Shoot for the Moon: Strange Loops, Irrational Exuberance, and Venture Capital
An argument for the existence of an economic bubble in venture capital and the technology industry on the basis of a strange loop of irrational exuberance.
If only to escape this strange loop.
Douglas Hofstadter is a computer scientist slash philosopher slash mathematician slash author with a singular obsession: “strange loops”. He explores the concept in his famous work, Gödel, Escher, Bach: An Eternal Golden Braid. For those without the time on hand to delve through the six hundred page masterwork, Wikipedia provides a pretty good abstraction of what Hofstadter means.
A strange loop arises when, by moving only upwards or downwards through a hierarchical system, one finds oneself back to where one started
To put it in simpler terms, it’s any cycle we find ourselves repeating that winds up placing us right back where we started. Some say history can be such a cycle, with humans damned to repeat their mistakes until they realize the errors of their ways. However, I’m of the opinion that strange loops are as valuable to historians as they are to modern venture capitalists (amateur or otherwise).
The trendy idea a lot of VCs seem to be having vaguely resembles the following:
- Take a considerable amount of money, and be prepared to spend it.
- Invest a significant amount (five or six figures) in an idea pitched as a “startup”.
- Repeat step two until you run out of capital.
In some cases, this can be a tremendously successful strategy. Well… Sort of. It’s successful for firms who are essentially using companies as smaller, freelance ventures to add on to their existing corporate structure. I think it’s a much longer topic of conversation, I’m of the school of thought that many of the firms that have exorbitant valuations in their first and second funding rounds have been valued as such due to irrational exuberance more than their potential return on investment.
I’ll admit. I’m writing this from a university in the Bronx, not my ivory tower lined with certified deposit slips. I’m not the most qualified person to be making critiques of market behavior, but this one has stuck with me, and I just can’t shake it. I see a strange loop in progress, and I’m worried that if left unchecked, it will pop a bubble propping up an industry.
So many firms in the growing tech industry are struggling to be profitable. And in many instances, that’s okay. Firms like Amazon, Google, and to a lesser extent Facebook, are changing world infrastructure “macroscopically”. World economies have been, are being, and will continue to be changed by the investments these firms make in infrastructure, digital or physical. Whether it’s another NSA-style server farm in the middle of a mesa, or fiberoptic cables to bring the United States up to developed world internet standards, they are always finding ways to solve mind-numbingly big problems.
But the thing the market has to remember is not every full stack developer with a MacBook has is Sergey Brin or Larry Page, no matter how great they think their new algorithm is. Entrepreneurs will always be entrepreneurs, and in many ways, they will continue to be part of the lifeblood of a global economy. Many of them will be important, and many will be very valuable. But not all of them. And not all of them will be the lifeblood of a global economy. And that’s the problem.
Psychologically speaking, it’s a mess. Unfortunately, like most strange loops, it’s a mess that makes sense. If you’re in the tech “startup” industry, nothing is hotter. Everything idea can blast off like a rocket ship, capable of picking up millions, if not billions of dollars in funding. The question that’s seldom asked of firms that rely around these new technologies is frequently the following: What’s the business model? And for whatever reason, this seems to be eschewed as “old school” and “dated” thinking, as opposed to the fundamental reason for the company’s existence. It seems almost fallacious really. From my perspective, the actions of the companies resemble the following:
1. Invent a new technology with potential real world applications.
2. Partially flesh out one or two of those applications.
3. Take a slide deck and a protoype in front of a VC firm.
4. Get funding.
It’s true that the last few decades have gifted entrepreneurs with plenty of inspiration, from Peter Thiel’s hellbent crusade to stop college from crushing innovation to anyone who made this horrific BusinessInsider listicle. However, as one of those pursuing this new American dream, I can tell you, it’s hard not to feel light-headed walking away from the newest technology conference or ProductHunt update feeling like the only thing that’s preventing everyone from making money is, you know, having money. But that’s not all. Life isn't ever that simple. Systems that seem to work one way, can work in ways we don’t understand. Some systems can even gain order from disorder.
So what’s the point of all this?
Stop treating every idea like it’s the next Google. You’re making a bubble, plain and simple.
By “inspiring” software engineers and entrepreneurs that way, you give them the impression that they can, and should, drink deeply from the well of capital that has fallen into the laps of tech firms in the last several decades. But that’s not always a good idea, and the notion that funding never dries up is not always true. Cool is not a commodity with a price label on it, no matter how much Justin Timberlake and Jesse Eisenberg tell you it is. In fact, all “cool” does is increase the irrational exuberance surrounding the valuation of these firms to the point of sheer speculation. And what have we learned about economies based on speculation?
Well let’s just say it doesn’t end well.
I think that it’s fitting to close with a snippet of Silicon Valley, given our topic.
While it might be satire, the stinging barb Silicon Valley writers launched at those who destroy their business through venture capital valuations holds true here. Messing up a business plan is not the worst decision of your life. Life is more than acumulation of capital. A lot more. And it’s certainly not something to sweat about as much as the status quo would have you believe.
At least, I think that’s what I need to tell myself for now. If only to escape this strange loop.