10 ms·

Why Silicon Valley Funds Instagrams, Not Hyperloops

181 points by Bahamut 13y ago

pa5tabear 13y ago
Payback. Risk. Magnitude. Is there really any more to it than that?
- tansey 13y ago
  Exactly. Hyperloop in particular has the worst of all worlds. 1. Huge investment required up front. 2. First of its kind, so lots of risk. 3. Small potential gain relative to the investment. In fact, Hyperloop was never proposed as a VC funded project by Musk. He's merely proposing it as an alternative to high-speed rail. Historically, public transit loses money, making it a terrible investment. However, it's a public good so governments continue to support them.
  - wavesounds 13y ago
    You forgot the biggest risk of all, Death. I'm all for the Hyperloop but lets be realistic, its way easier to give a few guys in a garage a hundred thousand dollars to build software for sharing pictures that's never going to hurt anyone then fork over billions for a futuristic transport that could potentially kill people.
volandovengo 13y ago
i couldn't help but think about this article when news broke of the 3 billion dollar snapchat offer.
- bane 13y ago
  Or half the cost of the Hyperloop? And it was turned down.
- vdaniuk 13y ago
  Really? You think that spending 6B on an absolutely untested idea with great risk is somehow comparable to a 3B acquisition of a mature startup that will immediatly bring business value to a company?
  - auctiontheory 13y ago
    You can call me a old fuddy-duddy, but I'm just not sure that a company with zero revenue qualifies as "mature."
    - vdaniuk 13y ago
      I've specifically said 'mature startup' to address this type of concern.
      - adamnemecek 13y ago
        I can't say that that really addresses that concern.
        vdaniuk 13y ago
        Company != startup. They dont have revenues, but they have 25M users audience that will be instantly monetizable as soon as it is plugged in the FB or other company advertising system. And that makes them a perfectly fine target for acquisition, even if they don't have revenues of their own. Does this address a 'mature' company concern?
        notahacker 13y ago
        It might make it a logical target for acquisition, but it doesn't follow that it's worth ~4% of Facebook's market cap when Facebook has 100x the users (including virtually all the Snapchat userbase...) and could trivially clone Snapchat's tech. Not to mention that Facebook's own profit figures from their more diverse and mature advertising platform suggest it would take a very long time to accumulate $3bn in advertising revenues off 25m users.
aclements18 13y ago
Silicon Valley did fund some "hyperloops", look no further than Musk's other two big ideas (Space X & Tesla). Look for the few VCs that are non conventional thinkers themselves. The ones that discuss the distant future as though it is right around the corner or even happening now. As an example watch any 10 minutes of this interview with Steve Jurvetson of DFJ. You'll see why he and Musk were a good fit: http://youtu.be/O2tK0Wl2F8w http://youtu.be/O2tK0Wl2F8w
- abalone 13y ago
  Those are not hyperloops. Both SpaceX and Tesla are built on decades of R&D and core science paid for mostly by taxpayers to the tune of hundreds of billions of dollars. This is not to take anything away from the "layer" that Musk added to this foundation. But hyperloop does not have the same foundation. There have been space missions and electric cars before; there hasn't been anything approaching a hyperloop at scale. So the investment risk is even greater.
  - tehwalrus 13y ago
    I was going to compare it with the bullet train - but that apparently runs on standard gauge rails (just welded to the sleepers instead of bolted) - I swear they told us it was a levitated magnet in school... So maybe you're right, the hypertube is very complicated compared to a pair of rails and an power supply cable.
    - snogglethorpe 13y ago
      Even standard HSR is a lot more complicated that that—you can't just put a bigger motor in a slow-speed train—but it certainly benefited from the large amount of commonality with lower-speed rail, and most of the higher-speed technology was developed over time, with real testing. [Note the first Shinkansen was a fair bit slower (~200km/h) than today's highest-speed models, and ramping up the speed from there occurred over many years.] Japan is also building a real (long-distance, high-speed) maglev system. It's much more of a leap from standard rail than HSR was, but again, they're using technology which they actually have long-term real-world experience with. Hyperloop, by contrast, doesn't even have a lab model. It's a diagram on a napkin, with some of the calculations worked out. The press and the general public may not notice this distinction, but people investing large amounts of money most certainly will...
bane 13y ago
Because VCs are not about changing the world, they're about quickly making lots of money on high-risk bets. There needs to be something looking for medium sized boats of money over medium length periods of time for medium risk. Is that the stock market I guess?
raverbashing 13y ago
This is a very truthful article and one that should bother a lot of people The stock market and investors "immediateness", and all the other points. 3B dollars can fund a (small) semiconductor company. And they're going for a picture sharing app (different, but worse - as in, a quirk - than Instagram)?
- vdaniuk 13y ago
  Can 3B dollars fund a small semiconductor company that will have a sustainable competitive advantage against Intel, AMD and TSMC? My guess is NO. Successful picture sharing apps has stable audience locked in with network effects and switching costs. That is a sustainable competitive advantage.
  - raverbashing 13y ago
    "that will have a sustainable competitive advantage against Intel, AMD and TSMC? My guess is NO" Maybe, but these are not the only semiconductor companies in existence. And there's a whole lot of (semiconductor) products beyond what those produce. But to compete agains them, yes, you would at least have to double that value, but probably more. Or you just design and subcontract manufacturing to them.
    - vdaniuk 13y ago
      Dont you think that all that considerations are factored in the VC process?
      - ksk 13y ago
        Why are you assigning some sort of 'perfect knowledge' or clairvoyance to VCs ? They are just like everyone else and they make irrational decisions and have inherent biases.
        vdaniuk 13y ago
        I didn't assign anything. You did. Stop putting words in my mouth. My point was that if a random HN commenter is able to raise some issues about ROI of various investments then certainly VCs who do it professionally have these issues factored in. Simple as that.
b0z0 13y ago
If you think about it, it's amazing what we're valuing at billions of dollars these days. Twitter, $4 billion? That's for a lot of lines of code, and, sure, some server infrastructure, etc. that will be obsolete in the next few years. The same goes for Facebook, Instagram, Pinterest, almost any Silicon Valley startup we can name. Just a bunch of lines of code, not really solving any problems. But it makes money, and that's what people care about.
- danhak 13y ago
  The value of the companies you mention doesn't come from the code. It comes from people's attention. That said, I'm not sure I disagree with your point.
- k_os 13y ago
  I totally agree, that said think about gold.. just a bunch of atoms that reflect light in such a way that our brain computes it into a 'shining' image..
JDDunn9 13y ago
Mass transportation has always lost money. Most of the original railroads in America went bankrupt. Today, ~90% of the cost of building railroads are subsidized by the government. In Japan, they over-invested in trains and it produced a huge drag on the economy. Most experts I've heard say the hyperloop would cost far more than the estimated $6 billion. Doing things for the first time means you're likely to go way over-budget. After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese".
- idProQuo 13y ago
  >After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese". Isn't this the exact situation patents were intended to prevent?
  - JDDunn9 13y ago
    The hyperloop is open source though. Even if it wasn't, 20 years isn't a huge head start to work out all the bugs and build very many lines given the cost/time to build 1.
    - idProQuo 13y ago
      So then how did railroads do... ohhh. How exactly is it open source?
      - JDDunn9 13y ago
        The design is open source, anyone can build it. As opposed to the et3 concept, which requires a 5% royalty if you build it.
- snogglethorpe 13y ago
  > Mass transportation has always lost money Most passenger rail in Japan is private, and profitable, including both capital and operating expenses. In the years leading up to WWII, and during it, the Japanese government nationalized many rail lines (although many stayed private as well) to form JNR, and JNR proved to be too inefficient, and built up a lot of debt. That then of course lead to the privatization of JNR in the 1980s (which included transferring JNR's debt to the new private JR companies), which was highly successful. > In Japan, they over-invested in trains and it produced a huge drag on the economy Japan has invested a lot in rail, but it certainly isn't a "drag on the economy". Indeed, it's arguably a boon to the economy as it's a much more efficient transit system than private vehicles on roads, and given the business model of Japanese railroads (which builds retail and housing around railroad nodes, and builds railroads to support new retail and housing), directly contributes to much more efficient urban organization. The rail lines in Japan that lose money are rural ones in sparsely populated areas. However these account for a very small proportion of rail usage.
mistermumble 13y ago
Link for those who want to see the original article: http://jerzygangi.com/why-silicon-valley-funds-instagrams-not-hyperloops/ http://jerzygangi.com/why-silicon-valley-funds-instagrams-no...
- hfz 13y ago
  Now I wonder why it's on Pathfinder on the first place and why it's stealing traffic from the original source.
- neeee 13y ago
  Thanks. I close the pathfinder page the moment i saw "Reading time" over the article.
- Bahamut 13y ago
  Ah, my apologies - I was linked the article from a friend and immediately thought it would be a good topic of discussion here. At least the original article was linked prominently at the top though.
data_app 13y ago
Great post. Thanks for writing this - you have guts! Many here think the same way but too afraid to say so.
- vdaniuk 13y ago
  You really need that sarcasm tag.
nostromo 13y ago
It is amazing that someone is willing to pay $3 billion for SnapChat, but nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate, although many people took issue with it). But we're still in the early days of the internet and smartphone era. It's still a gold rush where people are running after get-rich-quick ideas. Eventually we'll hit saturation and those quick exits will become less common. That will force investors to look for new opportunities elsewhere.
- anigbrowl 13y ago
  True, but at least Snapchat already works and has users. I like Elon Musk but I LOLed when I saw his estimate of $6 billion.
  - kamaal 13y ago
    I am not sure why that is hilarious. India just sent a probe to Mars at $69 Million. Musk has himself built a rocket company with a million dollar scale investment. There is no reason to dismiss, especially when he has a track record of delivering great stuff on time and in budget.
    - anigbrowl 13y ago
      Because the cost is not just technological. There's also major land use issues, which get expensive in CA. His idea that putting it along the middle of the freeway will obviate these is not credible. I estimate $20bn to build it, minimum. Rocketry is simple by comparison.
      - david927 13y ago
        Maybe, maybe not. I don't see how running it along the freeway is not credible. But here's the upshot: Snapchat is a photo-sharing app that will hardly be around in 10 years; the Hyperloop would be. This seems to be lost on all those in Silicon Valley who sit for hours every day in traffic to go to their one-story prefab work box, only to then sit in the same traffic later to return to their prefab home box. There's investment to make your money grow and investment in the future. We need less of the former and more of the latter.
deleted 13y ago
[deleted]
vdaniuk 13y ago
So what is the level of majority of arguments in the linked article? DH0-DH1[1]. Is this really an article worthy of attention for HN audience? [1] As per http://www.paulgraham.com/disagree.html http://www.paulgraham.com/disagree.html
rjurney 13y ago
Just because the internet sector is temporarily insane where gimmick apps reject $3 billion acquisitions doesn't change that most money invested in the valley goes to serious businesses doing real research and development.
- seeingfurther 13y ago
  This is probably the most accurate on point statement in the thread.
  - vdaniuk 13y ago
    Except for that gimmick apps part. Snapchat has 25M users. That is more than most countries in the world to put it in perspective. That is nothing to scoff at.
yummyfajitas 13y ago
A big part of the reason the IPO market suck, i.e. why "the stock market isn’t influenced by value today like it was thirty years ago", is taxes. Specifically, the differential tax treatment of capital gains and dividends. A long time back, equities were viewed as a vehicle for distributing dividends. A company earns money and pays it to investors. You build the hyperloop, customers buy tickets, you give investors a cut of the proceeds. The value of HLOOP is based primarily on the expected value of this revenue stream. Nowadays, dividends are double taxed while capital gains are only single taxed, which means that companies mostly don't bother with dividends anymore. Investors tolerate this because the differential tax rates mean that management would be throwing away their money if they issued dividends. As a result, the value of equity is the value of expected capital gains, resulting in the current situation.
- wnoise 13y ago
  So we should double tax capital gains?
  - InclinedPlane 13y ago
    In my opinion capital gains and corporate income tax should go away and everything should fall under individual. income tax. Simplifies a lot of things and avoids a lot of perverse incentives created by the existing system.
    - PeterisP 13y ago
      Moving corporate income tax to individual income tax would allow to postpone paying any such tax forever, allowing company-owners to skip paying the tax, but allowing them to use the (yet untaxed) funds to purchase/invest whatever they want.
      - yummyfajitas 13y ago
        No, it doesn't. The IRS is very good at taxing corporate transfers to individuals (e.g., the company paying for your house, clothes and food) as income. If this wasn't already a solved problem, we wouldn't even need to eliminate corporate taxes to engage in the scheme you propose. Just book revenue, book your personal expenses as corporate expenses, and the company made no profit and hence needs to pay no taxes. This is why your company generally only provides you benefits in a very narrow set of categories that happen to be tax deductible (health insurance, 401k).
auctiontheory 13y ago
Silicon Valley is about momentum investing. You or I may think that many of these companies are silly, but where the money goes, the rest of us may have to follow.
pytrin 13y ago
I agree and disagree. Venture capital has become somewhat more risk-averse in recent years, mainly because the costs of building software products has become so low. But there is a lot of innovation to made in the physical world, which is currently underrepresented in investment portfolios. On the other hand, I'm not sure the hyperloop is a good fit for a VC investment. Maybe someone out there will be willing to take a huge risk with limited upside, but it does not fit VC theory, which is still a business at the end of the day. It seems like the appropriate funding channel for something like should be the government, at least in a perfect world. Otherwise, major players in the industry are the next most relevant, perhaps companies that already manage toll roads and infrastructure.
snitko 13y ago
I have an alternative theory. It's because important real things are heavily regulated. Government sticks its nose into everything. The internet was an exception, because they didn't realize its potential fast enough (China, on the other hand, had some time to do the homework). Whatever industry is regulated - transportation, healthcare, protection, drugs - you have high prices and a high entry barrier. By pretending to care about consumers, governments simply rob both entrepreneurs and consumers. If they truly cared, they would allow multiple consumer protection agencies on the market each helping consumers navigate the said market, but with no power to prohibit or regulate anything. Right now a government is a monopolist in consumer protection business with an ultimate power to kick anyone out of the market. That can't be good for consumers. And don't tell me people would die if there was no regulations - every day thousands die because it takes years for the FDA to approve an experimental drug, but no one seems to care. As a side note, don't be surprised that tangible businesses with a lot of real assets make less money than some chat application. In airline industry, whose margins do you think are the lowest? Airlines. Whose margins are the highest? IT companies that run ticket reservation systems.
- anigbrowl 13y ago
  Actually, the federal government passed a law in 1998 for the specific purpose of limiting the taxability of internet services specifically in order to grow the the industry, which kind of negates your whole theory. http://en.wikipedia.org/wiki/Internet_Tax_Freedom_Act http://en.wikipedia.org/wiki/Internet_Tax_Freedom_Act
  - snitko 13y ago
    No, it doesn't. It's a smart move: allow the industry to grow fast, then start taxing it (as far as I remember, some states, California perhaps, recently planned to introduce internet sales tax or something like it and Amazon was outraged, no?).
    - anigbrowl 13y ago
      The ITFA has nothing to do with sales tax. Your original argument was that government didn't get around to regulating it heavily here because it didn't realize the potential of the internet. Now you're saying that they avoided regulating it because they recognized its potential.
kamaal 13y ago
Capitalism works to tackle such things, it gives you exactly what you want. Which is extremely powerful and dangerous at the same time. If people want free services to share pictures and not low priced long distance travel. They will get exactly that. I'm not saying that people don't want cheaper long distance travel, or better medical electronics equipment etc. But sharing cat pictures seems to be a more immediate need which people want in the next 30 minutes, 15 times a day. This is a hypothetical situation, but imagine if there is major global diabetes pandemic in the next 10 years. You will see a major demand for glucometers, and you will see tons of innovation go around it. Plus there are other dynamics at play here like ROI, barrier to entry etc.
- rosser 13y ago
  The notion that "capitalism... gives you exactly what you want" presumes that people know what they want. I don't think I buy that premise. People may know which they prefer of the alternatives presented to them, but by no means is that the same as knowing what they want.
- Osiris 13y ago
  The problem that's being brought up is that Capitalize focuses on serving selfish, individual, needs. Those may or may not also been good for society as a whole. We, the people, have entered into a social contract that is enforced through government to allow us to co-exist. Given that situation, there are some things/processes/services that are good for society as a whole but don't really make sense individually. For example, vaccines are really good for society in that they reduce disease, thus freeing up resources for other individual medical needs. However, a single person wouldn't take a vaccine because it only benefits them in at least 80% of the population also takes it. Here is a situation in which a societal good is underserved in pure capitalism. Often I see people arguing that "pure" capitalism solves all problems, but that's clearly not the case. It's a very good system, but outside influence can be needed to optimize social welfare over individual welfare.
  - kamaal 13y ago
    Note, the soviet style centrally planned economy didn't work too well for them. In the absence of market indicators you are left at the judgement of a few bureaucrats. I'm not saying capitalism is panacea, but its best of other worst options. Market indicators are not perfect, but they get close.
dmourati 13y ago
Torch icon, didn't read.
rikacomet 13y ago
Because the gap between current capacity, and required capacity is bit more than worth risking money. There are in short variables we yet not know, which will come in force when such a project is undertaken. Personally I would have taken the leap, if given the choice, but if people are not investing in Hyperloop, than it is mainly because they are playing safe. The only reason besides that, which pokes me in the face, to not fund this is: economics for the common man. If the case of current trains not being built to full capacity (i.e we can do 400 kmph in Bullet trains, yet in developing countries, avaerage speed is 100kmph)is proof enough, the point can be taken from the concept itself. What is more convincing then the design is the "5th dimension of transport" thing. But where does that 5th dimension exists? A living example is in Delhi at the moment. Metro just entered Phase 3, yet the stress on Delhi's transportation system has become so large, that even with record ridership, Metro is not being able to ease that pressure. The government is going for efficiency by modernising its bus fleet into BRT corridors, still it is a temporary fix. How can we solve this? Its not the possibility that matters here only, but the individual need and economics.
apsec112 13y ago
Many say that, in Silicon Valley, there is "no penalty for failure". I'll be a heretic for a bit, and say this is part of the reason why we don't have Hyperloop. Software companies have huge payoff ratios. You invest $1M in 5,000 companies, and hopefully one of them is Facebook. The payoff on a big success is thousands to one. If you give $1M to some douchebag who spends it on hookers and blow, no big deal. Infrastructure companies have much lower payoff ratios. You might invest $1B in the hope of getting back $10B. But for that to be profitable, the success probability must be at least 10%. Which means you have to be pretty sure they aren't going to just blow it all on parties. Now, from the founder's perspective, building an infrastructure company is really hard, and blowing $1B on parties is really easy. So if there's no penalty for failure - no social cost to wasting the money, and not trying very hard to build the hardware - that's what almost everyone winds up doing. Infrastructure demands large capital investment, and large capital investment demands some form of accountability.
- notahacker 13y ago
  Never mind the failures due to coke and hookers. The big upside to the SV early stage investments is that startups that are responsibly run but don't seem to have a natural route to profitability can probably end up selling the people or tech as assets to someone else in the sector. Investors expect positive returns on some of the "near misses" in their portfolio. By contrast, if you can't make an operating profit on the Hyperloop having paid all the research and infrastructure costs (either it doesn't reliably work, or is just widely considered too unpleasant to ride on a regular basis) you end up with miles of very visible scrap metal.
seeingfurther 13y ago
It's because PG values hyper growth in the early days of a startup.
tfb 13y ago
This might be one of the best articles I've read on HN in a long time. One point that really hit home with me is that we need to innovate innovation. I'm willing to bet that a huge part of our stagnation is a result of our creative outlets not being diverse enough. We seem to have become limited to our screens and our virtual worlds. And it isn't by accident. We're social creatures and social media has sucked us in. And of course the internet plus the various kinds of screens (devices) used for viewing it are very effective means of communication, advertising, etc. And we love to be entertained. So I think the key to a wider range of innovation is to somehow reveal to the masses that there are many tangible concepts just waiting to become part of our physical world, concepts that will provide the same social, commercial, and entertaining functions as those in the virtual world. Somehow our collective focus will need to shift from virtual to physical. 3D printing is probably a good step in the right direction, but I think it will need to be combined with some kind of commodified robotics to be truly useful.
- vdaniuk 13y ago
  Anecdotally, this might be one of the worst articles I've read on HN in a long time filled with ad hominem attacks, crude language, misplaced anger and trite memes to stir a controversy. The point is important but the presentation is very bad.
tehwalrus 13y ago
It's almost like we need to go borrow investors from the past - investing in railroads. I like the analysis though, sad I didn't see it in August. We need a new startup incubator called "Sleepers and Ballast" instead of "Y Combinator".
abalone 13y ago
Folks. There's no crisis of innovation. This would be a lot clearer if people understood how Silicon Valley has always worked: 1. Government pays for really big long-term high-risk core technology development. Things like microprocessors, the internet, voice analysis, lasers, space rockets, highways, etc. 2. These are mostly done under the rubric of defense spending. (This is important.) 3. Private sector steps in to commercialize the projects that bear fruit. Hyperloop falls under category #1. Those projects take billions invested over decades with very uncertain prospects. Usually supported by military procurement. Yes, even highways were built ostensibly for the military. And Siri on your iPhone? Funded by the CIA. That kind of Really Big Fundamental innovation is funded by the government. It's never been VCs. They focus on the "last mile". Space X is a good example of that: bringing a foundation of core tech developed by NASA to market, adding commercial-oriented innovation on the scale of a few years and a couple hundred million from the private sector. But even at this stage, there's still many more hundreds of millions in government procurement (prepaid launch contracts). The reason Hyperloops don't get funded is that the government doesn't have a military application (or pretext) for it. Now we could go on to ask why Silicon Valley's megabucks foundation is military spending and not, say, direct government investment in sustainable public services. But then we get to some uncomfortable issues, like how the public might feel more entitled to the fruits of those investments. Whereas if core science and tech is seen as a kind of "military surplus", free or cheap for the taking, then the VC private sector gets to keep the profits from commercialization.
- InclinedPlane 13y ago
  The idea that "military development advances technology" is very popular but not entirely accurate. The micro-processor, for example, was invented while working on a handheld calculator project, and advanced through the consumer market. Sometimes military development advances technologies in ways that might not have happened otherwise but it's hard to compare to the way development would have gone otherwise. Take the development of aircraft from their invention through WWII. Unquestionably there was a rapid pace of development during, and due to, WWI and WWII. But there was also a rapid pace of development outside of the wars. The design of the iconic WWII fighters the Supermarine Spitfire and P51 Mustang owe much to the advancement of high performance aviation spurred by the entirely civilian Schneider Trophy competitions through the 1920s and '30s, for example.
icebraining 13y ago
OK, so where are the examples of $6B projects being funded by private money before the dominance of SV? Surely you can provide some examples from before SV had "killed major innovation", no?
Cthulhu_ 13y ago
Well, Instagram and Snapchat and the like are on the extreme end of the scale; the reason they get funded is because: * Development is cheap * Returns are quick That is, anyone with a PC and a server can create a Snapchat clone; anyone with an image processing library (or knowledge to create one) can create an Instagram; getting a handful of developers together is easy, and building the next big web app will take just an idea and a few dozen K to develop - low risk. If it fails, no biggie, few K lost, some personal drama. If it doesn't fail, and is lucky it'll grow for a few years in its userbase, prove itself, and increase its value to the billions the lucky few companies did. This is a complete opposite to the truly disruptive things like Hyperloop, which, if successful, will change the world of transportation. If it fails, however, investors will have lost billions - because the start-up costs are billions, not a few K or a garage and spare time like the silicon valley startups cost. Risk vs reward, risk-spreading. With a billion dollar, an investor can fund a hundred startups comfortably, and only one of them has to strike it big for the investor to make a profit. With bigger and potentially more influential projects like Hyperloop, the investor will have to pour all of his investment money into one project, and if it fails - and I'd say there's a decent chance that it will - that money's gone. And Hyperloop is, I'd say, a high-risk investment; it'll take years to develop, it'll probably have a lot of problems getting the 'pipe' up, it'll have to combat the user's fears of being locked up in a high-speed pipe, it'll have to be cost-competitive with the competition, and it has to be safe; a new transportation system like this needs just one serious accident for nobody to ever use it again.
goggles99 13y ago
So if someone reputable started an anti gravity tech company, you would write the same blog about them? The point is, most don't think that the design would even work. The specs defy many laws of physics. It is more of a concept or dream at this stage. It would be an extremely high risk investment - thus, no takers. By comparison, Instagram had a proven and popular product. Why would you compare something so very different?
tehabe 13y ago
Investors are not stupid or blind. Hyperloop is similar to the Maglev train technology developed in Germany and Japan for the last decades. The inventor of the maglev train even thought about hyperloop. But so far just one single commercial maglev train route has been build. And the suck costs are extremely high. The six billion Musk estimated are wrong, it won't be six billion, it will much, much more than that. Investors don't invest in hyperloops not because of the 9 theories the author is mentioning but because hyperloop are not an alternative to conventional trains.
k_os 13y ago
T.D : Do you know what a hyperloop is? N : A sort of train that moves in vacuum T.D : It's just a very fast train. Now why do guys like you and me know what a hyperloop is? Is this essential to our survival? In the hunter gatherer sense of the word?
embro 13y ago
I really liked this post! I sometimes feel the innovators and thinkers of this world are not getting their fair share of attention. I also feel like companies should team up together and do crazy things share the risks as a group. If a group of key companies team up together to make nearly impossible things they would also create a "hype" in an instant around this. It doesn't need to be the Hyperloop, it could be much much more "down to earth"
nraynaud 13y ago
As seen from Europe, it reminds me of Russians Bonds (I think my grandfather still have some) and Eurotunnel. Didn't go too well.
programminggeek 13y ago
The difference between SnapChat and Hyperloop is that Snapchat has people using it today, which drives its value, Hyperloop will cost billions before anyone is using it, and people might hate it. The hyper loop could easily turn into The Homer: http://simpsons.wikia.com/wiki/The_Homer http://simpsons.wikia.com/wiki/The_Homer and who wants to spend $6 billion on inventing that?
mimog 13y ago
Those aren't theories they are hypotheses
daddykotex 13y ago
I like the Activity Graph on the right :D
eliben 13y ago
On a related note, the shitstorms over Google's closing projects like Reader or changing the comment systems in YouTube completely eclipse announcements of developing self driving cars, new ways of wearable computing, new methods of distributing internet to 3rd world countries, and so on.
roymurdock 13y ago
I'm a little confused about a couple of the statements made in the article: 1. “If Kaiser Permanente releases a drug that cures all cancers, is the stock price guaranteed to go up? No, of course not. The stock price goes up or down based on supply and demand. It only responds to human action. And, therefore, the price of a stock is solely determined by how people think about the price of a stock." - Am I wrong in thinking that the price of the stock is correlated with the value of the company which is much less influenced by what stockholders think and much more based on what people think of the value of the product/service? Whoever invents the cure for cancer is going to see a huge increase in their stock price because people are going to buy their drugs, increasing revenue, profits, ROE, dividends, growth. etc. What is the author trying to say? 2. "Right now, the only sane choice is to aim for an acquisition. But mergers and acquisitions are on average $100 million a piece. There’s no way to have a company as large as Hyperloop acquired because it’s a multi billion-dollar company. You just can’t do it." What about motorola (12.5bn) youtube (1.5bn) and instagram (1bn) just to name a few? Just because a company is valued over $1bn doesn't mean there's no more room for growth and a subsequent exit? Shotgun Investing vs. Value Investing - Doesn't the government sometimes fill the role of value investor? Especially in cases of infrastructure like the hyperloop? Any clarification would be appreciated.
vinceguidry 13y ago
The last time infrastructure investment's been sexy was the 1800s. That was the last time you could build large scale transportation projects with private money, and that was only because there was a huge frontier to conquer. Now everything is owned by someone whose got powerful friends, rather than natives you can just shove out of the way. It took the political might of a wartime hero president to build the Interstate system. It's utterly silly to look at the Valley's reluctance to fund the Hyperloop as some kind of failure of the sheeple. The authors should crack open a history book sometime and learn how hard stuff like this is.
- jseliger 13y ago
  This is one of the more astute comments in this thread, and I hope it gets the upvotes it deserves. Alex Tabarrok also discusses the "veto player" problem some in Launching the Innovation Renaissance (http://www.amazon.com/Launching-Innovation-Renaissance-Market-ebook/dp/B006C1HX24?ie=UTF8&tag=thstsst-20&linkCode=as2&camp=1789&creative=390957 http://www.amazon.com/Launching-Innovation-Renaissance-Marke...), which is worth reading if you're interested in these issues.
  - vinceguidry 13y ago
    Purchased, thanks.

181 points by Bahamut 13y ago

pa5tabear 13y ago

Payback. Risk. Magnitude. Is there really any more to it than that?

tansey 13y ago
Exactly. Hyperloop in particular has the worst of all worlds. 1. Huge investment required up front. 2. First of its kind, so lots of risk. 3. Small potential gain relative to the investment. In fact, Hyperloop was never proposed as a VC funded project by Musk. He's merely proposing it as an alternative to high-speed rail. Historically, public transit loses money, making it a terrible investment. However, it's a public good so governments continue to support them.
- wavesounds 13y ago
  You forgot the biggest risk of all, Death. I'm all for the Hyperloop but lets be realistic, its way easier to give a few guys in a garage a hundred thousand dollars to build software for sharing pictures that's never going to hurt anyone then fork over billions for a futuristic transport that could potentially kill people.

volandovengo 13y ago

i couldn't help but think about this article when news broke of the 3 billion dollar snapchat offer.

bane 13y ago
Or half the cost of the Hyperloop? And it was turned down.
vdaniuk 13y ago
Really? You think that spending 6B on an absolutely untested idea with great risk is somehow comparable to a 3B acquisition of a mature startup that will immediatly bring business value to a company?
- auctiontheory 13y ago
  You can call me a old fuddy-duddy, but I'm just not sure that a company with zero revenue qualifies as "mature."
  - vdaniuk 13y ago
    I've specifically said 'mature startup' to address this type of concern.
    - adamnemecek 13y ago
      I can't say that that really addresses that concern.
      - vdaniuk 13y ago
        Company != startup. They dont have revenues, but they have 25M users audience that will be instantly monetizable as soon as it is plugged in the FB or other company advertising system. And that makes them a perfectly fine target for acquisition, even if they don't have revenues of their own. Does this address a 'mature' company concern?
        notahacker 13y ago
        It might make it a logical target for acquisition, but it doesn't follow that it's worth ~4% of Facebook's market cap when Facebook has 100x the users (including virtually all the Snapchat userbase...) and could trivially clone Snapchat's tech. Not to mention that Facebook's own profit figures from their more diverse and mature advertising platform suggest it would take a very long time to accumulate $3bn in advertising revenues off 25m users.

aclements18 13y ago

Silicon Valley did fund some "hyperloops", look no further than Musk's other two big ideas (Space X & Tesla). Look for the few VCs that are non conventional thinkers themselves. The ones that discuss the distant future as though it is right around the corner or even happening now. As an example watch any 10 minutes of this interview with Steve Jurvetson of DFJ. You'll see why he and Musk were a good fit: http://youtu.be/O2tK0Wl2F8w http://youtu.be/O2tK0Wl2F8w

abalone 13y ago
Those are not hyperloops. Both SpaceX and Tesla are built on decades of R&D and core science paid for mostly by taxpayers to the tune of hundreds of billions of dollars. This is not to take anything away from the "layer" that Musk added to this foundation. But hyperloop does not have the same foundation. There have been space missions and electric cars before; there hasn't been anything approaching a hyperloop at scale. So the investment risk is even greater.
- tehwalrus 13y ago
  I was going to compare it with the bullet train - but that apparently runs on standard gauge rails (just welded to the sleepers instead of bolted) - I swear they told us it was a levitated magnet in school... So maybe you're right, the hypertube is very complicated compared to a pair of rails and an power supply cable.
  - snogglethorpe 13y ago
    Even standard HSR is a lot more complicated that that—you can't just put a bigger motor in a slow-speed train—but it certainly benefited from the large amount of commonality with lower-speed rail, and most of the higher-speed technology was developed over time, with real testing. [Note the first Shinkansen was a fair bit slower (~200km/h) than today's highest-speed models, and ramping up the speed from there occurred over many years.] Japan is also building a real (long-distance, high-speed) maglev system. It's much more of a leap from standard rail than HSR was, but again, they're using technology which they actually have long-term real-world experience with. Hyperloop, by contrast, doesn't even have a lab model. It's a diagram on a napkin, with some of the calculations worked out. The press and the general public may not notice this distinction, but people investing large amounts of money most certainly will...

bane 13y ago

Because VCs are not about changing the world, they're about quickly making lots of money on high-risk bets. There needs to be something looking for medium sized boats of money over medium length periods of time for medium risk. Is that the stock market I guess?

raverbashing 13y ago

This is a very truthful article and one that should bother a lot of people The stock market and investors "immediateness", and all the other points. 3B dollars can fund a (small) semiconductor company. And they're going for a picture sharing app (different, but worse - as in, a quirk - than Instagram)?

vdaniuk 13y ago
Can 3B dollars fund a small semiconductor company that will have a sustainable competitive advantage against Intel, AMD and TSMC? My guess is NO. Successful picture sharing apps has stable audience locked in with network effects and switching costs. That is a sustainable competitive advantage.
- raverbashing 13y ago
  "that will have a sustainable competitive advantage against Intel, AMD and TSMC? My guess is NO" Maybe, but these are not the only semiconductor companies in existence. And there's a whole lot of (semiconductor) products beyond what those produce. But to compete agains them, yes, you would at least have to double that value, but probably more. Or you just design and subcontract manufacturing to them.
  - vdaniuk 13y ago
    Dont you think that all that considerations are factored in the VC process?
    - ksk 13y ago
      Why are you assigning some sort of 'perfect knowledge' or clairvoyance to VCs ? They are just like everyone else and they make irrational decisions and have inherent biases.
      - vdaniuk 13y ago
        I didn't assign anything. You did. Stop putting words in my mouth. My point was that if a random HN commenter is able to raise some issues about ROI of various investments then certainly VCs who do it professionally have these issues factored in. Simple as that.

b0z0 13y ago

If you think about it, it's amazing what we're valuing at billions of dollars these days. Twitter, $4 billion? That's for a lot of lines of code, and, sure, some server infrastructure, etc. that will be obsolete in the next few years. The same goes for Facebook, Instagram, Pinterest, almost any Silicon Valley startup we can name. Just a bunch of lines of code, not really solving any problems. But it makes money, and that's what people care about.

danhak 13y ago
The value of the companies you mention doesn't come from the code. It comes from people's attention. That said, I'm not sure I disagree with your point.
k_os 13y ago
I totally agree, that said think about gold.. just a bunch of atoms that reflect light in such a way that our brain computes it into a 'shining' image..

JDDunn9 13y ago

Mass transportation has always lost money. Most of the original railroads in America went bankrupt. Today, ~90% of the cost of building railroads are subsidized by the government. In Japan, they over-invested in trains and it produced a huge drag on the economy. Most experts I've heard say the hyperloop would cost far more than the estimated $6 billion. Doing things for the first time means you're likely to go way over-budget. After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese".

idProQuo 13y ago
>After someone builds a hyperloop though, and works out all the kinks, there will be investors for the 2nd one. It's a case of "the second mouse gets the cheese". Isn't this the exact situation patents were intended to prevent?
- JDDunn9 13y ago
  The hyperloop is open source though. Even if it wasn't, 20 years isn't a huge head start to work out all the bugs and build very many lines given the cost/time to build 1.
  - idProQuo 13y ago
    So then how did railroads do... ohhh. How exactly is it open source?
    - JDDunn9 13y ago
      The design is open source, anyone can build it. As opposed to the et3 concept, which requires a 5% royalty if you build it.
snogglethorpe 13y ago
> Mass transportation has always lost money Most passenger rail in Japan is private, and profitable, including both capital and operating expenses. In the years leading up to WWII, and during it, the Japanese government nationalized many rail lines (although many stayed private as well) to form JNR, and JNR proved to be too inefficient, and built up a lot of debt. That then of course lead to the privatization of JNR in the 1980s (which included transferring JNR's debt to the new private JR companies), which was highly successful. > In Japan, they over-invested in trains and it produced a huge drag on the economy Japan has invested a lot in rail, but it certainly isn't a "drag on the economy". Indeed, it's arguably a boon to the economy as it's a much more efficient transit system than private vehicles on roads, and given the business model of Japanese railroads (which builds retail and housing around railroad nodes, and builds railroads to support new retail and housing), directly contributes to much more efficient urban organization. The rail lines in Japan that lose money are rural ones in sparsely populated areas. However these account for a very small proportion of rail usage.

mistermumble 13y ago

Link for those who want to see the original article: http://jerzygangi.com/why-silicon-valley-funds-instagrams-not-hyperloops/ http://jerzygangi.com/why-silicon-valley-funds-instagrams-no...

hfz 13y ago
Now I wonder why it's on Pathfinder on the first place and why it's stealing traffic from the original source.
neeee 13y ago
Thanks. I close the pathfinder page the moment i saw "Reading time" over the article.
Bahamut 13y ago
Ah, my apologies - I was linked the article from a friend and immediately thought it would be a good topic of discussion here. At least the original article was linked prominently at the top though.

data_app 13y ago

Great post. Thanks for writing this - you have guts! Many here think the same way but too afraid to say so.

vdaniuk 13y ago
You really need that sarcasm tag.

nostromo 13y ago

It is amazing that someone is willing to pay $3 billion for SnapChat, but nobody is willing to pay $6 billion for Hyperloop (which was Musk's estimate, although many people took issue with it). But we're still in the early days of the internet and smartphone era. It's still a gold rush where people are running after get-rich-quick ideas. Eventually we'll hit saturation and those quick exits will become less common. That will force investors to look for new opportunities elsewhere.

anigbrowl 13y ago
True, but at least Snapchat already works and has users. I like Elon Musk but I LOLed when I saw his estimate of $6 billion.
- kamaal 13y ago
  I am not sure why that is hilarious. India just sent a probe to Mars at $69 Million. Musk has himself built a rocket company with a million dollar scale investment. There is no reason to dismiss, especially when he has a track record of delivering great stuff on time and in budget.
  - anigbrowl 13y ago
    Because the cost is not just technological. There's also major land use issues, which get expensive in CA. His idea that putting it along the middle of the freeway will obviate these is not credible. I estimate $20bn to build it, minimum. Rocketry is simple by comparison.
    - david927 13y ago
      Maybe, maybe not. I don't see how running it along the freeway is not credible. But here's the upshot: Snapchat is a photo-sharing app that will hardly be around in 10 years; the Hyperloop would be. This seems to be lost on all those in Silicon Valley who sit for hours every day in traffic to go to their one-story prefab work box, only to then sit in the same traffic later to return to their prefab home box. There's investment to make your money grow and investment in the future. We need less of the former and more of the latter.

deleted 13y ago

[deleted]

vdaniuk 13y ago

So what is the level of majority of arguments in the linked article? DH0-DH1[1]. Is this really an article worthy of attention for HN audience? [1] As per http://www.paulgraham.com/disagree.html http://www.paulgraham.com/disagree.html

rjurney 13y ago

Just because the internet sector is temporarily insane where gimmick apps reject $3 billion acquisitions doesn't change that most money invested in the valley goes to serious businesses doing real research and development.

seeingfurther 13y ago
This is probably the most accurate on point statement in the thread.
- vdaniuk 13y ago
  Except for that gimmick apps part. Snapchat has 25M users. That is more than most countries in the world to put it in perspective. That is nothing to scoff at.

yummyfajitas 13y ago

A big part of the reason the IPO market suck, i.e. why "the stock market isn’t influenced by value today like it was thirty years ago", is taxes. Specifically, the differential tax treatment of capital gains and dividends. A long time back, equities were viewed as a vehicle for distributing dividends. A company earns money and pays it to investors. You build the hyperloop, customers buy tickets, you give investors a cut of the proceeds. The value of HLOOP is based primarily on the expected value of this revenue stream. Nowadays, dividends are double taxed while capital gains are only single taxed, which means that companies mostly don't bother with dividends anymore. Investors tolerate this because the differential tax rates mean that management would be throwing away their money if they issued dividends. As a result, the value of equity is the value of expected capital gains, resulting in the current situation.

wnoise 13y ago
So we should double tax capital gains?
- InclinedPlane 13y ago
  In my opinion capital gains and corporate income tax should go away and everything should fall under individual. income tax. Simplifies a lot of things and avoids a lot of perverse incentives created by the existing system.
  - PeterisP 13y ago
    Moving corporate income tax to individual income tax would allow to postpone paying any such tax forever, allowing company-owners to skip paying the tax, but allowing them to use the (yet untaxed) funds to purchase/invest whatever they want.
    - yummyfajitas 13y ago
      No, it doesn't. The IRS is very good at taxing corporate transfers to individuals (e.g., the company paying for your house, clothes and food) as income. If this wasn't already a solved problem, we wouldn't even need to eliminate corporate taxes to engage in the scheme you propose. Just book revenue, book your personal expenses as corporate expenses, and the company made no profit and hence needs to pay no taxes. This is why your company generally only provides you benefits in a very narrow set of categories that happen to be tax deductible (health insurance, 401k).

auctiontheory 13y ago

Silicon Valley is about momentum investing. You or I may think that many of these companies are silly, but where the money goes, the rest of us may have to follow.

pytrin 13y ago

I agree and disagree. Venture capital has become somewhat more risk-averse in recent years, mainly because the costs of building software products has become so low. But there is a lot of innovation to made in the physical world, which is currently underrepresented in investment portfolios. On the other hand, I'm not sure the hyperloop is a good fit for a VC investment. Maybe someone out there will be willing to take a huge risk with limited upside, but it does not fit VC theory, which is still a business at the end of the day. It seems like the appropriate funding channel for something like should be the government, at least in a perfect world. Otherwise, major players in the industry are the next most relevant, perhaps companies that already manage toll roads and infrastructure.

snitko 13y ago

I have an alternative theory. It's because important real things are heavily regulated. Government sticks its nose into everything. The internet was an exception, because they didn't realize its potential fast enough (China, on the other hand, had some time to do the homework). Whatever industry is regulated - transportation, healthcare, protection, drugs - you have high prices and a high entry barrier. By pretending to care about consumers, governments simply rob both entrepreneurs and consumers. If they truly cared, they would allow multiple consumer protection agencies on the market each helping consumers navigate the said market, but with no power to prohibit or regulate anything. Right now a government is a monopolist in consumer protection business with an ultimate power to kick anyone out of the market. That can't be good for consumers. And don't tell me people would die if there was no regulations - every day thousands die because it takes years for the FDA to approve an experimental drug, but no one seems to care. As a side note, don't be surprised that tangible businesses with a lot of real assets make less money than some chat application. In airline industry, whose margins do you think are the lowest? Airlines. Whose margins are the highest? IT companies that run ticket reservation systems.

anigbrowl 13y ago
Actually, the federal government passed a law in 1998 for the specific purpose of limiting the taxability of internet services specifically in order to grow the the industry, which kind of negates your whole theory. http://en.wikipedia.org/wiki/Internet_Tax_Freedom_Act http://en.wikipedia.org/wiki/Internet_Tax_Freedom_Act
- snitko 13y ago
  No, it doesn't. It's a smart move: allow the industry to grow fast, then start taxing it (as far as I remember, some states, California perhaps, recently planned to introduce internet sales tax or something like it and Amazon was outraged, no?).
  - anigbrowl 13y ago
    The ITFA has nothing to do with sales tax. Your original argument was that government didn't get around to regulating it heavily here because it didn't realize the potential of the internet. Now you're saying that they avoided regulating it because they recognized its potential.

kamaal 13y ago

Capitalism works to tackle such things, it gives you exactly what you want. Which is extremely powerful and dangerous at the same time. If people want free services to share pictures and not low priced long distance travel. They will get exactly that. I'm not saying that people don't want cheaper long distance travel, or better medical electronics equipment etc. But sharing cat pictures seems to be a more immediate need which people want in the next 30 minutes, 15 times a day. This is a hypothetical situation, but imagine if there is major global diabetes pandemic in the next 10 years. You will see a major demand for glucometers, and you will see tons of innovation go around it. Plus there are other dynamics at play here like ROI, barrier to entry etc.

rosser 13y ago
The notion that "capitalism... gives you exactly what you want" presumes that people know what they want. I don't think I buy that premise. People may know which they prefer of the alternatives presented to them, but by no means is that the same as knowing what they want.
Osiris 13y ago
The problem that's being brought up is that Capitalize focuses on serving selfish, individual, needs. Those may or may not also been good for society as a whole. We, the people, have entered into a social contract that is enforced through government to allow us to co-exist. Given that situation, there are some things/processes/services that are good for society as a whole but don't really make sense individually. For example, vaccines are really good for society in that they reduce disease, thus freeing up resources for other individual medical needs. However, a single person wouldn't take a vaccine because it only benefits them in at least 80% of the population also takes it. Here is a situation in which a societal good is underserved in pure capitalism. Often I see people arguing that "pure" capitalism solves all problems, but that's clearly not the case. It's a very good system, but outside influence can be needed to optimize social welfare over individual welfare.
- kamaal 13y ago
  Note, the soviet style centrally planned economy didn't work too well for them. In the absence of market indicators you are left at the judgement of a few bureaucrats. I'm not saying capitalism is panacea, but its best of other worst options. Market indicators are not perfect, but they get close.

dmourati 13y ago

Torch icon, didn't read.

rikacomet 13y ago

Because the gap between current capacity, and required capacity is bit more than worth risking money. There are in short variables we yet not know, which will come in force when such a project is undertaken. Personally I would have taken the leap, if given the choice, but if people are not investing in Hyperloop, than it is mainly because they are playing safe. The only reason besides that, which pokes me in the face, to not fund this is: economics for the common man. If the case of current trains not being built to full capacity (i.e we can do 400 kmph in Bullet trains, yet in developing countries, avaerage speed is 100kmph)is proof enough, the point can be taken from the concept itself. What is more convincing then the design is the "5th dimension of transport" thing. But where does that 5th dimension exists? A living example is in Delhi at the moment. Metro just entered Phase 3, yet the stress on Delhi's transportation system has become so large, that even with record ridership, Metro is not being able to ease that pressure. The government is going for efficiency by modernising its bus fleet into BRT corridors, still it is a temporary fix. How can we solve this? Its not the possibility that matters here only, but the individual need and economics.

apsec112 13y ago

Many say that, in Silicon Valley, there is "no penalty for failure". I'll be a heretic for a bit, and say this is part of the reason why we don't have Hyperloop. Software companies have huge payoff ratios. You invest $1M in 5,000 companies, and hopefully one of them is Facebook. The payoff on a big success is thousands to one. If you give $1M to some douchebag who spends it on hookers and blow, no big deal. Infrastructure companies have much lower payoff ratios. You might invest $1B in the hope of getting back $10B. But for that to be profitable, the success probability must be at least 10%. Which means you have to be pretty sure they aren't going to just blow it all on parties. Now, from the founder's perspective, building an infrastructure company is really hard, and blowing $1B on parties is really easy. So if there's no penalty for failure - no social cost to wasting the money, and not trying very hard to build the hardware - that's what almost everyone winds up doing. Infrastructure demands large capital investment, and large capital investment demands some form of accountability.

notahacker 13y ago
Never mind the failures due to coke and hookers. The big upside to the SV early stage investments is that startups that are responsibly run but don't seem to have a natural route to profitability can probably end up selling the people or tech as assets to someone else in the sector. Investors expect positive returns on some of the "near misses" in their portfolio. By contrast, if you can't make an operating profit on the Hyperloop having paid all the research and infrastructure costs (either it doesn't reliably work, or is just widely considered too unpleasant to ride on a regular basis) you end up with miles of very visible scrap metal.

seeingfurther 13y ago

It's because PG values hyper growth in the early days of a startup.

tfb 13y ago

This might be one of the best articles I've read on HN in a long time. One point that really hit home with me is that we need to innovate innovation. I'm willing to bet that a huge part of our stagnation is a result of our creative outlets not being diverse enough. We seem to have become limited to our screens and our virtual worlds. And it isn't by accident. We're social creatures and social media has sucked us in. And of course the internet plus the various kinds of screens (devices) used for viewing it are very effective means of communication, advertising, etc. And we love to be entertained. So I think the key to a wider range of innovation is to somehow reveal to the masses that there are many tangible concepts just waiting to become part of our physical world, concepts that will provide the same social, commercial, and entertaining functions as those in the virtual world. Somehow our collective focus will need to shift from virtual to physical. 3D printing is probably a good step in the right direction, but I think it will need to be combined with some kind of commodified robotics to be truly useful.

vdaniuk 13y ago
Anecdotally, this might be one of the worst articles I've read on HN in a long time filled with ad hominem attacks, crude language, misplaced anger and trite memes to stir a controversy. The point is important but the presentation is very bad.

tehwalrus 13y ago

It's almost like we need to go borrow investors from the past - investing in railroads. I like the analysis though, sad I didn't see it in August. We need a new startup incubator called "Sleepers and Ballast" instead of "Y Combinator".

abalone 13y ago

Folks. There's no crisis of innovation. This would be a lot clearer if people understood how Silicon Valley has always worked: 1. Government pays for really big long-term high-risk core technology development. Things like microprocessors, the internet, voice analysis, lasers, space rockets, highways, etc. 2. These are mostly done under the rubric of defense spending. (This is important.) 3. Private sector steps in to commercialize the projects that bear fruit. Hyperloop falls under category #1. Those projects take billions invested over decades with very uncertain prospects. Usually supported by military procurement. Yes, even highways were built ostensibly for the military. And Siri on your iPhone? Funded by the CIA. That kind of Really Big Fundamental innovation is funded by the government. It's never been VCs. They focus on the "last mile". Space X is a good example of that: bringing a foundation of core tech developed by NASA to market, adding commercial-oriented innovation on the scale of a few years and a couple hundred million from the private sector. But even at this stage, there's still many more hundreds of millions in government procurement (prepaid launch contracts). The reason Hyperloops don't get funded is that the government doesn't have a military application (or pretext) for it. Now we could go on to ask why Silicon Valley's megabucks foundation is military spending and not, say, direct government investment in sustainable public services. But then we get to some uncomfortable issues, like how the public might feel more entitled to the fruits of those investments. Whereas if core science and tech is seen as a kind of "military surplus", free or cheap for the taking, then the VC private sector gets to keep the profits from commercialization.

InclinedPlane 13y ago
The idea that "military development advances technology" is very popular but not entirely accurate. The micro-processor, for example, was invented while working on a handheld calculator project, and advanced through the consumer market. Sometimes military development advances technologies in ways that might not have happened otherwise but it's hard to compare to the way development would have gone otherwise. Take the development of aircraft from their invention through WWII. Unquestionably there was a rapid pace of development during, and due to, WWI and WWII. But there was also a rapid pace of development outside of the wars. The design of the iconic WWII fighters the Supermarine Spitfire and P51 Mustang owe much to the advancement of high performance aviation spurred by the entirely civilian Schneider Trophy competitions through the 1920s and '30s, for example.

icebraining 13y ago

OK, so where are the examples of $6B projects being funded by private money before the dominance of SV? Surely you can provide some examples from before SV had "killed major innovation", no?

Cthulhu_ 13y ago

Well, Instagram and Snapchat and the like are on the extreme end of the scale; the reason they get funded is because: * Development is cheap * Returns are quick That is, anyone with a PC and a server can create a Snapchat clone; anyone with an image processing library (or knowledge to create one) can create an Instagram; getting a handful of developers together is easy, and building the next big web app will take just an idea and a few dozen K to develop - low risk. If it fails, no biggie, few K lost, some personal drama. If it doesn't fail, and is lucky it'll grow for a few years in its userbase, prove itself, and increase its value to the billions the lucky few companies did. This is a complete opposite to the truly disruptive things like Hyperloop, which, if successful, will change the world of transportation. If it fails, however, investors will have lost billions - because the start-up costs are billions, not a few K or a garage and spare time like the silicon valley startups cost. Risk vs reward, risk-spreading. With a billion dollar, an investor can fund a hundred startups comfortably, and only one of them has to strike it big for the investor to make a profit. With bigger and potentially more influential projects like Hyperloop, the investor will have to pour all of his investment money into one project, and if it fails - and I'd say there's a decent chance that it will - that money's gone. And Hyperloop is, I'd say, a high-risk investment; it'll take years to develop, it'll probably have a lot of problems getting the 'pipe' up, it'll have to combat the user's fears of being locked up in a high-speed pipe, it'll have to be cost-competitive with the competition, and it has to be safe; a new transportation system like this needs just one serious accident for nobody to ever use it again.

goggles99 13y ago

So if someone reputable started an anti gravity tech company, you would write the same blog about them? The point is, most don't think that the design would even work. The specs defy many laws of physics. It is more of a concept or dream at this stage. It would be an extremely high risk investment - thus, no takers. By comparison, Instagram had a proven and popular product. Why would you compare something so very different?

tehabe 13y ago

Investors are not stupid or blind. Hyperloop is similar to the Maglev train technology developed in Germany and Japan for the last decades. The inventor of the maglev train even thought about hyperloop. But so far just one single commercial maglev train route has been build. And the suck costs are extremely high. The six billion Musk estimated are wrong, it won't be six billion, it will much, much more than that. Investors don't invest in hyperloops not because of the 9 theories the author is mentioning but because hyperloop are not an alternative to conventional trains.

k_os 13y ago

T.D : Do you know what a hyperloop is? N : A sort of train that moves in vacuum T.D : It's just a very fast train. Now why do guys like you and me know what a hyperloop is? Is this essential to our survival? In the hunter gatherer sense of the word?

embro 13y ago

I really liked this post! I sometimes feel the innovators and thinkers of this world are not getting their fair share of attention. I also feel like companies should team up together and do crazy things share the risks as a group. If a group of key companies team up together to make nearly impossible things they would also create a "hype" in an instant around this. It doesn't need to be the Hyperloop, it could be much much more "down to earth"

nraynaud 13y ago

As seen from Europe, it reminds me of Russians Bonds (I think my grandfather still have some) and Eurotunnel. Didn't go too well.

programminggeek 13y ago

The difference between SnapChat and Hyperloop is that Snapchat has people using it today, which drives its value, Hyperloop will cost billions before anyone is using it, and people might hate it. The hyper loop could easily turn into The Homer: http://simpsons.wikia.com/wiki/The_Homer http://simpsons.wikia.com/wiki/The_Homer and who wants to spend $6 billion on inventing that?

mimog 13y ago

Those aren't theories they are hypotheses

daddykotex 13y ago

I like the Activity Graph on the right :D

eliben 13y ago

On a related note, the shitstorms over Google's closing projects like Reader or changing the comment systems in YouTube completely eclipse announcements of developing self driving cars, new ways of wearable computing, new methods of distributing internet to 3rd world countries, and so on.

roymurdock 13y ago

I'm a little confused about a couple of the statements made in the article: 1. “If Kaiser Permanente releases a drug that cures all cancers, is the stock price guaranteed to go up? No, of course not. The stock price goes up or down based on supply and demand. It only responds to human action. And, therefore, the price of a stock is solely determined by how people think about the price of a stock." - Am I wrong in thinking that the price of the stock is correlated with the value of the company which is much less influenced by what stockholders think and much more based on what people think of the value of the product/service? Whoever invents the cure for cancer is going to see a huge increase in their stock price because people are going to buy their drugs, increasing revenue, profits, ROE, dividends, growth. etc. What is the author trying to say? 2. "Right now, the only sane choice is to aim for an acquisition. But mergers and acquisitions are on average $100 million a piece. There’s no way to have a company as large as Hyperloop acquired because it’s a multi billion-dollar company. You just can’t do it." What about motorola (12.5bn) youtube (1.5bn) and instagram (1bn) just to name a few? Just because a company is valued over $1bn doesn't mean there's no more room for growth and a subsequent exit? Shotgun Investing vs. Value Investing - Doesn't the government sometimes fill the role of value investor? Especially in cases of infrastructure like the hyperloop? Any clarification would be appreciated.

vinceguidry 13y ago

The last time infrastructure investment's been sexy was the 1800s. That was the last time you could build large scale transportation projects with private money, and that was only because there was a huge frontier to conquer. Now everything is owned by someone whose got powerful friends, rather than natives you can just shove out of the way. It took the political might of a wartime hero president to build the Interstate system. It's utterly silly to look at the Valley's reluctance to fund the Hyperloop as some kind of failure of the sheeple. The authors should crack open a history book sometime and learn how hard stuff like this is.

jseliger 13y ago
This is one of the more astute comments in this thread, and I hope it gets the upvotes it deserves. Alex Tabarrok also discusses the "veto player" problem some in Launching the Innovation Renaissance (http://www.amazon.com/Launching-Innovation-Renaissance-Market-ebook/dp/B006C1HX24?ie=UTF8&tag=thstsst-20&linkCode=as2&camp=1789&creative=390957 http://www.amazon.com/Launching-Innovation-Renaissance-Marke...), which is worth reading if you're interested in these issues.
- vinceguidry 13y ago
  Purchased, thanks.