regard Bitcoin as a speculative bubble, I myself have known about it since 2011 and back when it was $10-50 did not consider it a bubble, because I thought it would become a medium of exchange:


> I regard Bitcoin as a speculative bubble

So do I; shame it turned out this way. I also like the reference to Gresham's law in your post. Spot on, almost a decade earlier.

we are intently focused on what we anticipate will be the two biggest drivers of the next decade:

The first is the marginal cost of energy going to zero.

I anticipate that this is the dumbest thing I will read from a supposedly serious person in the next decade.

Predicting a 0 marginal cost of energy is basically predicting a post-scarcity society... in the next decade... thanks to solar and wind. Oh and a wee-bit of natural gas thats somehow going to be magically piped out of the ground and transported to power plants free of charge... I guess by the same good folks who will be manufacturing and maintaining all of the solar panels and wind turbines free of charge...

How is one even supposed to seriously discuss or critically examine an article when its conclusion is that we'll build a perpetual motion machine in the next 10 years?

Perhaps, you have misunderstood the meaning of "marginal cost." It does not mean that there is zero total cost. Marginal cost is the cost of producing the next kWh. Once my solar panels are installed (not necessarily cheap at all), the marginal cost of producing power is essentially 0.

You’ve basically mentioned it’s not zero since the cost of the spend on the solar panels would have a next best alternative and a hurdle rate. So each marginal kWh does have a cost, not to mention the depreciative factor.

Maintenance of the power inverter, batteries, wiring, and the panels themselves means that marginal cost is not zero, and as long as we don't know the solution to entropy, will never be "essentially" zero.

All of those things happen the same, and cost the same amount, whether 10 kWh are produced or 11 kWh. The marginal cost of the last kWh is zero for these items.

There is thermal wear on the power management and voltage step-up electronics, but it is small unless design parameters are exceeded in going to 11. So maybe those components would have to be replaced ten milliseconds earlier than otherwise.

Those things need to be maintained so seldom that they won't be far from 0 though. Systems without moving parts are nice like that.

Setting aside the article's mention of moderately intensive solutions like natural gas which has a very real and obvious cost per KWH, your panels will still need maintenance and eventual replacement (the current industry standard lifetime for a panel is 25-30 years), as will any peripheral systems required for the panels to work (batteries etc) and even the space they take up has an associated opportunity cost.

Again, no one is saying that isn’t true. He’s saying that the marginal cost, the main inhibitor to rapid scaling, is likely to approach zero.

Why is the marginal cost of a KWH the main inhibitor to rapid scaling? Wouldn't the main inhibitor be the marginal cost of additional capacity?

To put it another way, if my solar panel can currently support 10 GPUs running all day but I need to run 11, don't I need to add another solar panel?

Marginal cost is the derivative of the cost function. Fixed costs drop out of the derivative. You’re confusing amortizing a fixed cost with marginal cost.

* provided you’re located in a region that has ample solar power.

Turns out, a lot of the world doesn’t really live in perpetually sunny or windy places.

The solar-wind cult would be hilarious if it wasn’t so tragic. Entire economies have suffered because they marched headfirst into solar and wind without understanding their own geographical limitations (prime example: Germany).

Germany suffers because they decided to abandon Nuclear, not invest in wind/solar. It’s possible to do both

They understand their geographical limitations just fine, Germany's plan was wind, solar and gas. Not just wind and solar as you claim.

Agreed, I saw those two predictions and closed the tab immediately. Was a interesting article up to that point but it's evidently bonkers and/or naive.

>from a supposedly serious person

The article is by Chamath Palihapitiya, a guy who shamelessly attaches himself to whatever is currently popular. When he's arguing in favor of an idea or movement, that tells you nothing except that it's trendy and can be used for self-promotion.

Haha well I'm in full agreement with you (and u/shapefrog below) on your Chamath evaluation, but the sad reality is that his influence, by virtue of both the money and attention he can direct towards projects he deems worthy, is real and serious. Though hopefully statements like "the marginal cost of energy will approach 0 in the next decade" will help erode some of that influence...

> a supposedly serious person

Its Chamath Palihapitiya. The word "supposedly" is doing a lot of work in that description.

This is what gets me about fusion power being touted as “unlimited free energy.” The cost of the coal going in to a coal fired power plant is a tiny fraction of the final retail cost of electricity. If coal were free, retail power cost wouldn’t go down appreciably. So replacing the coal burner with fusion isn’t going to make it suddenly free from the wall socket.

Let's see. There's generation, transmission, distribution and final use.

The most costly part is probably distribution, taking electricity from the 11 kilovolts of transmission grid endpoints to street-level voltage and connecting up each house/factory. That's a lot of wire and a lot of maintenance.

If you can generate electricity and use it at the same place, you avoid transmission and distribution costs. If the cost of an extra kilowatt-hour is zero, as with PV once the systems are built, then the marginal cost for that use is zero.[1]

This implies we'll see large electricity users set up shop right next to, or in, PV farms.

1. It won't be zero zero, of course. Using the PV system's power control circuits (and possibly internal voltage step-up or step-down circuits) will affect their life. But those costs are pretty small in the scheme of things. Infinitesimal cost rather than zero, perhaps.

It really depends is the real answer.

Let's take a pretty low price of 50 per tonne from 2018. Tonne produces 2 460 kWh. Thus 2 cents per kWh.

But last year prices were at 400+ level and currently 170 I think. So about 6 cents per kWh. Not actually not that tiny fraction.

Ofc, this ignores fixed costs, and carbon credits that are huge price add.

The thing is, we are post scarcity for certain goods. If we ignore copyright issues, it costs a few thousand dollars (via Cloudflare R2 and BitTorrent) to distribute a copy of a book to anyone with a smartphone and an Internet connection. If we want to move to a utopian post-scarcity society, we should start good that can be duplicated, basically infinitely, and iterate from there. we'd need to make sure creation of digital goods is still incentivized with some sort of system, but I think that's quite possible if we can manage to revamp copyright. UBI for digital goods!

Or maybe modulating the macro economy as perversely as was done for covid simply created a bunch of chaos that needs to settle before the regular economic growth continues considering we’re nowhere near scientific, engineering or mineral extraction ubiquity

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