🌌 Reshaped #22
The real entrepreneur, Nvidia market cap, Big Tech efficiency, platform geopolitics, fossil fuel nationalization and much more
Welcome to a new issue of Reshaped, a newsletter for those who do not want to miss a thing about the huge transformations of our time.
I have a passion for the chip industry and the news that Nvidia is now worth more than Intel is at the top of the News section. I will be watching more closely the market dynamics between the two giants and AMD in the future. Entrepreneurship is more than the Silicon Valley model. Is it time to go back to the original meaning of the word “entrepreneur”?
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News
💻 For the first time, Nvidia is worth (about $10 billion) more than Intel in terms of market capitalization (Reuters). This reflects the growing strength of Nvidia, which has diversified its portfolio — once focused only on personal computer chips — to include huge investments in AI. On the other hand, Intel has suffered from the recent announcement that Apple will start producing its own chips for the Mac product line and from the renewed competition with AMD in the CPU segment, where the Ryzen product line is gaining shares. Last week, Tesla had surpassed Toyota, becoming the most valuable car producer in the world (TechCrunch).
📱 ByteDance is thinking about restructuring its TikTok business to avoid new bans due to its Chinese roots (The Wall Street Journal). After the ban of TikTok and other 58 Chinese apps in India and the potential ban in the US, it is crucial for ByteDance to prevent the risk of losing millions of users worldwide. Even Wells Fargo has banned the app, while Amazon made a step back to reverse such a decision. This is a pure example of platform geopolitics. If the fundamental asset of a social network is the network itself, being the technology behind easily replicable, states can apply protectionist countermeasures to the growing power of foreign platforms. The problem, of course, is that users get angry — switching costs for influencers might be greater than expected. And, like in the case of Facebook Lasso, cooking the right UX recipe to clone a successful app is still a hard job. In any case, India provided a useful case study on how tech protectionism works: after the ban, the downloads of domestic apps have boomed. In the medium term, this could prove to be a big weapon for governments.
💵 According to a new job post, Twitter would be working on a new subscription model (The Verge). A new team called “Gryphon” would be building a subscription platform for power users. It would make the company less dependent on revenues from advertising, with a relevant diversification of the profit formula. The news had a positive effect on the share price of the company, even if no official announcement has been done yet.
🛒 Walmart is launching a new service to challenge Amazon Prime in the grocery segment (Bloomberg). Walmart+ will cost $98 per year (less than the $119 charged by Amazon) and is aimed at scaling the online business of the retail giant. Due to the enormous power of Walmart in the US, made even stronger thanks to the recent partnership with Shopify, the battle with Amazon in the grocery segment is not a utopian scenario. In the meantime, Uber announced the integration of its platform with the on-demand grocery delivery company Cornershop (VentureBeat). Cornershop only works in Latin America and Canada, but it is expected to expand its operations in the US as well.
🌞 Sunrun is acquiring Vivint Solar for $3.2 billion, including the assumption of debt (The New York Times). Sunrun is currently the leading residential solar company in the US, having surpassed Tesla in 2018. The merger with Vivint, now the third company in the sector, would result in the first sign of market consolidation, with about 15% of shares.
🎩 The real entrepreneur
Try to think about the concept of entrepreneurship without associating it with tech startups, rich billionaires, or financial speculators. The excessive hype around the Silicon Valley model of entrepreneurship, which has been widely discussed here (see, for example, this special issue), generated a mental bias towards the concept itself that is hard to remove.
This is why, according to David Sax, it is time to go back to the original concept of entrepreneurship to embrace a more inclusive definition. It is time to stop discriminating local entrepreneurs with no willingness or potential to scale globally, since they are often crucial for the sustainability of local economies. And it is time to stop promoting models of entrepreneurship based on the idea that a company is a bet on fast and high-rewarding profitability.
Two solutions to this problem, according to Sax, are new education programs and better financing options. Innovation and entrepreneurship education is indeed an absolute priority, being too focused on replicating the Silicon Valley model to the detriment of more traditional forms of business — including lifestyle ones. It is now common for students with different backgrounds — from business management to chemistry — to enroll in such programs. The rate of those who actually become entrepreneurs, however, is declining (see chart below).
They enroll in these programs, where gamification often simplifies the complex dynamics of venture founding, because whatever you do you want it to have a link with innovation. And the innovation economy is now a game for people that are fine with an over-simplified world, where history is taught by a best-seller book and ethical dilemmas are solved by elite committees of tech-enthusiasts.
The real world, however, is all but readable through the lenses of these narratives. This is why those who accept them refuse to work for local SMEs and most unappealing corporations. After the entrepreneurship education program, you might not become an entrepreneur, but you are probably willing to work for a startup or a VC fund. How could you imagine yourself working for an anonymous company close to your hometown and far from where the innovation game is mostly played? Young professionals refusing to explore the real economy are an incredible waste of talent.
New programs thought for young entrepreneurs willing to engage in more traditional forms of business could help. A guy with no relevant educational background but a great passion can be a fantastic entrepreneur if local authorities sponsor educational programs aimed at providing them with the required competencies. This is not surrendering to the small size of local businesses. These companies would still be able to scale at a national or global level at a later stage. They simply refuse the idea that a company is nothing more than a way of getting rich.
The second area of concern is financing. If small, local banks leave the floor to bigger ones, loans become harder to obtain. This reduces the chances of survival of many SMEs and makes it almost impossible to get startup funding for local businesses. New models of venture capital funding are emerging, as reported by Tim O’Reilly (see the article in the Alternative perspectives section below), in which the focus is not on blitzscaling but on sustainable businesses that deliver relevant value. This is a beautiful trend, but it will hardly solve the problem — what about areas where this kind of financing is strongly underdeveloped?
VCs can have an impact when dealing with the social injustices of our time. The news that Rethink Impact, a VC focused on female entrepreneurship, has closed its second fund worth $182 million is a good one. Something similar can be done, for instance, to foster local entrepreneurship for lifetime businesses in small cities where the economy is gradually dying. Or to support businesses run by immigrants in metropolitan areas with integration issues.
Again, the responsibility of (local) governments seems huge in this case. Matching local needs with new ventures is absolutely reasonable, as the latter would have a well-defined market and privileged access to it. Hence, financing schemes that include public money from local or national budgets to create businesses with predictable revenues would also facilitate the access to debt instruments later on — maybe even earlier, as banks would see an opportunity in those companies. This means creating a link between entrepreneurship and development, which is the ultimate goal of a policy-maker in a capitalist economy. (This topic deserves a separate discussion and more details — I will come back to this point in the next weeks).
Too often we focus on quantity metrics of entrepreneurship instead of quality ones. In his famous paper Entrepreneurship: Productive, Unproductive, and Destructive, William J. Baumol brilliantly explained how “the allocation of entrepreneurship between productive and unproductive activities, though by no means the only pertinent influence, can have a profound effect on the innovativeness of the economy and the degree of dissemination of its technological discoveries”. In other words, the allocation of entrepreneurship determines if it is productive or not; sometimes it can also be destructive, for example when generating huge negative externalities.
The link between innovation, entrepreneurship, and development cannot forget this fundamental relationship. Thirty years after the article was published, we are surrounded by unproductive startups with more or less the same SaaS business model and no ambition to generate any positive outcome. The startups of that time have evolved into tech giants that many scholars define as the most destructive elements of our society. The illusion that COVID-19 will perform a sort of natural selection of ventures with real-world relevance is fading away.
But we can act at the local level to restore the authentic meaning of the word “entrepreneur”. Education programs and funding schemes are a good starting point, but we also need to counterbalance the dominant narrative that undermines entrepreneurship models different from the ones of Silicon Valley. When young MBA graduates will not see a job of great responsibility in a local, small enterprise as less important than being an intern at Google, we will be going in the right direction.
Alternative perspectives
🔥 In a new report by the People's Policy Project, Mark Paul, Carla Santos Skandier, and Rory Renzy make the case for nationalizing the fossil fuel industry to accelerate the transition to a green economy. The argument is not new, but the authors focus on the current opportunity to nationalize the major American oil and gas companies at a cheap valuation — between $550 and $700 billion.
The time has come for the U.S. government to nationalize the fossil fuel industry. With oil prices collapsing, and even going negative, and firms’ market values plunging, the government can once again use a policy weapon that has in the past been successful in overcoming social and economic unrest: nationalization. A federal takeover can start to meaningfully address the climate emergency and remove fossil fuel interests from the political equation—for a cheap price, too. […] Nationalization alone will not solve the crisis, but it’s a crucial tool to consider as we engage in a program of crash decarbonization, particularly in ways that protect workers and communities dependent on extraction. This is especially true given current macroeconomic conditions (specifically the economic collapse due to the COVID-19 outbreak and the collapse of international oil prices), where fossil capital has been rapidly devalued and government debt is as cheap as it has ever been.
💼 On Palladium, Byrne Hobart explains why Big Tech is more efficient than the US government when it comes to reacting to unexpected shocks. Tech companies have a well-defined purpose and are used to acting fast, measuring everything they can in the path. This is a very recommended article, dealing with a topic that was already covered by the author in the past with reference to James C. Scott’s Seeing Like a State. How Certain Schemes to Improve the Human Condition Have Failed.
The economics of technology companies encourage them to insert themselves into the highest-margin gap they can find between supply and demand. But this gives them a peculiar form of altruism: what’s good for the country is good for Big Tech, because Big Tech gets a disproportionate share of the upside. And because of how their stocks are valued, the long-term is what matters. Most of the net present value of a growth stock is far in the future, so they’re deeply sensitive to systemic risks. The paradoxical combination of risk-tolerance (they have to continuously reinvent themselves to grow) and risk-aversion (Amazon trades at over 100 times earnings, so its value is almost entirely based on what happens a long time from now) basically forces tech companies to be high-agency.
🔮 According to Tim O’Reilly, interviewed by Connie Loizos on TechCrunch, the VC model is outdated and has failed to maintain high ambitions. Its only purpose is about finding the best route for a billionaire exit, with no interest in the outcomes of the investments undertaken.
They’re the kind of small businesses, and small business entrepreneurs, that have vanished from America, partly because of the VC myth, which is really about creating financial instruments for the wealthy. […] That’s what we have to really think about. It’s not: How do we get more Black and brown founders into this broken Silicon Valley model? It’s: How do we go figure out what the opportunities are helping them to grow businesses in their communities? […] So many things that VCs have created are really financial instruments like those CDOs. They aren’t really thinking about whether this is a company that could survive on revenue from its customers. Deals are designed entirely around an exit. As long as you can get some sucker to take them, [you’re good]. So many acquisitions fail, for example, but the VCs are happy because — guess what? — they got their exit.
Other readings
🏢 In a new paper, Alvaro Cuervo-Cazurra and Cheng Li analyze the pros and cons of state-owned multinationals, taking into account the risks of state ownership (especially related to agency theory) and the potential benefits for local development.
⌛️ On The New Yorker, Anna Wiener explains why the debate that followed the decision of Twitter to label Donald Trump’s posts is outdated.
💰 On Recode, Theodore Schleifer reports about the growing number of billionaires in the US (now about 800, a record high), which is causing a diffused sentiment of backlash both towards the conservative and the (globalist) progressive elites of the country.
🎥 On The New York Times, Ben Smith examines how Netflix has reacted to the growing attention towards racial discrimination with more Black programming faster than competitors.
💧 A new documentary by Ora DeKornfeld and Isabel Castro, recently published on The New Yorker, analyzes the case of Scott Warren, who was arrested for bringing water to migrants in the deserts of Arizona. It is a short video that I recommend to all those interested in the moral implications of humanitarian aid.
Thanks for reading.
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Have a nice weekend!
Federico