We had our first ever meeting last week with a venture capitalist. He was an impressive chap, knowledgable in the way that a professional investor should be. I learnt a lot about investing just from one meeting, although not enough to decide whether Venture Capitalist should be capitalised or not.
Most people don’t ever meet VCs, Hedge Fund managers, or Private Equity investors, despite the enormous influence they wield over which businesses get funding, and which don’t. My mate Pete slightly misheard and demanded to know why I was meeting with a French capitalist rather than a salt of the earth British one. Brexit means Brexit after all.
Mostly we associate these kind of investors with High Tech, cutting edge, industry disruptors, driving fast paced change in the economy. We are used to thinking that we live in a world of dizzying technological change that is transforming our lives when in fact the rate of change in lots of fields of technology is getting slower, not faster. The big transformative technological changes, flight, TV, space travel, through to washing machines happened a couple of generations ago.
When my Grandad was a small child the first motor cars were raced at over 100mph at Brooklands. After centuries when the top speed that man could travel at was set by the velocity of a fast horse, this was a massive leap forward. He lived near the goods depot at Gilesgate (when Durham had a goods station), and saw the first 100mph Steam Train – The Flying Scotsman.
When my Dad was a small child Chuck Yeager because the first human being to go faster than the speed of sound in the Bell X-1. From 100mph to 770mph in one generation.
When I was a toddler Charlie Brown, the Apollo 10 re-entry vehicle achieved 24,791 mph, the fastest speed ever by a human being. A long way from the Flying Scotsman.
My children are 17 and 12. They have never seen a major speed landmark achieved; the current water speed record was set in the 1970s; the fastest manned aeroplane was the 1960s, the land speed record was the early 1990s. Apart from a few obscure records the pursuit of speed is over. The world last supersonic passenger jet was scrapped a few years ago
Attempts to break speed records are about as cool as the World Strongest Man Competition, which is to say, a bit naff.
There are regular claims that the US will try and restart the Space Programme, but right now the only launches taking place are satellites to improve Internet or Mobile Phone coverage, and some experiments for high priced tourism. I took my kids to the Museum in St Petersburg to see the Russian space programme. It was ancient history to them, and the analog nature of so much of the technology made it look even older. Yuri Gagarin was as far away in time to them as the Tsar.
At the risk of being too dismissive lots of the dizzying advances in technology in recent years have been aimed at improving our leisure time, rather than pushing the boundaries of the possible.
The same pattern can be seen in Pharmaceuticals. The number of patents being submitted in the UK remains high, and the number of breathless newspaper stories heralding the rise of medical miracles is equally prolific.
The majority of these patents however are new uses for old molecules rather than new molecules themselves. These patents are designed to extend the patent protection period on existing drugs by re-licensing them for new uses and new populations. The number of genuinely new molecules emerging from the product development pipeline of major Pharmaceutical companies is falling. A BMJ paper a few years back rated new patents on how innovative they were in offering treatments – the proportion of new patents they rated as highly innovative is falling, as companies try and extend the patent life of existing treatments.
At the heart of this problem are the economics of the pharmaceutical industry. In order to keep shareholders and investors happy big Pharmaceutical companies have prioritised maintaining patents on existing drugs, and creating treatments for Western ailments such as obesity and erectile dysfunction. Really useful stuff like a cure for Malaria has dropped down the priority list.
If you want an image to represent the gap between the treatments that patients need and the economic priorities of Pharmaceutical companies watch the Great North Run. Loads of the athletes taking part will be wearing vests supporting medical research charities – Cancer Research UK is popular, MND also. I ran for Arthritis research, which seemed like a positive investment in my own future.
Each one of those brightly coloured vests represents a point of market failure. People are raising money through charities to do the job that the big Pharmaceutical companies find uneconomic.
It can be hard intellectually to resolve the conflict between the newspaper headlines trumpeting the latest breakthroughs in pharmacology, with the decline in actual innovation, but the same gap between reality and headline occurs in lots of places. We read loads of headlines about the rise of robots to take our jobs, but the biggest robot take over of the workspace is relatively mundane and low tech – the movement to self service check outs in supermarkets and DIY stores. I say DIY stores but in reality I mean Homebase as they are close to the only company left in the business. I miss Texas Tom.
It is possible to see the differential pace of changes in terms of cycles of technology, but fromm the perspective of a small business trying to raise funds to grow it is hard to separate technological innovation and business growth from patterns of investment.
Some of the technological advances I listed above were driven high levels of state spending, on both sides of the ideological divide, during the Cold War. Lots of them weren’t – they simply date from an era when investments, both private and state went into different things. It is no co-incidence that the list of everything getting faster all of the time comes to an end around the time the Berlin Wall comes down. It is even less of a co-incidence that the areas where technological change is still growing strongly are the ones where the state is still active in aiding development (this is a massive subject in it’s own right, and I will come back to it I promise).
From the 80s onwards deregulation of financial markets became a popular policy choice, first in the in US and UK, then, as the Cold War ended, in countries making the transition from Communism. Financial markets like Wall Street and the City of London, which had always been important in allocating capital, became more and more powerful.
The theory was that rational utility maximising actors such as Banks, VCs, Hedge Funds, Private Equity firms working in deregulated markets should have become more efficient at allocating resources as they were freed from regulation and government interference. The greater the deregulation, the greater the efficiency.
Over the last 30 years it is clear that things haven’t quite worked out like that.
It is easy to find examples where investors and capital markets have made odd decisions, without having to look deep into the heart of darkness that is the Credit Crunch. Juicero recently raised $120m to develop a juicer that was linked to the internet of things. Linking things to the internet of things is currently a good way of getting people to invest in what would ordinarily be a very humdrum business opportunity.
Investments like Juicero look like innovation when they are pitched to investors, but in reality there is nothing innovative about it – it is 2 sensible ideas (fruit juice and the internet of things) mashed together to create one weird idea.
A similar phenomenon can be observed in the on demand market. Investors have backed the Uber of Hot Food, the Uber of Groceries, the Uber of Flowers, the Uber of Booze, the Uber of Gardening, the Uber of Dry Cleaning. All of these have been lucratively capitalised despite the real Uber failing to actually make a profit.
Who would like to join me in pitching an on demand musical instrument delivery service – the Uber of Tubas? On demand greasing and oiling services? Lets set up the Uber of lubers.
To find evidence of the disconnect between business investment and economic growth we can look at the ONS data set. This shows wild swings in business investment, apparently unrelated to any kind of business cycle.
I was so shocked by this chart that I swapped a couple of emails with the Business Investment Team at ONS, to check that it was right. Apart from the obvious collapse in investment during the credit crunch I can’t explain these wild swings other than irrationality in the market.
A few weeks ago I wrote about low levels of productivity in the UK economy. The inconsistent levels of business investment look like they are a big part of this problem.
Productivity is rubbish. Inefficiency rules. Why Craft Gin is better than United Airlines.
Despite all of this it is clear that there is plenty of money out there to invest in stuff. Tech unicorns in the US are having billions piled into them without any clear idea of where the profit is going to come from. It seems incredible with all of the opportunities from technology and globalisation that we are apparently running short of really good stuff to invest in
One of the obvious problems behind this is a lack of consumer demand. Companies who have surplus capacity already won’t invest in expanding, and instead will take advantage of low interest rates to do things like buy back shares and increase dividends rather than build new factories. Share buy backs, particularly leveraged ones allow businesses to improve profits, particularly profit per share, without having to do anything messy like make things. Lobbying for cuts to Corporation Tax has pretty much the same effect.
It is pretty clear that globalisation has increased trade, and raised living standards in a number of countries. However even in highly consumer oriented societies like the UK we are starting to get to “peak stuff”.
Measuring peak stuff is hard, however to look into this we can look at the tonnage of raw materials we consume in the UK. This is one of my favourite ONS datasets (we all have favourite ONS datasets don’t we?).
In 2001 the UK used 888.9 million tonnes of raw materials (15.1 tonnes per person), the highest on record. By raw materials I mean biomass (crops, wood and fish), metal ores (iron and non-ferrous metals), non-metallic minerals (such as construction materials) and fossil energy materials (coal, oil and gas).
By 2011 this had fallen to 642.0 million tonnes (10.1 tonnes per person).
In the same period resource productivity had risen sharply – the amount of GDP we generated from a KG of stuff had increased from £1.87 per kilogram in 2000 to £2.98.
This partly reflects people becoming more environmentally friendly. it also reflects that technology is making things smaller and less resource intensive
But a big driver of this is the shift from buying lots of stuff, to buying less and better. More personalised and bespoke. For our last wedding anniversary some of the nicest presents we got were vouchers for experiences, rather than actual physical gifts. Over the last year I have paid to go on 2 guided walks. We want experiences, not more stuff to go in cupboards. This seems like a very middle class explanation, given that lots of other people don’t have enough anyway, but the shifts in tonnage are too great for it just to be a middle class fad.
Changing the metric from output per person, to output per KG of raw material changes fundamentally how we look at consumption. All of a sudden the decline in efficiency caused by an economy which moved from high volume manufacturing to services and bespoke products doesn’t look as scary. In fact the whole concept of economic performance, efficiency and growth looks different.
If there was one really cool product I would love to own it would be a 3D printer. I love the idea of making my own stuff. If there was a way to recycle and 3D print I would love it even more – breaking down waste packaging and plastic into pellets to fuel my 3D printer. I could make stuff, use it, recycle it myself into something else.
Central banks are still trying to boost demand for stuff by Quantitative Easing. There is some evidence that this is working, for example in new car sales. But across the economy it looks like they are better at boosting asset prices for things like houses than they are at stimulating demand. In our experience there is actually money out there chasing investments, rather than investments chasing investment, which isn’t great for encouraging hard nosed decision making
But no amount of QE can solve the essential problem – from the 80s onwards investment has moved towards consumer products and global supply chains. This has increased the amount of resources we consume globally, and accelerated environmental degradation. But as markets mature the scope to sell more products in advanced economies is declining.
We still want all the cool stuff that modern Capitalism produces. But increasingly we want less of it, from smaller, more local producers, rather than from giant impersonal conglomerates with rubbish customer service. We want more differentiation and more individuality. Right now big financial markets want us to have a wifi juicer.
If you are interested in some of the data I have referred to in this blog you can find more at:
https://www.ons.gov.uk/economy/grossdomesticproductgdp/datasets/businessinvestment
http://bmjopen.bmj.com/content/4/10/e006235
http://eprints.lse.ac.uk/65415/1/Schankerman_Patents%20and%20the%20Global%20Diffusion.pdf
http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0147215
Take it you’re not going to do a pitch to VCs about the “Uber of Gin”? 😉
Enjoy your blogs immensely. Thanks for writing.
Cheers!