PILOT

There are plenty of reasons to be hopeful about the future. Now more than ever, we should try to ignore the pessimists and see challenges not as problems, but as opportunities to grow and prosper. Once we understand that our attention is very limited, and that we were programmed to be more sensitive to negative stimulus, we can make a conscious effort to instead focus on all the possibilities around us. This is the Rosetta Stone of Venture Capitalism, to see opportunities where others see problems.

We only see what we aim at. The rest of the world (and that’s most of it) is hidden. Vision is expensive – psychophysiologically expensive; neurologically expensive. Thus, we triage, when we see. We point our high-resolution capacities at the few specific things we are aiming at. And we let everything else fade, unnoticed, into the background. That is how we deal with the overwhelming complexity of the world: we ignore it. There is much more of the world than there is of us and seeing is very difficult, thus, we must choose what to see and let the rest go.  What we see determines what we think and how we act.

Psychologist Daniel Simons has investigated this phenomenon called “inattentional blindness.” He explains that given the structural limits on the nature of attention, we are unable to pay attention to all that goes on around us. Given we are not generally in control of the information around us, our thoughts are often not of our own choosing. This can be particularly problematic as external information often triggers physiological responses that are well outside our control. Contrary to Pythagoras’s, Plato’s and Descartes’s notion of a mind-body split, recent research on body-brain feedback has shown that we think with our body. Our brain and body evolved together, when confronted by an opportunity for gain or a threat to our well-being, our brain sparks a storm of electrical activity and precipitates a flood of hormones throughout our bodies, altering metabolism and cardiovascular functions in order to sustain a physical response. These somatic and visceral signals then feed back on the brain, biasing our thinking so that it is in sync with the physical task at hand. These physiological responses can be dangerous as they dye our perceptions, which in turn alter our behavior.

This body-brain feedback mechanism is the result of billions of years of evolution. However, our body and brain have lagged the technological advances of the last couple of centuries. That is to say, we have ancient bodies in a modern world and ancient brains in a high-tech world. This statement is of particular importance because humans have been programmed by evolutionary forces with a negativity bias, which means we are neurologically and physiologically wired to be more sensitive to negative stimuli given the potential costs of missing negative information far outweigh the potential benefits of discovering positive information. Similarly, our physiological responses to perceived (at times real) dangers tend to be out of proportion and are often amplified and extended through negative feedback mechanisms aided by certain hormones and brain structures.

When we perceive danger, our hypothalamus releases Cortisol, the main human glucocorticoid commonly known as the “stress hormone”. Cortisol is highly lipid soluble, which enables it to cross the blood-brain barrier and access the brain easily. This hormone is also particularly influential because of its range of action as it has receptors in almost every nucleated cell in the body. One of the most important brain regions containing steroid receptors is the amygdala, the “emotional center of the brain,” thus, Cortisol has powerful effects on the amygdala. If levels remain elevated for long enough, they can shrink the hippocampus, a brain structure involved in learning and memory, and enlarge the amygdala, which amplifies negative emotions such as fear. This negative loop is self-perpetuating and the cycle is tough to break. Because of our inattentional blindness, once we are afraid, it is very difficult to think clearly and find alternative possibilities. Unfortunately, the main stream media (MSM) and certain public institutions have a good understanding of this mechanism and often use it to sell us products and guide the public’s thoughts and behaviors.

Fear keeps journalists employed as people are more likely to process information that sounds dramatic, which triggers Cortisol release and increases our negative emotions, perpetuating the fear. Kalev Leetaru applied a technique called sentiment mining to every article published by the New York Times between 1945 and 2005. The sentiment went from generally net positive between 1945-1967 to generally net negative thereafter, and declining. Of all our dramatic instincts, it seems to be fear that most strongly influences what information gets selected by news producers and presented to us consumers. This nature of news interacts with the nature of cognition to make us think that the world is worse than it is. Which is particularly problematic because when we are scared, critical thinking is almost impossible. There is no room for facts when our minds are occupied by fear. The news distort reality and people’s view of the world, which is why most people believe the world is continuously getting worse, while the opposite is true.

Contrary to prevailing sentiment, the world has seen unparalleled progress and improvement in the last 100-200 years. In Factfulness, Hans Rosling provides a good account of recent progress. For example, the share of people with water from protected sources increased by 30% to 88% between 1980 and 2015, the share of people with access to electricity went from 72% in 1991 to 85% in 2014, the share of 1-year-olds who got at least one vaccination went from 22% in 1980 to 88% in 2016, the share of undernourished people decreased from 28% to 11% between 1970 and 2015, the percent of children dying before their fifth birthday declined to 4% in 2016 from 44% in 1800… the list goes on. Similarly, Steven Pinker has done extensive research to demonstrate how the world is a better and safer place today than it has ever been. To wit, the share of population living in extreme poverty has declined from 90% in 1820 to less than 10% in 2018, the number of battle deaths per 100,000 people per year has declined from 300 in 1946 to 1.2 in 2016, occupational accident deaths per 100,000 people per year in the U.S. have declined from 60 in 1910 to less than 2 in 2015, the world democracies have gone from 52 in 1989 to 103 in 2015… the list goes on. Lastly, Marian Tupy[ix] has shown an expansion of forests as tree coverage has gained 1.7 million km2 between 1982 and 2016, protected areas worldwide have increased from nearly 0 in 1900 to 50million in 2018, the kilograms of CO2 emissions per 2010 dollars of GDP have declined from 0.82 in 1960 to 0.49 in 2013… the list goes on. These are few of countless examples that prove the world has and continues to improve. This is not to say, of course, that we should not aim for further progress, or that we have eradicated all problems that humans face. This is to show that significant progress has been made and the reality portrayed by the media is generally divorced from reality.

In spite of the ample evidence suggesting the world is indeed a much better place than it has ever been, there are many people incapable of recognizing progress and who thrive on spreading negativity. This behavior is called Progressophobia, a term coined by Cognitive Psychologist Steven Pinker. The problem is, progress tends to be mistakenly taken for granted. A colossal mistake given nature follows the Second Law of Thermodynamics - in an isolated system, entropy always increases over time. This means “things fall apart.” Thus, progress is not natural, chaos is. Similarly, wealth is not natural, poverty is. As Economist Peter Bauer puts it: “Poverty has no causes, wealth has causes,” and Economist Per Bylund said: “What causes poverty? Nothing. It is the original state. The real question is, what causes prosperity?” So… what drives progress and prosperity? Technology. The ability to do more with less, to use new or improved tools to solve problems and overcome challenges. Thus, if we want a more prosperous world, we must to allocate a greater share of capital to technological development and deployment.

COULD HAVE, SHOULD HAVE

Following the credit freeze and stock market sell off in 2018, the Federal Reserve put on hold the hiking cycle and delivered interest rate cuts in 2019. Later that year, following a Repo Market shock, the Fed engaged in Quantitative Easing (QE), which means they purchased long-term securities in the open market to alleviate funding pressures by providing liquidity to financial markets. In 2020, following the turmoil in markets as Covid-19 spread, the Fed further cut interest rates to zero and increased their Balance Sheet (through QE). As of today, interest rates remain at record lows (0.33%) and the BS at record highs ($8.93trillion, up from $4tn in early 2020). Such extreme monetary policy measures and the unprecedented government intervention we have seen were supposed to alleviate the economic hardship faced by working Americans. Two years later, however, we have accumulated an additional $7 trillion dollars in public debt, we are facing a 40-year high inflation rate, and have a record trade balance deficit. More importantly, it is increasingly apparent that the Central Bank will not be able to roll-off their BS and hike the overnight rate to historical levels. Why does this matter? Because the gargantuan injection of liquidity into financial markets have hindered the process of creative destruction and have led to capital misallocation of epic proportions.

What we have seen in the last two years is a setback for progress given the extreme monetary policy tools in place promoted and permitted financial engineering rather than investment in productive and innovative projects (since ’08, really). To wit, existing unprofitable and outdated companies have refinanced their debt, others have engaged in stock buybacks, and countless others have done inorganic M&A’s. Likewise, several private companies have raised capital at extreme valuations. This sort of misallocation of capital will disrupt innovation and progress, it might even regress it. What we are facing is a Could have, Should have, Would have problem. We will never really know what could have been accomplished had that capital been allocated towards productive purposes. What would the world look like if those $7 trillion had not been spent and interest rates had been tightened faster so that capital was allocated by the private sector towards innovative projects. What if instead of buybacks and unproductive debt restructurings we had funded nuclear energy plants, or funded scientists working on agricultural genetic engineering, or we had built automated manufacturing plants? we do not know, but we must find out. Projects such as these will continue to drive humanity forward, and contrary to what Progressophobians say, a rising tide does lift all boats.

TYING UP LOOSE ENDS

To connect the dots… We have been programmed by billions of years of evolution to be more sensitive to negative news because of the basic asymmetry in life between the positive, which is difficult and takes time, and the negative which is much easier and takes less time. Evolution has also made vision psychophysiological and neurological costliness of vision, which makes our capacity to focus very limited. Thus, we are prone to pay more attention and remain fixated on the negative and ignore the positive. Given the past two years have been difficult and the news particularly bleak, many of us have become increasingly pessimistic as we are continuously bombarded with negative news. At times like these we must conserve our spirit and believe that humans have evolved to overcome challenges and that we have been blessed with reason, which will allow us to continue to bring prosperity to the world. As Victor Frankl said, it is exceptionally difficult situations which gives man the opportunity to achieve greatness and solve problems which in ordinary circumstances would have never been achieved. [x] The question is… how will we overcome these challenges and how will this greatness be achieved? with technology.

FORTUNE FAVORS THE BOLD

There is one group of courageous people who believe in the beauty of creative destruction and see it as the foundation of progress and prosperity. They are not afraid to disrupt the status quo and, thus, allocated significant resources towards crazy inventors who are tackling the challenges we face and are building the future – Venture Capitalists. While many sit and complain and others turn a blind eye and fail to do much about these problems, VCs have been funding entrepreneurs who are addressing the most pressing of issues. The following are three of the challenges I would like to help solve, and some examples of companies that are doing so (more to follow in later posts).

ENERGY

Ecopessimists have been predicting the end of times for many decades now, many have said the increasing use of energy will cause a climate catastrophe and that we will run out of natural resources. Thus, extensive regulation has been passed to address climate change and to restrict the use of natural resources. These policies have left us with an energy crisis in both developed and underdeveloped countries. For example, many European countries have been forced to switch on their coal plants amidst energy shortages following decades of absurd policies. Unsurprisingly, this energy crisis will do more harm than the good the regulation aimed to achieve, both for the environment and for people’s living standards. To sustain economic growth, we need a growing supply of cheap-to-produce energy products, matched to the economy’s energy needs. Increasing the use of energy will, by no means, lead to a global disaster, on the contrary. The Environmental Kuznets Curve shows that economic growth leads to environmental improvement. This implies that environmental impacts or emissions per capita are an inverted U-shaped function of per capita income. Escaping from poverty requires abundant energy, and once people have risen out of poverty, they can afford to concern themselves about the environment, not before. It follows then, that increasing energy availability will indirectly solve poverty, from which the environment will benefit as well.

While the net zero movement appears to have good intentions, it is a delusion to think the world’s infrastructure is ready for a complete electrification. Such delusion and unrealistic goals have left first world countries such as the U.K. with energy shortages. The big elephant in the room is Nuclear Energy, there is no credible path to reducing global carbon emissions without an enormous expansion of nuclear power. Nuclear energy is the cheapest and safest energy source available to us. Mining the uranium for nuclear leaves a far smaller environmental scar than mining coal, oil, or gas, and other renewables, while the power plantsthemselves take up about one five-hundredth of the land needed by wind or solar. More importantly, nuclear energy is reliable and readily available, unlike alternative renewable energy sources which are intermittent and are at the mercy of uncontrollable variables.

While nuclear is not a novel and unknown idea, there are plenty of misconceptions around it and ample room for growth in the space. As of 2021, the global share of electricity coming from nuclear sources was a meager 9.94%. Some companies involved in the space include Commonwealth Fusion Systems, a start-up focused on the development of nuclear fusion. The company aims to achieve it sooner and at a lower cost. Flibe Energy is researching and developing liquid fluoride thorium reactor (LFTR), an innovative reactor technology. Kairos Power is developing an advanced reactor technology that uses an efficient and flexible steam cycle to convert heat from fission into electricity to complement renewable energy sources, these reactors eliminate the need for massive containment structures. Meanwhile, Elysium Industries is working on molten chloride salt reactors (MCSFR), which are capable of providing base-load and clean power while addressing the current issues in the nuclear power industry. Additionally, MCSFR converts spent nuclear fuel and weapons waste by transforming it into useful energy. These are few of the many start-ups developing solutions to scale nuclear so that we may grow our supply of cheap, clean, reliable, and safe energy.

AGRICULTURE

In a similar vein, Progressophobians have long argued that the world population growth is unsustainable and that we shall soon run out of resources. As documented by Pinker, these apocalyptic predictions have been around since the 18thC when Thomas Malthus warned of the inevitability of more frequent and worsening famines. Similarly, in 1968, biologist Paul R. Ehrlich claimed in The Population Bomb that “the battle to feed all of humanity is over” and predicted that by the 1980s sixty-five million Americans and other four billion people would starve to death. The extent of their inaccuracy is quite remarkable. Global famine deaths have collapsed from 20.4 million in the 1870s to 255 thousand in 2016 (while world population grew from 1.38bn to 7.71bn in 2019). Similarly, chronic undernourishment has declined from 35% in 1970 to 8.4% in 2019. That said, many reports (See – Link & Link & Link) have warned of the negative consequences and possible scenarios as a result of the fallout of Russia-Ukraine conflict and continued Covid-19 supply chain issues.

While the current global agriculture situation appears dire, food shortages will, to a certain extent, be a result of strict and misguided regulation that has impeded the deployment of new technology in the sector. For example, while all food is genetically modified to some extent, the only technique considered “GMO” and regulated as such is transgenesis, whereby one or more useful DNA sequences is added from one species’ genome to another with modern molecular genetic engineering techniques. Technological progress will continue to play a key role in food production and distribution, in this case, genetic engineering. The new “agrarian revolution” will allow scientists to accomplish in days what traditional farmers accomplished in centuries. Transgenic crops can be developed to be safe, and to have high yields, lifesaving vitamins, tolerance for drought and salinity, and reduced need for land, fertilizer and plowing. All of which has been testified by hundreds of Nobel laureates. Fortunately, several entrepreneurs understand the importance of scientific progress and the need to deploy new technologies to agronomy.

Some of the companies working in the space include Mammoth Biosciences, founded by CRISPR technology co-inventor Jennifer Doudna. The company has capitalized on CRISPR’s unique ability to accurately find and bind to specific sequences of DNA. Their next-generation CRISPR products, will address challenges in the agriculture industry. Bright Seed, a developer of genomic-based plants, has developed seeds from crops using molecular biology and plant breeding techniques. Pairwise is a developer of new crop varieties for agrigenomics, by leveraging proprietary gene-editing technologies to re-arrange the genetic code of existing plant species they are enhancing yields and productivity. These technologies will be leveraged in vertical farming, a good candidate to take on the challenge of food production. Some of these companies include Bowery, a modern operator of autonomous aeroponic farms for the cultivation of leafy greens. Similarly, Pure Harvest Smart Farms is suppling farm produce using hydroponic techniques paired with controlled environment simulation. In Pinker’s words, food supply can grow geometrically when knowledge is applied to the process of production. Thus, we need not despair at the prospect of food shortages, what we need is to be creative and substitute our old ways with improved technological processes.  

MANUFACTURING

A country cannot consume more than it produces. Ramping up debt to fund unproductive purposes such as consumption inevitable weakens an economy. More importantly, as was made obvious with the Covid-19 crisis, consumption driven economies are vulnerable to shocks, especially when consumption has been outsourced (net importer). As previously mentioned, the US trade balance has been on a worrying trend since 2010 and has recently posted a record deficit. Additionally, inflation has hit a 40-year high, partly as a result of continuous supply chain disruptions. The Covid-19 crisis has exposed several vulnerabilities in the US financial system, one of which is the overreliance in imports from countries such as China, Japan, and Germany. Some causes include higher labor costs and higher input prices. For example, even as the gap has been shrinking, Chinese productivity-adjusted manufacturing labor costs are still less than half of that of the US (up from 25% in 2000), a problem given 72% of tasks in factories are still performed by humans. Similarly, the Chinese manufacturing industry has greatly benefited from government subsidies in the form of free or low-cost loans; artificially cheap raw materials, components, energy, and land. Fortunately, we can turn this trend around and once again become a power house if we invest in cheap energy (see above) and employ technology in factory automation.  

There are two ways to balance the trade deficit 1) stop consuming (not too popular) or 2) redirect resources into CapEx and expand the manufacturing base. If we follow the latter, we would need to build factories to ramp up production at home. Improving processes and targeting productivity through technological improvement appear to be the obvious choice in the short-term. Fortunately, several companies have been working on the space. Some of these include Dyndrite, a 3D printing manufacturing software developer that is helping manufacturers produce at scale by solving complex geometrical and computational problems. Drishti is using Ai and computer vision to optimize manual assembly processes in the manufacturing industry. Their platform offers a comprehensive view of the entire manual assembly system, thereby increasing visibility and limiting production errors. Ware is an enterprise-grade supply chain digitization platform building technology at the intersection of robotics and machine learning. The company’s first product leverages the power of drones to track inventories in warehouses. Varda Space Industries is building space factories for earth-bound products, which will be the world’s first commercial zero-gravity industrial park at space. Through leveraging the cheapening costs of reusable rockets, Varda aims to manufacture products such as fiber optic cables in space. These are few, and diverse, companies that will allow the US to increase its manufacturing base by leveraging technology.

IN SHORT

There are plenty of reasons to be hopeful about the future. Now more than ever, we should try to ignore the pessimists and see challenges not as problems, but as opportunities to grow and prosper. Once we understand that our attention is very limited, and that we were programmed to be more sensitive to negative stimulus, we can make a conscious effort to instead focus on all the possibilities around us. This is the Rosetta Stone of Venture Capitalism, to see opportunities where others see problems. I believe some of these opportunities can be found in the energy, agriculture, and manufacturing industries.

FURTHER READING

Jordan Peterson – 12 Rules for Life

Robert Greene – The 50th Law

Daniel Kahneman – Thinking Fast and Slow

John Coates – The Hour Between Dog and Wolf

Heather Heying and Bret Weinstein – A Hinter-Gatherer’s Guide to the 21st Century

Adam Gazzaley – The Distracted Mind

Steven Pinker – Enlightenment Now: The case for reason, science, humanism and progress

Hans Rosling – Factfulness

Marian L. Tupy & Ronald Bailey – Ten Global Trends Every Smart Person Should Know

Viktor Frankl – Man’s Search for Meaning

Steven Pinker. Ibid.