Billionaires, With Flowers in Their Hair

Jul 2012

(Based on a talk at an Angel Network Event)

 

“Money can’t buy happiness but it does bring a more pleasant form of misery. It’s all in the mind you know. A sure cure for seasickness is to sit under a tree.”

– Spike Milligan

 

“Do not be hasty Hobbit! It is not worth doing unless it is worth taking a long time to do. We never say anything unless it is worth taking a long time to say and to listen too.”

– Treebeard, Lord of the Rings: The Two Towers

 

I’m going to try and illustrate a point. I don’t know if it’s right, it probably isn’t. I’m going to try and examine why that is. This essay is a thought experiment. I’ll try my best to ignore luck and speak in absolutes.

I’ve noticed something strange happening. Like an acceleration of wealth creation. It’s almost happening too fast.

I think it has something to do with the notion of a “billion dollar company.” Before technology there were no billion dollar companies, that might be because inflation has caught up but I don’t know. So the question becomes, how do you create a billion dollar company? The obvious answer is to provide a billion dollars worth of value. But what does that mean?

I think bootstrapping is out of the question. I’ve never heard of a bootstrapped billion dollar company but I’d love to know if there was one, maybe at the beginning. So a company needs investors and a big valuation to be worth that much. When I first learnt about company valuations I figured if someone gave me a million dollars for 0.1% stock in a company, I’ve just created a billion dollar company. If only..

 

Let’s take a billion dollars. Ask any sample size of prototypical tech entrepreneurs and greater than zero will say they’re trying to build a billion dollar company. A few decades ago that wasn’t a thing that could be done. First, I don’t think billion dollar companies start with the pretext of trying to be billion dollar companies, it almost happens by accident — like a lucky freak of nature type accident.

A bit like the 4-minute mile. It wasn’t possible until Roger Bannister did it in 1954, proving it could be done but more importantly proving a system where it became known how it was done then everyone was doing it. It took Google 6 years to become worth a billion dollars. It took Facebook 4 years. It took Instagram 2 years. Pinterest less than 2.

Following that logic will a billion dollar company ever be created in a year? Or even a week? Or a day? Why not? Will we get to a point where billion dollar companies sprout up every few minutes? Seems almost comical, eat breakfast, start a billion dollar company, go for a run, start another one.

That seems kind of ridiculous but is it really?

 

Most of these are internet companies. It’s common knowledge that majority of the world is still not connected to the internet and since the advent of mobile devices the number of screens in the developed world effectively tripled. So basically their valuations are indicative of only a fraction of what is possible as more and more people become connected. Since majority of these companies are valued by how many users they have, most of their potential users aren’t even on the internet yet. That seems a scary thought – Facebooks valuation is only a fraction of what it is supposed to be.

So maybe we need to stop measuring companies by how many users they have and go back to the old fashioned dollars and sense method. Income in, expenditure out. But I don’t know. Maybe this is just the stepping stones to a new form of commerce altogether.

They all follow an asymptotic curve but I’m not sure what the X and Y values are yet. I think it’s probably a billion dollars as the limiting point and time so the implicit measurement is the growth rate. Which is the heuristic in question. Typically a hyper fast growth rate does not equal a valuable sustainable company.

Conventional wisdom has always been to work hard your entire life and then you retire a millionaire or owner of your own home. But conventional wisdom didn’t see asymmetric acceleration happening. Didn’t see Moore’s Law coming.

Why not? Perhaps it’s a type of survivor bias, greed or impatient founders. I think the goal of any company should be to try and create impactful, valuable companies. So perhaps they were on to something – the slow billion dollar company is something good for humanity.

But this didn’t always used to be the case. If you rewound 50 years you’ll see a snapshot of a culture that was very suspicious of greed and the pursuit of money. Iconic singers like Bob Dylan sang about how destructive it could be. Disney movies would portray the overworked parent as the villain. The moral was basically money is bad, relationships are good. Somewhere along the line this idea got lost. I think it happened about the same time as things started to accelerate. Maybe what they were talking about was this but they saw it before everyone else?

It happens frequently that the artists and cultural icons dream the future before it happens. Maybe this is what they were talking about. Trying to prepare people for asymmetric acceleration. It is said that light travels faster when you are sitting from where the light is emanating from.

 

But these aren’t the first billion dollar companies to be created in a short amount of time. I think it would be interesting to see when the trend started, when like the 4-minute mile, it first became “possible.” The first one I can think of is Tandem Computers from 1977.

One thing starts to become clear. The fundamentals of commerce have little to do with being a billionaire and wealth creation. Because wealth creation is precisely that, it’s a delayed outcome. It’s only what happens at the end of the arc.

When a company is given a valuation, it is a delayed valuation of future potential. The implicit part of a company’s valuation is in its lifetime value. That’s the multiplying factor. But technology changes so rapidly that a billion dollar company may be formed and become irrelevant within a few years.

So how can this happen?

 

Maybe it has something to do with a flaw in the valuation process. That seems a likely place to begin. So to isolate the bug in the system we go back to 1533 when the notion of a corporation was created.

The laws were written with the assumption that for a company to operate, they needed to have a real world presence. With immutable costs such as land. Their purpose was to legitimise something carried on for centuries with a governing regulatory body. That something was commerce. You buy something then you sell it for more. But somewhere in the technology world that notion got lost and Metcalfe’s Law became a business model.

Technology has reduced the immutable costs for web companies to effectively zero. Why then does anyone start “real world” companies? Maybe they just haven’t caught on.

 

But in this new form of commerce what happens to John who has no programming experience? He probably has skills but what is he going to do? Does he get left behind? It seems like the whole world is becoming computers or the more glamourised software is eating the world. I’m not sure if that’s necessarily a good thing. It’s good because it frees up time but that time needs to be filled, but that’s starting to seem like the Luddite fallacy or Schumpeters Gale.

I can imagine a dystopian future where everything that could possibly be automated is, everything is personalised and the population becomes hyper specialised and diversifies into pushing boundaries in their chosen fields. Interconnected but detached. Almost like being on an island that is connected to every other island. Like a writer who sits and writes while everything not related to writing is done for them.

 

Perhaps the bug isn’t in the corporation itself rather the process by which a corporation is valued. I guess implicitly that’s the same thing. By the same token you could assert that web companies do not exist. They exist only in abstraction.

I don’t believe the writers of company laws could fathom that a few thousand lines of code and an idea could be a functioning corporation. I can imagine someone in the 1600s being utterly baffled by that concept.

So are we valuing internet companies with a formula designed to value “real world” companies? That seems a likely scenario because there seems to be almost *too* much value created in too short a time.

Instagram, when it sold to Facebook generated more wealth in 2 years than the entirety of Fiji, a country pre-dating most western civilisations, without having earned a dollar in revenue.

Something feels broken about that.

 

Then how do you bridge the divide. Should a new formula for company valuation be devised? What would it even look like. It reminds me somewhat of Newton trying to formulate equations to decipher gravity. Nobody at the time would have understood its significance. But tie that law to the way a lot of money is created and people will start getting angry.

I think something similar happened in the world of copyright. The laws for copyright were written for a time before exponential computing was imaginable. Before an idea could be stolen instantly, many times over at a macro level. A song can be downloaded a million times around the world in the time it takes to brush my teeth.

Limewire when prosecuted, was sued for over 75 trillion dollars. For context, it is more money than has ever existed cumulatively since the history of everything. They can’t possible pay it back. It’s indicative as to how outdated copyright law has become, than how influential Limewire was. Why then are those same laws used?

Let’s assume a function where the punishments for breaking a law reside on a curve on a cartesian plane. If the punishment is more than the total amount that has ever existed it means something is definitely broken. That’s an extreme example but if that point resides on a curve then that whole curve must be wrong. Interpolating, it means every point on that curve is wrong. Which means everyone who has ever been prosecuted by that law has probably been hit with a punishment far greater than their crime.

That seems to make sense, it’s how Sony ends up suing 12 year olds. Isn’t that a scary thought? Everyone who has ever been in violation of this definition of copyright law has been hit with a punishment disproportional to their crime. For how long? How many people might that be? My guess is probably a lot but nobody realised how broken it was until a limiting case came along and proved the function invalid.

So we’ve proven the law is definitely wrong. My next question would then be, well how wrong is the law? Is it really wrong or just a little bit wrong? Is it wrong in the sense of a scrappy code base where it is good enough and still works sub-optimally or is it wrong in the sense of an equation that either works or it doesn’t.

 

If it’s the second case how might it be fixed? I think a good way of describing it is: Laws sometimes work sometimes. That might not make much sense but I think it’s important to remember laws aren’t really real. They’re like a makeshift form of rules. If you put a group of smart people on an island they would probably start creating rules as to how everyone should get along. Fast forward a few thousand years and the laws would probably get quite complex.

I’m not sure what the answer is there but I think it lies somewhere in it being an inherent tipping point: it’s right as long as everyone else thinks its right.

 

I have a friend who created a website which received 1.2 million hits and half a million users within 3 weeks of going live – within a month the site was shut down and he spent 3 months in jail for destroying millions of euros worth of value to the European music industry. But a homeless person who steals a $4 chocolate bar may be incarcerated for upto a year. It’s a funny world we live in.

Similarly, a 21 year old, Gareth Crosskey “hacked” into the Facebook account of Selena Gomez and was sentenced to a year in jail. I’ve had my Facebook account hacked. People hack facebook accounts in playgrounds and schools everyday, but it’s somehow more severe when it happens to a popstar.

Or a firm called Intellectual Ventures who’s entire business model involves filing patents then suing companies for infringing on them. They provide no social value but have built a billion dollar company of the back of a legal loophole. This has indirectly destroyed billions of dollars of value to nearly every industry. They say Global Warming has been solved but the patent is filed by Intellectual Ventures so no one can do anything about it.

So it’s probably not just copyright law and company law. Lots of laws are outdated and can’t keep up with technology.

A perfunctory glance shows something is very wrong. It’s obvious laws aren’t made or carried out equally. I’m not saying that as a means of justification rather an observation. The outcomes seem disproportional.

 

Why then are outdated laws being used to value modern companies? Probably because laws don’t change fast enough, there is too much politics and bureaucracy, not to mention lobbying. How do you write a law for a technology that could be irrelevant by the time the law passes?

One way might be to have a living document with constant incremental changes. Some would argue that’s what the law currently is but the legal system isn’t transparent enough for that. Too many companies have made too much money and built businesses around certain interpretations of laws. For the laws to change would be problematic to say the least.

I don’t think record companies deep down want an up to date law. It’s like a walled fortress they can hide behind. But what worked in the 90s or earlier probably isn’t going to work anymore, computers are too fast.

 

I’d love to see a law that was actually an algorithm. Most service industries are starting to become automated so it’s not unreasonable to think one day all legal systems would be automated, with possibly a human appeals process. That would remove much of the ambiguity of current laws which seems to be the natural endpoint, at least it would be impervious to lobbying.

It wouldn’t even be that difficult to implement, if it worked on a local basis. It might run simply of every interpretation of the law ever set by every precedence. That would be pretty interesting. But then who would write it?

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