Free Lunch: August 27, 2017 Snippets
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This week’s themes: Open source software subsidizes the tech industry | How Indian fintech companies like Ezetap will define global payment models in the future
Welcome back to our Snippets series on bubbles. So far we’ve talked about what bubbles are and why they form, and why bubbles sometimes serve a useful role in the innovation economy. At the end of last week’s issue, we were left with a question to ponder. We talked about how one of the hallmarks of a bubble environment being when investors are comfortable giving money to borrowers whom they know cannot repay them back without taking out yet another loan. It’s not hard to see why that’s a sign of irrational optimism. And yet, how different is that from making a seed-stage investment into a startup that you know cannot get to positive cash flow on that investment alone, and will need to raise Series A down the road? If that’s how you characterize the ingredients of a bubble, then by that standard, early stage tech is clearly something resembling a bubble and has been for some time. But the software industry seems different, somehow — as in, there’s other, pertinent information we need to consider. What might be some candidates? If early stage tech has been in a bubble of sorts all the while, is there some non-economically rational “free lunch” that’s been keeping it inflated?
Right off the bat, software is different from pretty much any other industry in that it’s a digital good: there’s an inherent scalability to its reproduction and distribution. The gross margin on software makes many other kinds of companies blush: you’re selling an incremental copy, or even an incremental instance, of some code. Furthermore, for the last fifty years we’ve ridden Moore’s Law, as both computing environments and their underlying hardware have gotten cheaper and easier to exploit as an entrepreneurial environment. And there’s no doubt that the web of founders, investors and acquirers in Silicon Valley have created an environment where FOMO plays no small role in getting deals done fast. But none of these fully explain why we’re able to overcome coordination failure so reliably with respect to funding early stage software companies. Unless, again, either a) we’ve been in a bubble this whole time, or b) there’s another important and overlooked factor that’s unique to the software and is quietly making an impact.
Here’s a surprising candidate: open source software.
Recall from our discussion from the past two weeks that investments into innovation, whether they were into canals and railways two centuries ago or broadband cables and genome sequencers more recently, often require some sort of non-economically rational subsidy in order to break coordination failure and kickstart initial investment. Sometimes the government fulfils that role, other times it’s a financial bubble. But these days we have a new kind of non-economically rational subsidy for innovative new ventures: the open source community.
From an overly literal economics perspective, free and open source software breaks the rules of how markets are supposed to work. There’s not meant to be such a thing as a free lunch: if you’re ever getting something for free, especially if it’s a crucial input to something that you make, it’s likely that either it’s a loss leader for something else, you’re paying for it in some other way, or at the very least you’re using an inferior good and will be at a disadvantage to those willing to pay for premium materials. But open source software isn’t just free; it’s often the best software available. (We’ll see why next week.) Taking advantage of open source software is a bit like taking advantage of an interest-free loan that you never have to repay: it’s not yours, but it’s there for you to use.
Furthermore, without the contributions and impact of the open source community, it’s quite likely that the software world would look very different today. If we were actually paying a fair price whenever we started new companies on top of existing code, the barriers to starting up would be a lot higher — almost like what it looks like in other parts of the economy, where starting a new business that wants to scale up and change the world is a laughably hard proposition. But in software, it’s not. The barriers are lower, and it’s easier to overcome coordination failure and take a flyer on a new startup with some cool-sounding potential. That’s in part because we’re all getting a free lunch of sorts, even if we don’t think about it all the time. And that may shed a little light into where the “economic irrationality” of early stage software keeps getting its lift, as if it were permanently subsidized. Open source is certainly a good candidate for the source of some of that subsidy and lift.
Next week, we’ll take a look at how the birth of the web and the ISP industry in the 90s enabled the open source community to become what it is today, what impact it had on the bubble at the turn of the century, how it has shaped what the modern innovation economy looks like. And then afterwards, we’ll wrap up the series by comparing the entire innovation ecosystem to a biological system that evolved over millions of years to do perform a surprisingly similar function.
Elsewhere in the world:
The lagoon metropolis: how can Lagos cope with its spiralling population? | Alastair Leithead, BBC
Indian Supreme Court in landmark ruling in privacy, with implications for biometric ID scheme | BBC
Omani monsoon season has become a global tourist draw | Samuel McNeil, in Skift
Norway’s sovereign wealth fund closes in on $1 trillion valuation | Dominic Chopping, WSJ
Energy:
US grid untroubled by total eclipse despite plunge in solar output | Robert Walton, Utility Dive
China installs 10.52GW of solar in July: exceeds 2020 target by 7% | Mark Osborne, PV Tech
Assessing big-time risk:
The logic of risk taking | Nassim Nicholas Taleb
The principles that divide us might be greater than the ones that bind us together | Ray Dalio
Reflecting on the Village Voice:
It took a village: how the Voice changed journalism (2009) | Louis Menand, New Yorker
Google Archive of Village Voice print editions, January 1969 onwards
Other reading from around the Internet:
The third wave of globalization may be the hardest | The Economist
Funding the evolution of blockchains | Fred Ehrsam
Cryptoassets: a crowd sourced evaluation and due diligence framework | Alexander Lange
Centralized vs Decentralized: the Internet of the past, present and future | Ryan Shea
Wonder Year: how Roger Federer upgraded his game | Peter de Jonge, NYT Magazine
In this week’s news and notes from the Social Capital family, Ezetap has raised more funds to seize their once in a lifetime opportunity to build out the Indian mobile payments industry:
Why Social Capital is betting big on India’s cashless economy | Polina Marinova, Fortune
CEO Bobby Bose, who has done a fantastic job navigating Ezetap through the race to build India’s modern purchasing infrastructure, explains that the Indian payment industry of the future depends on more than just last year’s move away from cash: “Demonetization was only step one in a multi-step government program to digitize the Indian economy. It woke people and businesses up and made digitization a must-do instead a nice-to-have. Hence, the macro trend that we all knew was going to happen over a decade is now happening in two to three years.” Emphasizing the opportunity in front of Ezetap, he added: “It is a perfect storm. We have a society and economy that is ready for digital adoption, mobile Internet infrastructure that finally allows us to reach every citizen, a once-in-a-lifetime government policy, coupled with a scrappy fintech ecosystem in which the winners will have built scalable, difficult-to-replicate businesses in a low margin market. The fintech companies that come out of India in the next few years will help redefine business models and how people transact globally.”
Chamath also weighed in with Social Capital’s perspective: “India is on the brink of a massive surge in consumer consumption, but not until the underlying payments infrastructure is securely in place. Ezetap is in an incredible position as the leading platform for Indian merchants, with deep IP and no US proxy — it’s like a combination of Stripe, AWS and Android, built for the complexities of the Indian market.” Furthermore, “At the end of the day, you have 1.2 billion people who will be earning more, and they will want to buy stuff. The future for fintech in India is bright for companies that figure out ways to get consumption power in the hands of Indians.”
Lumity has also raised another round of funding, bringing in 19 million dollars of Series B funding from Social Capital and other investors:
Lumity raises $19M to bring employee benefits experience to the modern era
With an expanding customer base including Lyft, Greenhouse and GoFundMe, Lumity’s benefits solution for growing companies hit a rare and impressive achievement for a growing software company: a year with 800% year over year growth and exactly zero customer churn. (If Walter Sobchak were a Lumity customer, he’d concur: Mark it zero!) They fill an important need in the employee benefits space, providing top-shelf packages and analytics solutions for companies that are growing quickly, who may be understaffed and straining at their own success, and who are facing more complex benefits needs than they did in the recent past. They are currently hiring for several positions in San Mateo, including in software engineering, marketing, operations and sales — if you’re interested or know someone who might be, please send them their way.
And finally, Propeller Health continues their march forward with a renewed and expanded commercial partnership with GlaxoSmithKline, bringing their smart inhaler solution to a broader audience:
Following their successful 510(k) class II FDA clearance, as well as their successful air quality work with the city of Louisville, Propeller Health is now running on all cylinders. Propeller’s smart inhaler platform helps people with airway conditions like asthma and COPD better track, understand and control their symptoms while giving physicians better tools for management and ultimately for full treatment. After many years of hard work to get to the starting line, it’s great to see Propeller’s work finally starting to pay off in a big way; if you’re thinking of starting or joining a company in the health care space, let them be an inspiration for the hard work required and the great impact that’s possible.
Have a great week,
Alex & the team from Social Capital
