4 ms·

While I think the money raised is a vote of confidence from the investors -- and it's only a vote -- my point about "too big to fail" is actually more a sunk-co

While I think the money raised is a vote of confidence from the investors -- and it's only a vote -- my point about "too big to fail" is actually more a sunk-cost argument. With that much funding, the worst-case glide path for Magic Leap might be to stumble along, sucking in continuation funding until it gets a product to market. (It's no Theranos.) To be clear, I'm not making predictions about ML specifically. I don't have a clue about what they're doing. My general point is that huge sums of money have both momentum and gravity of their own. (I'm not saying this is rational, good, or just -- just that it seems to be true.)

jayjay71 10y ago
How often do institutional investors fall prey to the sunk cost fallacy? If you don't meet your milestones, you're probably not getting more money from the same investors. VC's make a lot of mistakes, but throwing good money after bad seems pretty rare to me.
- new299 10y ago
  When developing a new basic technology the milestones are often vague, and they're generally not open to DD. So hitting milestones in taken on trust and open to interpretation quite often. Sink cost doesn't work quite the same way. It's more that they evaluate the investment as good because someone else put in a bunch of money (and they expect know what they're doing/did good DD).
  - jayjay71 10y ago
    I can agree that many investors will assume that because other firms invested, that is a "signal" that they use to invest themselves, and in that sense raising money can give you momentum. But I disagree that that is the same thing as the sunk cost fallacy. What I am claiming is that investors are not likely to reinvest once they realize the company is not performing as expected. It's only if they've spent their own money, and then put more money in a subsequent round that they are prey to the sunk cost fallacy.
    - new299 10y ago
      Right, I think we agree. It's not a sunk cost fallacy. It's more sink cost signaling or something.
new299 10y ago
Right, my comment wasn't on the last statement in your comment ("they're too big to fail"), but the bulk of it motivated by "Google didn't put ~$500m, and Alibaba something like $800m, just on a whim". Yea, they might well use the money for /something/ useful. The might use it to acquire a bunch of other companies. The question is, is this 1.4B USD more or less useful than 500K USD put toward the right idea.
- ryandamm 10y ago
  Right. I thought it was significant that the two lead investors are strategic (the first big tranche came from Google, not GV), so there's even less signaling there. As for $1.4B vs $500K... they're different species of investment animal. The people making the hundred-million dollar decisions aren't prepared to make hundred-thousand dollar decisions. So I don't think those huge investments are actually replacing or crowding out seed funding (especially if a highly-funded company like ML can then buy a bunch of seed-funded companies, returning liquidity to the seed market). The only thing that's weird about it is money is fungible, so the two are truly equivalent... just not commutable. Could those billions have been a shower of seed investments instead? I dunno; this is one of those things that makes me scratch my head and shrug. I don't know enough about the history of finance, and venture finance in particular, to weigh in on the logic (or forces of nature, or chance) that led to this structure, but it seems to make sense except when it doesn't. (/hedge)
  - new299 10y ago
    Well, perhaps think of it another way. Those billions are mostly going toward staffing costs (I would guess? If not direct employees then via semiconductor fabs etc). Would that engineer time be better spent proving out a bunch of smaller speculative ideas rather than throwing it all behind one speculative idea. That's the crux of it really. We could be spending our engineering time better. Maybe not funding 1000 smaller projects, but even 100 might be better. I understand that the current investment structure probably wont support that, but it seems unfortunate. Particularly when the large projects that engineering time gets thrown at are large, very speculative projects with likely poor DD like Magic Leap (or whoever else).

jayjay71 10y ago

How often do institutional investors fall prey to the sunk cost fallacy? If you don't meet your milestones, you're probably not getting more money from the same investors. VC's make a lot of mistakes, but throwing good money after bad seems pretty rare to me.

new299 10y ago
When developing a new basic technology the milestones are often vague, and they're generally not open to DD. So hitting milestones in taken on trust and open to interpretation quite often. Sink cost doesn't work quite the same way. It's more that they evaluate the investment as good because someone else put in a bunch of money (and they expect know what they're doing/did good DD).
- jayjay71 10y ago
  I can agree that many investors will assume that because other firms invested, that is a "signal" that they use to invest themselves, and in that sense raising money can give you momentum. But I disagree that that is the same thing as the sunk cost fallacy. What I am claiming is that investors are not likely to reinvest once they realize the company is not performing as expected. It's only if they've spent their own money, and then put more money in a subsequent round that they are prey to the sunk cost fallacy.
  - new299 10y ago
    Right, I think we agree. It's not a sunk cost fallacy. It's more sink cost signaling or something.

new299 10y ago

Right, my comment wasn't on the last statement in your comment ("they're too big to fail"), but the bulk of it motivated by "Google didn't put ~$500m, and Alibaba something like $800m, just on a whim". Yea, they might well use the money for /something/ useful. The might use it to acquire a bunch of other companies. The question is, is this 1.4B USD more or less useful than 500K USD put toward the right idea.

ryandamm 10y ago
Right. I thought it was significant that the two lead investors are strategic (the first big tranche came from Google, not GV), so there's even less signaling there. As for $1.4B vs $500K... they're different species of investment animal. The people making the hundred-million dollar decisions aren't prepared to make hundred-thousand dollar decisions. So I don't think those huge investments are actually replacing or crowding out seed funding (especially if a highly-funded company like ML can then buy a bunch of seed-funded companies, returning liquidity to the seed market). The only thing that's weird about it is money is fungible, so the two are truly equivalent... just not commutable. Could those billions have been a shower of seed investments instead? I dunno; this is one of those things that makes me scratch my head and shrug. I don't know enough about the history of finance, and venture finance in particular, to weigh in on the logic (or forces of nature, or chance) that led to this structure, but it seems to make sense except when it doesn't. (/hedge)
- new299 10y ago
  Well, perhaps think of it another way. Those billions are mostly going toward staffing costs (I would guess? If not direct employees then via semiconductor fabs etc). Would that engineer time be better spent proving out a bunch of smaller speculative ideas rather than throwing it all behind one speculative idea. That's the crux of it really. We could be spending our engineering time better. Maybe not funding 1000 smaller projects, but even 100 might be better. I understand that the current investment structure probably wont support that, but it seems unfortunate. Particularly when the large projects that engineering time gets thrown at are large, very speculative projects with likely poor DD like Magic Leap (or whoever else).