Edward Conard

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Wednesday, March 9, 2022

Joe Biden is right about police funding

AI Summary. Data indicate Black Americans are disproportionately affected by police violence, with higher rates of being killed, shot, and unarmed when shot by police than other groups. The author argues public safety is better served by strategically funding police departments—enabling improved training and community engagement—than by defunding them.

Matthew Yglesias Slow Boring
Date Posted:
March 9, 2022
Is Database:
Database

@MatthewYglesias All American, relative to Black people, murdered, shot by police, unarmed and shot by police 2013-2020.

Does funding police better serve public safety than defunding them?

Core argument: Data from 2013 to 2020 indicate that Black Americans were disproportionately affected by police violence, with higher rates of being killed by police, shot by police, and unarmed when shot than other groups.

From 2013 to 2020, data indicates that Black Americans were disproportionately affected by police violence, with higher rates of being murdered, shot, and unarmed when shot by police compared to other groups. This underscores the importance of addressing public safety concerns through strategic police funding rather than defunding. Economic implications suggest that well-funded police departments can implement better training and community engagement programs, potentially reducing incidents of violence and improving public trust. This approach aligns with Biden's stance on enhancing public safety by investing in law enforcement, which could lead to more effective crime prevention and a more stable social environment, ultimately benefiting economic growth and community well-being.

Takeaways by Macro Roundup® AI

  1. Data from 2013 to 2020 indicate that Black Americans were disproportionately affected by police violence, with higher rates of being killed by police, shot by police, and unarmed when shot than other groups.
  2. The argument holds that public safety concerns should be addressed through strategic police funding rather than defunding, with well-funded departments able to implement better training and community engagement programs.
  3. Biden's position of investing in law enforcement is presented as a path to more effective crime prevention, greater public trust, and a more stable social environment supporting economic growth.

Matthew Yglesias, "Joe Biden is right about police funding,"Slow Boring, March 7, 2022, https://www.slowboring.com/p/defund-police-biden

Joe Biden is right about police funding

“Defund the police” was a terrible movement, but some mainstream Democrats have a tendency to blame defunders for their own political problems, so I’d hoped to leave the question alone for a while.

But the line in Joe Biden’s State of the Union Address where he said that we should address public safety concerns by funding the police rather than defunding them prompted enough backlash that I do think it’s worth discussing. I don’t know what the political consequences of the defund movement are given that virtually no elected officials embrace it. But the paucity of defunders among elected officials does understate its intellectual influence.

I personally am not a fan of the Sunrise Movement, but they are often given a lot of credit in mainstream progressive politics and are financed by mainstream progressive donors. Gara LaMarche embraced it when he ran the Democracy Alliance, one of the most important progressive donor networks. Andrew Marantz published a long story in The New Yorker this week crediting Sunrise with moving the ball forward on climate change.

And Sunrise responded to Biden by arguing that police should be abolished.

Joe Biden is right about police funding: Extended Excerpt Image 1


Nick Johnson, who runs state fiscal policy at the Center on Budget and Policy Priorities, didn’t respond to Biden by calling to defund the police, but he did criticize the idea of police funding as an inferior alternative to non-police approaches to public safety.

Joe Biden is right about police funding: Extended Excerpt Image 2


Patrick Gaspard, the president of the Center for American Progress, had a similar reaction.

Ed Comment:Skip this. there is much better data on this than this article. I don’t want to be the person calculating the data. but here’s what can be gleaned from this data (given that I calculated it, put it in the database. 332mm total US population x (13.4% black alone +2.8% two race) = 54mm black (assuming all 2-race are black, which would be the upper bound) Murders per capita: Black: 61k/54mm = 1,130 murders per million; Not black = (155.3k-60.1k)/278mm = 340 murders per million; blacks are 1130/340 = 3.3x approximately more violent than not-blacks Shot by police per murdered: Black 2,498/60,980 = 4%; not black (9,942-2,498)/(155,253-60,980) = 7,444/94,273 = 8%; shot per murdered assumes murders is a surrogate for serious engagement with the police, and that murders is predominately by the same race Unarmed per shot: Black: 413/2498 = 16.5%; not black (1315-413)/(9942-2498) = 902/7,444 = 12.1% 16.5%/12.1% = 1.36 police are about a third more like to be shooting at an unarmed black suspect than an unarmed not-black suspect. 12 to 16% of those shot by police are unarmed seems surprisingly high to me. Given that blacks are approximately 3.3x more likely to be murderers than non-blacks, one would expect the police to respond more aggressively to blacks than whites. Yet shot by the police per approximate engagement with the police (as approximated by murders per capita) is half as much. although, it would appear that police assume black suspects are more likely to be armed—presumably approximately 3.3 times more likely based on the murders per capita. That’s taking the data further than it ought to be taken. Especially if there is better data.

"...Part of the generally higher level of mayhem in the United States is that we have relatively trigger-happy police departments that kill a lot of people. Even so, combining FBI Uniform Crime Reports data with information from Mapping Police Violence shows that good old-fashioned murder is even more common than police officer shootings and a lot more common than cops shooting an unarmed suspect. It’s also worth underscoring that while police violence against civilians disproportionately impacts African Americans, so does murder. Indeed, the racial gap in murder victimization rates is larger than the racial gap in police violence...."

Joe Biden is right about police funding: Comments Image 1


The problem here is not the wrangling over whether or not it’s true that Sunrise tweets hurt moderate Democrats at the polls; the problem is that mainstream institutions like CAP and CBPP are playing footsie with an idea that’s substantively bad, while progressive activist groups like Sunrise adopt hardline anti-policing stances that have nothing to do with their nominal missions.

On a personal note, last July there was a scary gun battle right near my house that got a lot of media attention because it happened in a hotspot dining corridor, and Jim Acosta happened to be there to take a video of it. That same week, Amazon opened its brand new “just walk out” supermarket of the future, literally across the street from the shooting. Earlier in July there had been several shootings nearby, but for the past six months, there’s been a squad car parked right by the Amazon Fresh store. And no more shootings! I can’t say for sure why that particular block has been blessed with 24/7 police presence. Is it because of Jeff Bezos’ clout? Is it because the 14th Street restaurant owners generate a lot of tax revenue for the city, so MPD caters to their needs? Is it because Logan Circle homeowners like me have a lot of juice? I don’t know. But someone got the city to make a substantial investment in getting people to not shoot up that stretch of 14th Street, and I really appreciate it.

The fact that most people living in high-crime neighborhoods do not benefit from that level of responsiveness from their local government is a huge substantive problem.

Murder is a big deal in America

The United States is a very rich country that enjoys a very high standard of living. Indeed, I often think Americans who walk around the Nice-Looking Old Buildings districts of major European capitals end up underrating how wealthy the United States is compared to France or Italy.

But there are a few areas in which America falls short, and the greatly elevated level of violent death is one of the major ones.

Part of the generally higher level of mayhem in the United States is that we have relatively trigger-happy police departments that kill a lot of people. Even so, combining FBI Uniform Crime Reports data with information from Mapping Police Violence shows that good old-fashioned murder is even more common than police officer shootings and a lot more common than cops shooting an unarmed suspect.

Joe Biden is right about police funding: Comments Image 2


It’s also worth underscoring that while police violence against civilians disproportionately impacts African Americans, so does murder. Indeed, the racial gap in murder victimization rates is larger than the racial gap in police violence.

Given American history, it’s not hard to see why “the police should act with more restraint” is coded as a racial justice cause whereas “violent crime is a really big problem” is not. But that is the outcome of a number of contingent historical processes and does not reflect an objective reality whereby crime is a problem facing white people and police misconduct is a problem facing Black people. Among Democrats, white people are less enthusiastic than Black or Latin people about the idea of having more cops in their neighborhood, probably for the very good reason that most white Democrats have less to fear from crime and less to gain from law enforcement.

Misconduct on the part of armed officers of the state has major societal implications beyond the incidents of misconduct themselves, which explains their prominence in our political discourse.

But the absolute numbers matter, too. A policy change that led to a 99.9 percent reduction in the rate at which unarmed people are killed by the police but also generated a 0.75 percent increase in the murder rate would generate a net loss of Black lives (you would, however, save white lives because police violence is less racially disproportionate than murder). Now is there really such a tradeoff in policymaking? I’m not sure. But it illustrates why the big gap in the quantities is such a big deal. To save large numbers of people by reducing police violence requires huge reductions in the rate at which it occurs. By contrast, small changes in the murder rate make a big difference, simply because murder is much more common.

Policing is a well-established deterrent to crime

Sherrilyn Ifill, president of the NAACP Legal Defense Fund, responded to Biden’s state of the union remarks by asking, “Where is the data to support this is ‘the answer’ to current public safety challenges? Do the highest funded depts have the lowest crime rates? Are those depts more effective in solving violent crimes?”

The cross-sectional question “do well-funded departments have more or less crime?” comes with a serious endogeneity problem. Hiring firefighters is a way to control wildfires. But we have more wildfires in states with high levels of spending on firefighters than we do in states with low levels of spending. That’s because wet states on the east coast don’t have wildfires, so we don’t invest in creating firefighting services that could fight them. The more prone your geography is to wildfires, the more money you spend on firefighting.

So scholars need to try to find more sophisticated causal strategies. Steven Mello looked at the inclusion of a program giving federal grants to cities to hire police officers in the 2009 American Recovery and Reinvestment Act and compared trends in cities whose applications were approved to those whose applications were denied. He writes that “police and crime follow similar trends in high and low scoring cities prior to 2009, but trends diverge as high scoring cities receive hiring grant funding.” Each additional officer generates about $350,000 worth of reduced crime victimization so “expanding the police force is easily cost-effective for the average city in my sample.”

Joe Biden is right about police funding: Comments Image 3


One issue with Mello’s study is that since murder is reasonably rare (and was considerably rarer in 2009 than it is today), generating evidence for statistically significant impacts on the murder rate is challenging. He finds statistically significant declines in violent crime in general and a directional decline in murder, but one that doesn’t reach the statistical significance threshold.

Aaron Chalfin and Justin McCrary try to get around that problem by abandoning the natural experiment approach to look at a much bigger dataset of all variations in crime and police spending across cities. Basically, they are asking Ifill’s question but using advanced math to try to address the endogeneity. They can’t guarantee that they’ve eliminated all endogeneity bias with their efforts, but they find $1.67 cents in crime reduction benefits for every $1 invested in policing — in this case largely driven by a reduction in murders.

More recently, Chalfin (this time with Benjamin Hansen, Emily Weisburst, and Morgan Williams Jr.) finds that “each additional police officer abates approximately 0.1 homicides” and improves on prior scholarship by documenting the race-specific effect, which is “twice as large for Black versus white victims.”

This seems persuasive to me — having more police officers around reduces crime. Most people’s intuition that hiring more cops is a good way to improve public safety is correct, as is their intuition that people who are very averse to hiring more cops are probably just not that fired up about crime reduction as a policy goal.

That said, there are certainly other investments that work, too.

There are other things that reduce crime

Summer jobs programs for kids are a well-studied intervention that, as Charles Lehman explains in this Manhattan Institute policy brief, have a very solid track record of reducing crime.

Interestingly, these programs don’t seem to generate long-term benefits for the kids enrolled in terms of superior educational outcomes and long-term earnings. If a kid is enrolled in a summer job program, they are less likely to commit a crime while enrolled, and that’s about it. As Lehman argues, we should probably invest not only in summer job programs but in more research as to whether we can tweak the programs to deliver a wider range of benefits and/or to target them more narrowly where they do the most good. But it’s absolutely promising.

As previously discussed in a column on the opioid epidemic, Medicaid expansion appears to reduce crime, seemingly because it increases the availability of substance abuse disorder treatment.

Annalisa Packham and Jillian Carr find that distributing SNAP benefits more frequently reduces theft at grocery stores, but in a separate paper, they find that it also increases domestic abuse, so I’m not as enthusiastic about that one.

Reducing lead exposure very clearly reduces crime, but it does so with a large lead time. If we invest today in lead abatement, then kids born a year or two from now will commit fewer crimes when they are teenagers.

The main thing that I would note about all of this is that increasing police staffing in cities with average to above-average levels of violence clears an absolute cost-benefit hurdle and does so relatively easily. So if “let’s spend more on the police” is something that can be done on a bipartisan basis or that helps win lots of votes, then there’s simply no reason not to do it. Medicaid expansion, of course, is great. But the blue states have already done it, so there are limited returns.

Meanwhile, when we look at CBPP’s proposal for non-police approaches to public safety, I see a lot of ambiguity. They argue that we don’t necessarily need to be using armed, uniformed police officers to be doing so much traffic enforcement. I absolutely agree (see “Automate as Much Traffic Enforcement as Possible”), but in practice this is a form of increasing police manpower. The idea is that you are taking work off police departments’ plates, which frees up more officers to do policing. The same is true for the idea that we should have more civilian mental health crisis responders. Within a normal-person framework where cops patrolling the streets play an important role in reducing crime, hiring non-cops to do non-cop work is a way of enhancing police manpower. It’s only within the weird worldview of anti-police ideology that “we don’t necessarily need cops to be spending their time writing speeding tickets” becomes “we don’t necessarily need cops.” We need cops to stop rival gangs from shooting at each other and terrifying or maiming bystanders in the process!

But the only real tradeoff I see is around the lead issue, where there is simply a difference between investing in controlling crime now and investments in crime control that pay off over the long term. I am a huge proponent of lead cleanup and always encourage people to think more long-term. But I also challenge progressives to do some self-scrutiny here. The Bipartisan Infrastructure Bill that Biden signed features by far the most significant investment in lead abatement in American history, and progressives mostly downplayed it. In the end, I’m glad they came around and passed the bill. But there’s a difference between fighting enthusiastically for lead abatement (what Joe Biden did) and bringing lead up in a whataboutist way to argue against police funding and then not actually being passionate about lead abatement when a lead abatement bill is on the table.

You should fire bad cops

Someone is reading all this and banging their head against the wall saying, “GODAMMIT YGLESIAS IS TOTALLY IGNORING POLICE MISCONDUCT!!!!!”

But it’s crazy that we managed to get a place in the discourse where the conventional way to demonstrate your concern about police misconduct is to argue for arbitrary budget cuts or to suggest that normal, workaday non-misconduct is somehow unnecessary or abusive. If a bus driver got drunk, crashed the bus, and killed an innocent person, you wouldn’t say, “that goes to show we shouldn’t have buses.” You’d punish the bus driver. And if the Bus Driver Union had rules that made it impossible to hold abusive bus drivers accountable, you’d try to change the rules. You wouldn’t say, “these drivers are reckless and out of control so let’s run the buses less frequently.” If the bus is useful, you run the bus. If the driver is engaged in misconduct, you punish the driver. Derek Chauvin is in prison because he murdered George Floyd, which seems extremely appropriate to me.

In general, though, it is too difficult to discipline or fire cops for misconduct and too easy for bad cops to circulate from department to department. These are absolutely things that should be changed.

But if a manager decides to start being tougher on staff — asking more of them and firing a larger share of the worst performers — and also decides that prior recruiting practices haven’t been rigorous enough, are they somehow also going to promise payroll savings? Of course not. They’d need a larger budget.

My guess, though, is that the deep roots of progressive dysfunction on the topic of policing stem from the fact that there’s solid reason to think that police unions and police collective bargaining meaningfully increase misconduct. Adam Serwer did a great piece titled “Bust The Police Unions,” but unlike “defund the police,” that never became a viral meme on the left. Tackling police union power would, obviously, be difficult coalition politics for progressives since the idea has negative implications for other public sector unions. By contrast, “cut the police budget” is comfortable.

But that’s a sloppy way to think about policy. And while I’m glad that Biden and congressional Democrats haven’t embraced it, it’s a real problem that the institutions that are supposed to do policy analysis for progressives seem so twisted around on this.

Republicans are the party of austerity

Mainstream Democrats should not be approaching this issue from a position of defensiveness or as a question of sloganeering.

It was Bill Clinton and then-Senate Judiciary Committee chair Joe Biden who created the original federal police funding initiative as part of the 1994 crime bill. Republicans opposed that bill, and Donald Trump spent much of the 2020 campaign trolling Biden about it. Obama boosted federal police funding as part of ARRA in the face of near-unanimous Republican Party opposition. Every single Trump administration budget request proposed cutting police funding. All throughout 2020, Democrats and Republicans argued about fiscal support to state and local governments (i.e., police departments) with Republicans in opposition. Then in 2021, Democrats got the chance to deliver big checks to support the hiring of teachers, cops, and front-line public servants, and they did so in the face of unanimous opposition.

Rick Scott and the NRSC recently released an 11 Point Plan for America that calls for eliminating all federal programs that duplicate local government functions — i.e., they once again want to cut the federal police spending.

This all reflects the basic logic of the larger political dispute in the United States. Democrats believe that rich people are undertaxed and that this creates an opportunity to fund more generous public services. Republicans believe that rich people are overtaxed and that in order to reduce their tax burden we should cut back public services. Police departments are a public service that costs money. Republicans are willing to do things like have state legislatures pass symbolic bills telling cities not to cut police funding. But are Republicans willing to send money to low-income cities to help them build larger and more effective police departments? Of course not. Are they willing to have the federal government step up and fill the need? Again, obviously no. They will salute a Blue Lives Matter flag, but it’s a low-tax party first and foremost.

Democrats need to remember that and to say it — they are the party of public services, the party that will fund the police and expand Medicaid so addicts can get treatment and provide subsidized summer jobs for teens and clean up the lead. Democrats will do all the things.

  • Poverty/Crime
  • Workforce

Thursday, March 10, 2022

Venture capital, Silicon Valley, and the future of startups: My long-read QA with Sebastian Mallaby

AI Summary. Venture capital returns follow a power law: most startups fail while a few deliver returns of 10x or 20x that drive the sector's profits, so success depends on identifying rare, transformative companies. This implies that ecosystems built around less ambitious ventures are unlikely to replicate Silicon Valley's results.

James Pethokoukis American Enterprise Institute
Date Posted:
March 10, 2022
Is Database:
Database

@JamesPethokoukis Venture capital success hinges on identifying & nurturing rare, high-impact companies that deliver returns of 10x or 20x, driving the sector’s profits. The venture capital model fosters innovation & economic dynamism.

@JamesPethokoukis Venture capital success hinges on identifying & nurturing rare, high-impact companies that deliver...

Does venture capital success depend on finding rare, transformative startups?

Core argument: Sebastian Mallaby argues that venture returns follow a power law in which most startups fail while a few deliver 10x or 20x returns that drive the sector's profits.

In venture capital, the principle "If it's not 10x different, it's not different" underscores the necessity for startups to offer groundbreaking innovations to overcome consumer resistance and achieve exponential growth. This aligns with the power law distribution in venture investing, where most startups fail, but a few deliver returns of 10x or 20x, driving the sector's profits. The skewed distribution highlights that venture capital success hinges on identifying and nurturing these rare, high-impact companies. Consequently, attempts to create "Silicon Valley light" ecosystems may falter without ambitious, transformative ventures. The venture capital model, by de-risking entrepreneurship and providing strategic guidance, fosters innovation and economic dynamism, emphasizing the importance of bold, scalable ideas in shaping future economic landscapes.

Takeaways by Macro Roundup® AI

  1. Sebastian Mallaby argues that venture returns follow a power law in which most startups fail while a few deliver 10x or 20x returns that drive the sector's profits.
  2. The venture maxim "If it's not 10x different, it's not different" reflects the view that startups must offer groundbreaking innovation to overcome consumer resistance and achieve exponential growth.
  3. Attempts to build "Silicon Valley light" ecosystems may falter without ambitious, transformative ventures, while the venture capital model de-risks entrepreneurship and supplies strategic guidance that fosters innovation and economic dynamism.

James Pethokoukis, "Venture capital, Silicon Valley, and the future of startups: My long-read Q&A with Sebastian Mallaby,"American Enterprise Institute, March 9, 2022, https://www.aei.org/economics/venture-capital-silicon-valley-and-the-future-of-startups-my-long-read-qa-with-sebastian-mallaby/

Venture capital, Silicon Valley, and the future of startups: My long-read Q&A with Sebastian Mallaby

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Now, I generally avoid two questions during these podcasts. I don’t like asking the guests about the title of the book or why they wrote the book. But I’m going to make an exception here because I actually really want to know the answer to those questions. We’re going to start with the name of the book, because I think it’s important for how we think about the subject of the book. “The Power Law”: Where does that come from?

Mallaby: The best way to explain the power law is to start with what it is not. It’s not a normal distribution. That’s one where you have a bell curve distribution. Most of the observations in a data set are near the average. The power law distribution refers to a skewed distribution, and so just to illustrate this, let’s just take the height of American men. The average man is five feet, 10 inches tall. Nearly all American men are within three inches of that average. And so if you think about a movie theater and there’s an NBA player right at the back, and he gets bored of the movie and walks out. Although he was seven feet tall, the average height of the residual men doesn’t really change. He’s not so way off the average that it really changes things. Now flip the example and think about the average wealth of American men.

Imagine that movie theater again. This time you’ve got Jeff Bezos at the back, he walks out. The average wealth of the residual men will crash. That’s because the distribution is way more skewed when it comes to wealth, and a power law distribution like that is what you get with venture capital investing. Most startups go to zero because most startups fail. But a handful, maybe one or two out of 10, will deliver exponential growth and returns of 10x or 20x your money. So all of the profits in venture investing come from that tail of sort of exceptional companies.

Most of the books that I see these days about capitalism broadly seem to be about an explanation of why it’s failing — why the key institutions have failed, why we’re in a stage of so-called late capitalism — and maybe there’s some speculation on what the post-capitalist world is going to look like. That is not the book you chose to write. Why did you write this book about something which is a pretty important institution of modern capitalism, but one we maybe don’t know that much about?

Well, a couple of things, actually. First of all, there’s just an intellectual mystery I was fascinated by, which is all investing involves tricky bets on an uncertain future, but in venture capital investing, you are dealing with these startups and there are no data. There are no profits. You can’t work out the price-earnings ratio. There aren’t any earnings. You can’t do the price to book value, because there’s no book value. None of the normal stuff applies. So how do you even start to allocate capital? And I try to unravel that mystery by telling lots of case study stories about how the good venture capitalists do it. But the second thing kind of gets to your question, Jim, which is that I wanted to explain the impact of venture capital on society and on economies. I believe it’s fundamentally positive.

I think this notion that we’re in late capitalism or capitalism is failing misses the fact that actually corporate forms and financial arrangements always evolve. I think there’s sort of an optical illusion created by the fact that Adam Smith came up with the idea of the invisible hand in the late 18th century and market price signals have not changed. So we think of capitalism as almost a static thing, but that’s wrong. The business side of capitalism, the shape of corporations, has changed a lot over the years. Most of those changes are driven by a combination of technological shifts and then on top of that financial shifts. So when you suddenly had an argument for having scale in corporations, because steam and electricity rail had been invented, then you have the invention of the joint-stock limited liability company in the late 19th century.

And that’s why you get big companies. Then equally with the arrival of the personal computer in the 1970s and early 1980s, there’s suddenly a case for de-layering the company, un-bundling, re-engineering. And those things are made possible by a combination of junk bonds and the leverage buyout. I think now we’re in a phase where capitalism is not late stage, but just the new phase of it is that we have lots of intangible capital and to value intangible capital, things like software and brands and patents and business processes and customer relationships. All of those things are valued only by investors if the investors are pretty close to the company, because you can’t see those things by reading the financial disclosure. So you need to be a hands-on investor and that’s where venture capital and private equity come into play. I think that’s just the new optimal type of finance for a new phase of corporate structure because of this rise of intangible goods.

When people think about venture capital, they think about them funding these disruptive companies that will disrupt a particular field in the technology sector, but you’re saying they also disrupt the basic capitalist structure of a country. They’re disrupting what the corporate form looks like and it is not a static thing and that is ongoing today.

Yeah, and then I’d also say something in addition to that, which is that Ronald Coase got the Nobel prize partly for this distinction between price signals on the one hand, that coordinate human economic activity through the arm’s length transactions that generate price signals and tell people what the market wants more of, what the market wants less of. That’s one kind of organization. Then the other kind that Coase pointed to in his Nobel work was the corporation, a way of internalizing that organizational structure. You have top-down management and so forth. I think that venture capital is really interesting because it’s like a middle ground between the two.

On the one hand, a venture capitalist is like a strategic sort of planning department inside a big corporation because the venture capitalist is deciding which experiments get funded, which kinds of research get assets and get talented people, and is shifting money and people and ideas around. That’s a bit like a sort of corporate organization function, but then also there’s a price signal because venture capitalists tend to fund things for six or nine months. And then if the startup doesn’t reach its next milestone, there’ll be a price discovery thing where nobody wants to pay the price for the next tranche of the startup and then it’ll just be closed down. So I think it combines price signals and corporate strategy. And that’s another sense in which venture capital is super interesting as a new kind of capitalist form.

If someone asked me to name the ultimate American capitalist, I think I’d say Warren Buffet. And when I think about Warren Buffet, I think about somebody pouring through lots of annual reports. And then the other day I was following a venture capitalist on Twitter who said, “I’ve never looked at a balance sheet. I’m not sure I could read an income statement.” If that’s not where the skill lies in a venture capitalist, like the Warren Buffet set of skills, then how do they do what they do? Would Warren Buffet make a good venture capitalist?

Well, Jim, that’s a fantastic question. Because, first of all, it illustrates exactly this distinction I’m kind of getting at, where Warren Buffet can sit in Omaha, Nebraska with his financial statements and be very far away from where these companies are that he’s investing in because he can find out what he wants to know by looking at those financial disclosures and by analyzing them. And that’s great if you are a traditional value investor, but if you are doing the opposite kind of investing, in other words, growth and extremely high-charge growth in the form of these early-stage tech startups, it’s the opposite.

You’ve got to be hands on. And this is to get to your question. The way you value the software of a new software startup is that you are on the board of that startup. You yourself as the investor understands computer science. You can evaluate the code. On the disclosure, it might say “We have this project software, we’ve spent 10 million on it,” but it could be worth zero if the code is rubbish, or it could be worth a billion if it’s fantastic. Only the hands-on, venture capital-style investor who understands code and has actually got his hands into the company can tell the difference.

In the book you described the creed, if that’s the right word, of Silicon Valley as, “The belief that most social problems can be ameliorated by technological solutions. If only investors can be goaded to be sufficiently ambitious.” Has that creed held back any success in Silicon Valley? Is that still a valid creed that is useful?

There is a critique of this creed, which is that venture capitalists come along and they are too ambitious and they drive entrepreneurs to take too much risk. Then because the entrepreneur is being pushed to expand their company too fast, it blows up. They make mistakes that they would not have made if they had gone slower. Furthermore, this is not just bad for the entrepreneur, so the critique goes, it’s actually also bad for the economy at large, because what you are getting... Let’s say a disrupter like Uber comes along, is getting tons of venture capital dollars to go and disrupt the existing taxi market. So the incumbent taxi guys have to compete against ride-hailing companies that have subsidized capital. Basically, every time you got an Uber in the first 10 years of that company, you were paying for two-thirds of the fare. And the other one third of the cost was being met by some venture capitalist who was just eating the loss. And that’s not a level playing field, so goes the argument.

I actually pushed back against those critiques because it seems to me that incumbent companies have tons of other advantages. They often have the regulators in their pocket. They have existing brand. They have existing customer relationships. The incumbents always have the upper hand. And in some sense, if the challengers are getting subsidized venture capital dollars, that levels the playing field, it doesn’t distort it. So, I’m not persuaded that it’s a bad thing to push for scale. Of course, some entrepreneurs don’t want to do that kind of bit-scaling growth. That’s perfectly within their rights. They can refuse venture capital dollars. And I quote one venture capitalist in my book saying, “I sell rocket fuel. Some people don’t want to build a rocket, that’s up to them. They shouldn’t take VC dollars and that’s fine. But for the really ambitious companies, it’s the best way to go.”

You mentioned the rocket fuel, which has been very important to the success of the American tech sector in Silicon Valley. It’s not just the funding that’s important to the success. They do a lot of other things other than just supply capital, right?

Yeah. They get involved in the company. They advise it on how to scale up. Typically, a startup founder might have a fantastic product idea, but often even if it’s a good idea, it’s going to have to be adjusted and adapted before it really fits the market. But on top of that, once you get the product market fit you’ve got to then scale up your sales operation, and many founders haven’t done that before. Whereas venture capitalists have seen countless other examples of startups that have gone through the growth process and they know how to help that to happen. So, they act as mentors and coaches. They often get involved in making the first four or five hires.

They would source people from their own network of useful engineers or sales executives who could be brought into the startup. They would help to interview those people. And importantly, the brand of the venture capitalist is reassuring to those early-stage hires because it’s risky to join a startup. Startups fail all the time. I’m always struck by the story that Eric Schmidt told me about why he agreed to be the chief executive of Google. It was a risky move for him. He’d been the chief executive of Intuit, another company, before. And he was joining this startup called Google where the two founders were these punks. Larry and Sergey, PhD students who were incredibly arrogant and had very low regard for anybody over the age of 30.

In fact, Larry and Sergey had admitted that the only CEO they would accept would be Steve Jobs and he was not available. So for Eric Schmidt to take that job was risky, and the only reason he agreed to do is that the venture capitalist involved, John Doerr said, “Look, Eric. Yeah, it’s true. It’s risky. They might fire you. But if they do, I’ve got your back and I’ll slot you in as a CEO to some other company because my venture capital partnership, Kleiner Perkins, is funding new startups all the time.” So the venture capitalists de-risk the choice of joining a startup both for the entrepreneur who starts the company because capital is provided, so you take the risk with somebody else’s capital, and for the early hires. I call venture capital a machine for manufacturing courage.

Well, I think what that story also highlights is how it creates the connective tissue between the company and potential executives. Everywhere, they help create those linkages that make it all work. Every city in America, every state would love to have their own Silicon Valley, and even having lot of the ingredients doesn’t quite work unless you can all connect them together in the right recipe. And venture capital is pretty important for making sure that happens.

Yeah, and you could see this as actually quite a sort of leveling the mechanism because it’s a cliche to say of somebody who does well in life. “Oh, well this person did well because they had money and connections.” Venture capital is the machine for delivering money and connections. The job of the venture capitalist is to find somebody who’s really smart. Who’s got a good idea for a new product and bring those money and connections to that person. So venture capital is often accused of perpetuating inequality and one can debate that, but in some sense it’s a super democratic, super leveling, super egalitarian thing.

Is there a potential real competitor for the Bay Area? Especially since there are governance problems in San Francisco. We have remote work. We’ve heard a lot about Miami becoming the new Silicon Valley. Do you see a legitimate competitor to the Bay Area?

Yes, I do. I think what’s happened in the last 10 years is that the formula for creating Silicon Valley, which in my view is really about the venture capitalist coming along and de-risking entrepreneurship, has been understood. And the process of spreading it out to other regions has been tried and it’s worked. The biggest example is China where Silicon Valley venture capitalists went around 15, 20 years ago and they successfully built up an amazing digital economy in China. It’s not about the government’s long-term planning. Don’t believe that story. It’s about the fact that Baidu, Alibaba, Tencent, Ctrip — all of these early Chinese digital companies received American venture-style investments and were structured by American Silicon Valley lawyers with dispute settlement under New York law, a Cayman Islands parent, and the ability to issue Silicon Valley-style stock options to the early employees.

It was just basically taking the Silicon Valley formula and taking it to China. Now it’s now happening all over the place. Silicon Valley is taking its model to India. Since my book has come out, I’ve been flooded with emails from venture capitalists in India. It’s coming to Europe. It’s coming to Latin America, and it’s spreading within the United States. I absolutely do think that Austin, Miami, New York, Boston, maybe Chicago can do this. And what you need is, you need to have some flow of technical people coming out of preferably a good local university. Texas has a bunch of those: Rice as well as Texas A&M. I think there’s enough of a flow of people there. I don’t see why it shouldn’t be true of Pittsburgh with Carnegie Mellon. And I think once you’ve got that flow of technical people, if the venture capitalists move to them and set up shop locally, you can build an ecosystem that’ll flourish.

You can have a successful ecosystem without it being Silicon Valley. Just because you cannot duplicate something as wildly successful, does not mean you have not created a successful tech ecosystem. But what about more of the left-behind areas in the United States? There have been efforts to create more innovation hubs there. Can’t we have successful clusters in the middle of Ohio or pick whatever state you want?

I think this is where there is some bad news, because although what you were saying earlier, that you don’t have to be as successful as Silicon Valley to be successful, is sort of true, there’s an important saying in venture capital, “If it’s not 10x different, it’s not different.” If you are trying to persuade people to switch from some product they understand, or some service they’re familiar with, to use a completely different product, which is going to annoy them initially because they don’t know how to work it and it’s going to be expensive, they’re going to buy it and maybe it’ll just be a waste of their money because it doesn’t really work — to get over those hurdles, you’ve got to deliver something that’s really quite seriously new. Then if you succeeded in delivering that thing, it’s very difficult to do it, but if you succeed, you’re normally going to get exponential growth. And it comes back to what we began with, the power law idea.

Stuff either really works big time and goes 10x, 20x your investment or it fails. This is a skewed distribution. And so it’s difficult to say, “I’m trying to do Silicon Valley light. I’m going to do some startups, but I’m not going to be too ambitious about it.” It’s kind of an all-or-nothing game. You’ve got to really shoot for the big ambitious outcomes if you’re going to break through and do that 10x different and achieve success. I think the bad news is that the more humble vision for a cluster is probably not going to work, but what can work is that in surprising places, you do get ambitious people who break out. And so a great example is a company called UiPath, which is the global leader in robotic process automation software, which is a big category.

And it was begun in Romania. The guy who began it actually taught himself to code without a computer because there weren’t enough in Romania at the time. He couldn’t get one, so he used some secondhand computer manual, which he borrowed from the library or something, and taught himself how to code before he had a computer. It can happen in the most crazy places. There is Drive Capital, which is a Sequoia spin-out in Ohio. But I think the point is, it’s not looking for sort of reasonably good startups, even if it’s in Ohio. It’s looking for the breakouts.

Given what you’ve said though, and given the title of the book, we should not expect to have lots of successful tech hubs evenly distributed across the United States. We should expect there to be a few of them, maybe more than we have now. And they may arise, even though there are other things government can do, for sort of happenstance reasons.

Yeah, I think the power law idea is useful to understanding this issue. The power law operates on multiple levels, which is why it’s such a cool concept and it’s kind of the secret sauce of the whole sector. All startups, whether they have anything to do with tech or not, just the fact is that many startups fail and then a few do well. It operates on the level of technologies. So, when a technology really works, it tends to grow at this exponential rate. Think about Moore’s law for the way that semiconductors grow in power, doubling in power every couple of years.

Then it’s true also of things like the internet networks where you get these network effects, where the value of the network rises as the square of the number of users. And Metcalfe’s law, which is that network law on top of Moore’s law. So you can have both. If you think about an internet router, it’s got Moore’s law going on because it’s using semiconductors inside the router. It’s reaping the benefit of the router becoming more powerful because the semiconductors are more powerful. On top of that is getting the benefit of Metcalfe’s law because the internet is multiplying the value or squaring the value, as more users join. It’s got that startup effect anyway of a power law effect.

Then on top of that, you get investors who invest in companies building routers. And those investors are going to experience power law effects in their portfolio. Because of that, some venture capitalists are going to reap most of the gains in the entire venture capital area. So, there’s a power law effect if you distinguish the outlier of venture capital firms from the rest of them. And there is this final effect, which you’ve just alluded to, which is that there will be some clusters that dominate. It doesn’t mean there has to be one cluster in America. China has some activity in Beijing, some activity in Shanghai, some activity in Hong Kong, and some in Hangzhou and Xinjiang. So I think it can be distributed, but it’s not going to evenly distributed.

What role do you want government to play here? Do you want subsidies? Do you want tax breaks? Is it just very basic kinds of public good stuff? Investment, lots of R&D research to create that feedstock of ideas? What is the role of government?

I think the best illustration of how to set up this answer is the internet. The people who really believe in industrial policies say the government created the internet. They say DARPA created the internet. This is both true and sort of misleading. True in the sense that, yes, DARPA funded the early internet and built it to a point where there were 50,000 users or something. Who created the internet we know today, which is part of everybody’s life and has basically changed the way we live? Venture capital did. Venture capital discovered a sort of hobbyistic little company called UUNET, which was building routers that connected engineers who wanted to hack into the government internet. Venture capital got behind that and scaled it to the point where it just basically connected up America. That’s the story.

And then venture capital, by the way, created Netscape, which was the thing that allowed the internet to be useful to people who didn’t want to type in complicated digits every time they wanted to access a website. I think the answer to your question about the role of government is that early-stage basic science is the role of government. I’m extremely in favor of more for the National Science Foundation. I think it’s great to have more funding for scientific education in K-12. For post-docs, for people who are doing engineering and physics and math: I think we fund life sciences very well with NIH, but we don’t fund the NSF enough. But I’m not in favor of the government trying to pick winners when you get to commercializing this stuff. So I would focus on the early stage.

Sebastian, thanks for coming on the podcast.

Jim, it’s been a pleasure. Thank you.

Ed Comment, “If it’s not 10x different, it’s not different.”Reminds me of the quote from the other day from Mark Andressen that should also be in the db: 90% of everything is shit.

"... there’s an important saying in venture capital, “If it’s not 10x different, it’s not different.” If you are trying to persuade people to switch from some product they understand, or some service they’re familiar with, to use a completely different product, which is going to annoy them initially because they don’t know how to work it and it’s going to be expensive, they’re going to buy it and maybe it’ll just be a waste of their money because it doesn’t really work — to get over those hurdles, you’ve got to deliver something that’s really quite seriously new. Then if you succeeded in delivering that thing, it’s very difficult to do it, but if you succeed, you’re normally going to get exponential growth. And it comes back to what we began with, the power law idea. Stuff either really works big time and goes 10x, 20x your investment or it fails. This is a skewed distribution..."

  • Startups
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    • Incentives/Risk-Taking
    • Innovation/Research
    • Investment


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