Accelerated payoffs incur a debt against the future
“Serendipity is not always about a single incident at a particular point in time, but requires tenacity, resilience, and the ability to see the bigger picture.”
Dr Christian Busch
If you believe that AI is the next great leap in the story of humanity, you may also recognise that progress is constrained by the capacity of a surprisingly narrow set of technologies:
- Grain-oriented electrical steel (GOES) for transformers
- Extreme ultraviolet lithography (EUVL) for chips
- Single-crystal (SX) superalloys for turbine blades and vanes
- Super heavy-lift launch vehicle (SHLLV) stack
Chip production is limited by lithography. Power is limited by transformers and gas turbines. Moving compute into space, for abundant solar energy, is limited by launch capacity.
Within those four categories are about 13 companies who are responsible for all Western capability. Beneath those 13 companies are roughly 40 major suppliers of critical materials, services or components. It’s a remarkably small pool of esoteric knowledge.
These companies are miles out on the frontier. Their technical moats have endured for decades, only growing deeper as the world has been distracted by financialisation and the internet’s many dopamine vending machines.
Indeed, EUVL was pioneered in the 1980s, by ASML. SX super alloys were pioneered by Pratt & Whitney, and SHLLV by NASA’s Saturn V, in the 1960s. Armco Steel produced the first GOES in the 1930s. It’s all old technology, by today’s standards.
None of these technologies were invented with the notion that they’d play a role in scaling artificial intelligence — and yet here we are.
It’s the serendipity of innovation; magical works from the past, converging on the future.
The Myopia of Greed
“By comparison, ours is an age of stagnation — of slowing median wage growth, rising inequality, and decelerated scientific discovery”
Boom: Bubbles and the End of Stagnation, by Byrne Hobart and Tobias Huber (2024)
Contrast with the pervasive attitude of today, where technology has become an impatient race for domination. Get to scale as quickly as possible, whatever sacrifices are required; all digital, asset light, negative margins, simple narratives…
The notion of becoming “legible to capital“, which could be better framed as becoming “obvious to idiots”.
As soon as companies have revenue, they are weighed and measured with financial ratios. The fattest are hooked-up to power law inflows (investors no longer have the patience to wait for natural power law outcomes) to accelerate growth.
Rather than the endgame of an exit (which now takes far too long), the “winners” are declared early — determined by their ability to consume allocation like a prize bull in a feedlot, not by any intrinsic quality or productive value.
This impatient strategy produces overcapitalised mutants, designed impress on the superficial metrics of private markets, while investors blame everyone else for the weak trickle of liquidity emerging from the other end.
“If only we had an IPO window!”, shout investors who don’t understand the implicit admission: IPO windows are opened by great companies, and exploited by a fast-following of opportunistic garbage.
(If everyone relies on someone else to open the window, it will remain shut.)
“If only Lina Khan wasn’t blocking M&A!”, shout investors who don’t have a single portfolio company worth acquiring, carefully ignoring the number acquisitions by the Mag-7 and any real data about the M&A market.
(If venture-backed companies stop having technical moats and IP value, they will just be raided for talent.)
Look at VC fundraising decks from the last 3–4 years. Note how many blame poor liquidity on the factors above, versus how many take responsibility for being lost in a collective delusion that scorched private markets.
GPs don’t want to admit they were lost in the sauce, because it would create pressing questions about their judgement. LP allocators don’t a reckoning either, because their judgement is also at stake. Instead, they cling to relationships that will keep producing the same outcomes.
Like an addict, the venture industry pretends that bloated funds and rampant enmeshment aren’t an obvious sickness. Just keep the good times rolling, deal with the consequences later.
“Three issues are particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small number of venture capital investors who hold, and shape the direction of, a substantial fraction of capital that is deployed into financing radical technological change; and 3) the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms.”
Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn (2020)
Indebted to the Future
In this rot of short-termism, the serendipity of invention has been pushed aside by the immediate payoffs of performative success.
We sacrifice what may be important tomorrow for what seems important today — an obvious category error for venture capital.
Behind the resulting facade of hypergrowth, there is a picture of increasingly poor health.
- Mag-7 companies became dominant because of the immense scalability of technology companies. They remain dominant because nothing better has come along in the last 20–50 years.
- Indeed, the bar to go public today isn’t higher, it’s that venture-backed candidates are lower quality. They grow more slowly, are less profitable, and fail more often than before.
- Ultimately, the same is true in private markets. Fewer companies are absorbing more of the capital because attractive opportunities are scarce and investors are increasingly insecure.
If venture capital has become systematically unable to produce companies that deliver on the promise of technolical innovation, from compounding growth to competitive moats, we will all end up paying the price.
- LPs will pay first, in a decade or so, when liquidity remains poor, also limiting reinvestment in the strategy.
- Public markets pay next, as they are denied the growth that future Mag-7-style companies would have provided.
- Finally, humanity pays the price, as financial markets and technology continue to stagnate.
In truth, it seems that there is very little the future will thank this industry for, and no telling what problems we create for ourselves with the cost of today’s complacency.1
“Civilization is not inherited; it has to be learned and earned by each generation anew; if the transmission should be interrupted for one century, civilization would die, and we should be savages again.”
The Lessons of History, by Will Durant and Ariel Durant (1968)
(top image: “The Alchemist Discovering Phosphorus”, by Joseph Wright)
- That biotech remains the last bastion of real innovation probably reflects nothing more than our persistent fear of death; no amount of stimulation or distraction can defeat the lizard brain. If only it was so obvious how existential innovation elsewhere might be. [↩]
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