7 Heresies; Concentric Investor Day 2020
Every year we at Concentric update our investors on the progress of our portfolio. As part of our talk, we try to impress upon them the way we see the world and how that impacts our investment strategy. For the first time, we are publicly posting a segment from the day, titled ‘7 Heresies’, outlining a number of thoughts that may be contentious but which are instrumental in shaping our thinking and approach. Intended to stir debate and arouse passions, it certainly did so on the day!
Heresy 1: Preference falsification pervades society
The technical definition for preference falsification would read; the act of misrepresenting what you want or feel under social pressure. In other words, it means lying to appease your audience. A notorious pop culture example would be the polls showing Clinton leading Trump in the last presidential election and, who knows, maybe even those showing Biden leading this time around. This phenomenon reveals preference falsification in action.
This is just one example of a wider issue; that people lie with increasing frequency — especially on hot button issues like immigration or, in the US, something like abortion. What people say and what they express in private are frequently different if not diametrically opposite.
The question then becomes; why do people refuse to tell the truth in public?
Heresy 2: The cost of telling the truth has never been higher
We’re living through an age of delusions, of collective fantasies that bear little resemblance to the truth. We seem to no longer engage in facts, just convenient narratives. Some examples from recent times would include:
- That race is simultaneously irrelevant, yet also the most important thing about you
- That defunding the police will reduce crime rates
- That those from certain ethnic backgrounds are actively discriminated against throughout society, for example in education. A point in particular disproved by data showing that the group which has the lowest chance of going to university in the UK is poor, white boys (see below graph from the FT).
Convenient, or socially acceptable narratives like those mentioned are why people lie on hot button issues and why the polls are so consistently wrong. Because stepping out on the wrong side of the cultural divide leaves you liable to cancellation. Indeed such a thing happened recently to JK Rowling for her comments about trans-women. It would seem ‘the tyranny of the woke’ extends to all.
But what is this ‘woke’ phenomenon? Formally it means to have a perceived awareness of social justice issues and is akin to being a ‘progressive’. Those who stand in contention to it would describe it as a form of cultural marxism, where unpleasant truths are expunged from the record. In reality I think it manifests itself as having an unhealthy and frankly dehumanising focus on racial and identity issues, as individuals cease to be recognised for their unique character, but more for the group identity they were born into.
And how did ‘wokeism’ come about in what are likely to be the least racist, most egalitarian societies in history? A compelling answer to me at least would be that it’s the younger generations’ pursuit of meaning and purpose. Indeed ‘wokeness’ does have many similarities to a religion or cult, those other famous providers of meaning, in that there are sacred tenants (structural racism exists throughout society), performative rituals (see the ‘black square’ post on social media feeds) and even the concept of original sin (white privilege). Considering we have largely done away with the old religions in the West, there is now a ‘spiritual’ void to fill. And perhaps capitalism and the pursuit of wealth is fundamentally unable to plug that gap. It just does not provide enough intrinsic value to the individual nor is it a realistic pursuit for many. Maybe people these days find the modern economy just too hard to compete in.
Heresy 3: Universities are a Ponzi scheme hiding in plain sight
Young adults are taking on tuition debt in the US and the UK for courses that they will never be able to repay. That’s the definition of a bubble.
Bizarrely, in the formerly capitalist nirvana of the US, the debt is not even dischargeable in bankruptcy, locking students into perpetual bondage. It’s no small problem either, with 45 million borrowers owing $1.6 trillion dollars — more than auto and credit card debt — the majority of which will never be repaid. Could this be the source of the next economic crash?
So Universities don’t provide economic value to students, nor equip them to succeed with a modern skills-based curriculum. Nor do they seem to challenge the way students think, with multiple studies showing that the vast majority of lecturers lean left. And they say twitter is the ultimate echo chamber!
In fact, somewhat tragically, the only role universities do play in our credentials obsessed society is that of the gatekeeper. University, especially in the UK and US is seen as the only pathway to success, whilst those without a degree are largely written off by employers. In contrast, Germany, with its much stronger emphasis on vocational education, has a small, geographically distributed business environment that’s the envy of the developed world.
Heresy 4: Capitalism no longer exists in any advanced economy. We are all socialists
The extent of state spending in the UK economy, but equally throughout the majority of the western world, is under-appreciated. It makes up around 40% of GDP and in some parts of Northern England, Scotland and Wales, close to 80%. The problem is that spending is a proxy for government control and the more they spend the more society expects government to take responsibility for.
The commercial world is not immune to government largesse either. At this point, it’s becoming easier to identify industries that have not been a beneficiary of state intervention, rather than those that have. Airlines, banks, universities, agriculture and manufacturing are all subject to direct tax breaks, regulation for incumbent protection masquerading as consumer protection or even direct bailout.
And of most concern to investors like ourselves, government interference distorts markets. Those distortions send false signals to entrepreneurs and introduce structural weaknesses to the economy as a whole. In response governments have to increase interference (through money printing, for example) to keep the show on the road. For example, the Fed is now the world’s largest investor and is even directly propping up equity markets through ETF purchases.
Money printing and artificially low-interest rates have flooded public markets with cheap capital and made unprofitable projects, profitable. Consequently, the number of US zombie companies — companies whose profits are less than the interest on their debt — is approaching a 30-year high, as the graphic shows.
Heresy 5: This is not a golden age of innovation and progress
Is our society as dynamic as commonly thought, or in fact increasingly static? British physicist, David Deutsch, defines a static society as one that is resistant to change, and I speculate that ours increasingly fits that description.
There are compelling reasons to believe that scientific productivity is declining. The graph below shows Total Factor Productivity (TFP) of the economy flatlining versus the number of researchers deployed. Loosely put, TFP is a measure of how scientific discoveries translate into economic growth. The message is clear; it’s taking an ever-increasing amount of resource to achieve the same amount of economically productive scientific progress and as I’ve written about before, it’s likely the problems are structural rather than that we’ve reached the limit of what we as a species are capable of.
To give a few more examples:
Transportation is almost universally slower (including from one end of a city to another) whilst with the retirment of the Concorde, air travel has clearly gone backwards.
Astonishingly, median male income in the US is lower now than it was in 1970! Despite rapid economic growth, the average working man is no better off than he was 50 years ago. Perhaps said economic growth was artificial, propped up by central banks and governments desperate for it and in the form is rising asset prices which benefit those with assets already. The rich.
Our cultural elite are out of ideas or at least abide by a narrow range of conventions. Hollywood is content to churn out endless sequels with the same tired tropes. The most optimistic and exciting sci-fi these days comes from China. Not to be outdone, our architectural elite produce buildings that look same the world over. An aspirational office, restaurant or home interior in Delhi looks the same as does in London. Architecture has a bland and monotonous ubiquity the world over
We further resist change through increasing regulatory complexity, empowering incumbents who have the ability to comply with it. For example, the US tax code is now 70,000 pages long
Finally, the most desirable credential for our elite class seems to be an MBA — a Masters of Business Administration. What sort of society looks up to business administration as it’s pinnacle? If you wanted a surer sign that we are a civilisation of managers and bureaucrats rather than innovators, this is it.
To conclude with an echo of Peter Thiel, it would appear that rapid progress in a few domains (telecoms, advertising, social media) has masked an absence of improvement in many others. Perversely, this can be viewed as great news, as it means the opportunity space for innovation and hence Venture Capital is practically infinite in scope.
Heresy 6: Venture is the only dynamic part left of a sclerotic western economy
This is not by divine right, but due to a number of structural advantages. The venture model works best with software, and software’s fast iteration cycles and presence in cyberspace mean that governments struggle to regulate it. Software is also best seen as leverage for hyper-talented individuals to build something of unprecedented value. In previous eras, founders would have needed to amass a workforce of thousands of individuals and even co-opted the support of the state too to launch a new venture. Now they need a laptop, a few likeminded compatriots and an internet connection. Therefore, those who have ambition and want to build gravitate toward this sector above all others. Meanwhile, venture capital provides the funds, the skills and the network that these young businesses need to grow from scrappy startup to established corporate listed on the NASDAQ.
Heresy 7: Economic growth makes life better and indeed possible. It is a virtue
Economic growth should be a priority. It should, in fact, be THE priority. Somehow as a society we’ve lost sight of why economic growth is a moral good, as if there is nothing left for us as a civilisation to achieve. Even our former PM, David Cameron, proposed not using GDP as a measure of a country’s success, while a recent survey indicated that 70% of Brits and French were in favour of a ‘degrowth’ policy, presumably over fear over what we are doing to our environment. These ideas are dangerously misguided.
Human history has been the history of problem solving, of using conjecture and criticism to seek solutions to problems, the latest of which is climate change. And you cannot solve problems if you don’t have the resources. Resources come from growth, which comes from innovations producing productivity improvements. This is why economic growth is so important. As David Deutsch once again points out, imagine if the carbon threshold (in which it becomes dangerous for human habitation) of the atmosphere was substantially lower than we know it to be and in 1900 we hit that limit right as the world began to industrialise. Back then, we would have had neither the resources nor skills to identify the cause of the problem, let alone solve it.
When we stop focusing on growing the pie we focus on dividing up a shrinking one, as has happened to countless civilisations throughout history that no longer exist today. We would be arrogant to believe the same couldn’t happen to ours.
The Implications for Venture Capital
Aside from being relevant social trends, why do they matter and why should the venture community care?
Focus on meritocracy:
With an increasing focus on diversity of physical characteristics, there is likely an unspoken and hard to prove valuation premium attributed to ethnic and minority founders. However, at Concentric, we continue to focus on merit, irrespective of background and paying no heed to discrimination, positive or negative. We take our inspiration from Martin Luther King when he pleaded with the world to focus on ‘content of character over colour of skin’.
Opportunities to differentiate:
A general obsession with ‘wokeism’ means there is an opportunity to differentiate for those who go against the grain. A good example is Coinbase, the multi-$bn crypto exchange, which explicitly stated that the company would not engage in social activism and would focus solely on their core mission of bringing crypto products to as many as possible. To those employees that were unhappy, they offered redundancy. In one fell swoop, they self-selected for mission-focused employees and removed any potential sources of disturbance in what is likely to be an increasingly fractious social climate.
Character over credentials:
Operating at the early stage of the venture funnel, we are in large part talent scouts and when evaluating founders, we are committed to focusing on character over credentials. While our society seems obsessed with the credentials bestowed by ‘prestigious’ institutions, character is forged through experience and taking risks. Character is underpriced, credentials overpriced.
We also believe that the private sector has a role to play retooling people for the digital age. Universities and government have had little success to date — and that doesn’t look set to change anytime soon.
Cheap capital to develop new technologies: Anything the state touches is inflationary (education, law, healthcare) and this opens up opportunities for technologists, as anything the internet touches is hyper-deflationary. The effect, through the depressing of cost curves is inherently equalising. The smartphone in your pocket is the same as the one in the Prime Ministers. However, with government interference only likely to increase in the near-medium term, a critical skill is understanding how governments will shape industries through their stated priorities.
Given too the glut of capital sloshing around the global financial system chasing growth, there are significant opportunities to list tech businesses on public markets, directly or via SPACs.
Venture as a catalyst for growth:
If the West is turn to a period of economic growth again, unsurprisingly we believe venture to be part of the answer. The Silicon Valley vogue these days is crypto, robo, astro, bio and quantum. But for us at Concentric, the investment themes we are exploring lie elsewhere. We can’t give all our secrets away of course, but here’s a taster (some things are just for LPs!)
- A riskless society
- Government and privacy
- Innovation for organisations becomes existential
- New age institutions