Work
Lately, I’ve been obsessed with the idea of work. Of the most meaningful things we will do in our lives, it is a high possibility that it will come from our work. It is one of the constant variables throughout human history. We are hardwired to work.
This is mostly because humans are hardwired (1) to survive and (2) to thrive. We work to get our basic needs in line, then climb Maslow’s hierarchy in search for more. We’re in an age of more, so let’s question what that more should be?
Investment is another core trait of an evolved species. When we have abundance, enough to keep our head above water, we allocate our resources towards long-term yield. Early humans invested in irrigation systems, farming, and other technologies to expand the scope and scale of human ability. With easier crop yield, we can build more technologies and armies to increase our safety and quality of life, with the intention of continued expansion. These layers of abstraction are something that I’m curious about.
Society at Work
Societies that work, work. Those that don’t, don’t. Those societies that have triumphed throughout history have been centers of innovation and investment, which bring long-term wealth and power.
Every human is incentivized to work for different reasons. Some want to create art, because it solves something deep within them. Some like community, so they like to interact with others. The capitalist is incentivized to work to create value, and then retain some percentage of it in the transfer of it. I’ve been curious about capitalism lately.
Under the flag of capitalism, us humans guided by incentive are pushed to create value. A society of capitalists is more likely to innovate, build wealth and win.
Capitalism has Flaws
This is a system that works well, but I think about its failures, and whether we could find ways to improve upon it. With capitalism, people often conflate the idea of value with money—it becomes an abstraction. I argue that this causes us to lose sight of what it means to be human and to continue to progress as a society.
In this game, the scoreboard is read in an amount of $. But money is not a perfect proxy for value in a society. At least in our current age, I think of cigarettes companies, social media click engineering, and the pornography industries as failures of this system dependent on the decentralized transfer of value preying on the more primitive human cortices to extract value.
I asked people close to me what their ideal work-life would be if money wasn’t an issue. You should attempt to ask yourself the same question. I found people do want to work, and they think of it as a way to add value to a community. Interestingly, those that worked in industries like law and finance often separated work and life. They saw work as: work to live rather than live to work. My hypothesis is that this is a result of our system. If money weren’t important, you wouldn’t spend your entire life trying to stack it. You would likely still strive, but it would be something more clearly for the community.
Many do find a good combination of adding value, enjoying it and making money. That is ideal.
Striving
Part of what work offers me is something to strive towards. I’ve always enjoyed working hard towards an exciting goal. I’ve been thinking about what the goal of my life should be.
I’ve been thinking more about this recently. Shamelessly, I do want to make a lot of money. It’s something to strive for.
When I was younger, perhaps it wouldn’t matter as much how I did it. Now, I feel like I have more integrity in how I think about that. I want to make a lot of money by adding real value to the world.
Output, Scaled
It is clear that some people add more value than others to the world. And some people build outsized wealth. I think about how to do those things as well.
I’ve never believed that success is based on luck. I’ve thought about the success of each member of the PayPal mafia, Michael Milken’s comeback from prison, and other serial entrepreneurs who strike gold time and time again. There are likely extraneous variables here, but I think that these people know something that I don’t. I think this is something that can be learned. If that is the case, I want to learn it.
Inputs
I used to think that if I worked as hard as I could, that was always the key to success. Looking around now, and I think that I was partially misguided. Paul Graham would also agree that you need to work hard to succeed, but there are plenty of people who work incredibly hard and achieve nothing. It matters what you are doing when you work hard. The hardest working waitress does not have leverage. It seems like humans often underweight our own time and what the cost of an hour of our life should be. If you know that some people’s time is worth 1,000x yours, why not try to add value to match that.
Removing ourselves from the abstraction of money, most fundamentally, businesses create value and then capture a portion of it.
y=mx+b.
y=resulting capital, m=% of value captured, x=value provided, b=initial capital
In business, it is also true that some avenues are more difficult to make money. Some have hard-to-reach customers, high initial capital expenditure requirements, limited available quality talent, regulatory pressure, and difficult engineering problems. Over time, you want to grow y exponentially.
Peter Thiel makes a couple of interesting counterintuitive arguments. (1) we think of capitalism and competition as synonyms, but they are not and (2) we think that we are living in an age of rapid technological progress, but we are not.
(1)
The point he is trying to make here is that in a world of perfect competition, the variable m gets whittled away. This is intuitive as an after-thought, but most businesses that are started are repetitions of what has worked prior. Thiel argues that the next Mark Zuckerberg will not start a social media platform and that these waves of innovation are inherently idiosyncratic. I’ve been really interested in this idea of competition, which I will dive deeper in its own section later.
The capitalist is the businessman who stacks capital. In capitalism, we are incentivized to pursue projects that make a lot of money.
(2)
Because we are incentivized to make a lot of money, we often don’t solve the problems that need to be solved. The soundbite he is quoted by is “we wanted flying cars, instead we got 140 characters.”
Software has been the boon of wealth over the last score. These 20 years have seen rapid adoption of the internet and digitization of our entire society. The idea that we have advanced computers in our pockets while we ride a dilapidating subway in New York City is indicative that maybe we aren’t progressing on all fronts.
Software is an incredible business model due to its operating leverage (fixed costs/total costs), scalability, and network effects. There was also an open frontier with white space for this generation’s tech companies to build on.
When I was building Nephra, I was always subtly jealous of any of those around me that were working on software projects, who could release a product in a week, simply talk to customers and iterate, who didn’t need to do years of interactions with the FDA, peel back layers of technical risk, burn $millions/year, draw up a manufacturing schema and pathway to commercialization in addition to the unknown of whether the damn thing would have product-market-payor-provider fit with all the major stakeholders in the industry. While it could have been done, I was not able to do it. If I had actually created any value, it would have been incredibly hard to capture any of it.
If I am incentivized at least in part by money, why on earth would I try to build a biotech company? This is why I think he is onto something.
Okay, so that’s the answer, right? Build software companies and scale them to the moon! – not quite…
Competition
Coming to the idea of competition. As an investor at Founders Fund, Thiel expresses some of the patterns he has noticed. These are also something that people make fun of Silicon Valley for often. Founders pitch that they are “building the Uber for dogs” or “disrupting big data using AI.” These words can act as a “tell,” like in poker, that you are bluffing, and you aren’t doing anything new at all.
When America was founded, ambitious types moved from all over the world to seek opportunity in a new nation, building the culture that we have today. When gold was found on the west coast, the area was inundated with these personalities. This cycle happens over and over. Then on Wall Street, then in Silicon Valley. But of course, after everyone rushes in, the space becomes incredibly competitive and largely washes away promise of profit. The point that he is trying to make here is the following: because each wave of innovation is so distinct, if you are trying to become the next Mark Zuckerberg by building a social network, you aren’t learning from him at all. You are heading towards competition.
This is a principle that he shows with his own life story, and one that I can at least a little relate to. As an incredibly tracked student in high school, his classmates predicted he would get into Stanford, then he got into Stanford. He later matriculated to Stanford Law School, before moving to a big law firm in New York City “where everyone on the outside was trying to get in and everyone on the inside was trying to get out.” When he finally left this competition, he found great success from starting a macro hedge fund, co-founding PayPal and Palantir, and being the first outside investor in Facebook’s Series A.
Banking seems the same. It is the tried-and-true way to build wealth, and so the recruitment process is incredibly competitive. While of course, there are an infinite number of ways to build wealth, succeed and solve problems in society, we are herd animals and like to hedge our risk in every possible way. Banks play an important lasting role in society, but the point is that people know that and there isn’t an opportunity arbitrage.
So, at what point, we need to ask ourselves, does this competition become zero-sum? That is a question, not a statement. In banking at least, I feel like I’ve learned so much from the path. It sharpens you and teaches you the lessons that have remained core to America’s financial system. But in a world of opportunity, we should ask ourselves if there is an open door just around the corner.
Have an Internal Compass
I am going to write this section to pick on my value investor friends. It seems to me that the whole idea beneath the Ben Graham, Buffett, Intelligent Investor philosophy is to say, “the future is uncertain, therefore, I am going to systematize my investment process in a way that can capture value mathematically.” By projecting cash flows of a stable company to find mispricing, you can arbitrage that company’s value. Whether or not this is a productive process that adds value to society is another question that I don’t know the answer to.
Of course, there is entropy in the future and the butterfly effect, but I do not believe the future is a lottery ticket. There are those that know topics so well that they can reasonably project the future. I do think, however, that this investment mindset is an important tool to have. But once someone understands value mispricing, they should go one step further and develop a conviction in the future that they can extract additional alpha through. Maybe this is what you guys already believe though.
First Principles
Admittedly, when I think about why I wanted to work in finance, it seems like a sort of risk mitigation technique. Other friends I speak with seem to think similarly. Build a decent enough nest egg, then pursue something when your life is already set. But what if that takes 10-20 years? Why do we not think of the risk of never doing anything meaningful with our lives.
“In just 10 years, Napolean went from an unknown artillery officer to the emperor of the largest empire Europe had seen in 1000 years.”
If only he knew that he could have played it safe and instead saved and invested his military wage to retire early.
Admittedly, I think I could look at the above chart and say, “I’d rather be the investor because they can make all the money without all the risk.” So, one then competes to get one of those spots. And you can work hard to take that path, but something feels transcendentally off to me. What I think it is, is that if I wouldn’t have that job, someone else would. I think there’s something very meaningful about doing something that no one else is doing. It’s like if you have 8 people carrying a table that only needs 2. Are you really offering any value, marginally?
Risk/Leverage
I have been thinking a lot more about that graph. It seems to me that the further you move to the right, the more you remove yourself from the actual problems on the ground floor of society. As an employee, you are in the weeds. As a founder, you may have found a specific problem that you can reasonably change. Maybe as a venture investor, you take on a sector theme that you believe in the world. By the time you are a Fund of Funds, you are so abstracted and removed from society. You have massive influence, but it’s so damn abstracted and competitive.
But I think there may be a cadence to these things. I almost feel like I need to earn each rung. You can’t really start a company if you don’t know how to lead employees or know the granular work you are going to do. The best VCs seem to have experience building a company themselves. Then you are getting into financial engineering, which is arguably a different skillset, but if you had the below in addition, it would make you a far more competitive investor to know the product, industry, business, and finance.
As you progress to the right, it’s seemingly harder to get started. It’s easy to be an employee. It’s harder to be a founder but there’s no gatekeeping items, I can just start and see if you find uncharted territory filled with value. It’s not quite that easy to start a private equity firm. So, the doors are somewhat closed. It’s hyper-competitive and it’s up and out.
There’s more leverage with the founder. In theory, a founder can bootstrap a billion-dollar company. It comes down to your personal ability. This is max risk, max opportunity. This is also a higher conviction role. You need to fundamentally believe there is value in a place no one else is looking.
Solve Problems
It's easy to look at these things and see the abstract, after-the-fact version where we try to repeat Warren Buffett’s path to success. As a founder, people may try to be the next Bezos. But if you look at all of these founders, like Thiel says, it’s always its own case and unique. And they are all solving a problem and then capturing a significant amount of it.
I think that when you think about work like this as well, it is much more rewarding and in tune with human nature. You are finding real problems and solving them. In a world where money clouds our judgement, I think I’d like to get back to the basics. If people adopted this mindset, maybe we would have much more than 140 characters.
Difficult
This process will not be for the faint of heart. Entrepreneurship is always filled with risk and hardship, but isn’t that what it’s all about--human striving and creation? We used to go to war, man.
Appreciate this post, found it off Twitter a while back, thought on it and formed my own thoughts on banking and problem-solving or the lack thereof: https://johndoughboyahhh.substack.com/p/on-proximity-and-indirectness-in