There are many important innovations that are just bad investments

If you need to have the possibility of near infinite returns on VC investments how is it possible to invest in higher risk things and expect a return?

# Can you get VC-level returns by funding research?
[[Isaac Barchas]] asserts that the answer is ‘no’ -
[[Laura Deming]] and [[Jason Crawford]] assert yes

Related:
 [[Commercializing non-health research does not produce VC level returns]]



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DARPA works where markets dont

Can you get VC-level returns by funding research?

Isaac Barchas Conversation 18/3/20

# Commercializing non-health research does not produce VC level returns
## Underlying assumptions
[[Commercialization has very high transaction costs]]

## Counterexamples
- [[Kurion]]

[[Science Business - Book]] asserts that possibly even biotech isn’t producing real returns

If this is true how does [[TandemLaunch]] stay in business? 

Asserted by [[Isaac Barchas]] 



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# If you need to have the possibility of near infinite returns on VC investments how is it possible to invest in higher risk things and expect a return?
VC portfolios are already constructed so that any company they invest in needs to have a chance of a near-infinite valuation in order to pay for all the failure. Software companies have incredible margins because they have low capital costs and often have known sales channels and little true technology risk. If there are enough software companies that have a potentially massive valuation (which seems to be a not-slowing-down trend in 2020), wouldn’t investing in non-software companies be irrational because it’s just increasing risk without increasing potential reward?

### Related
- [[Is it possible that base rate growth in the market is actually a bad thing for innovation?]]
- [[Can you get VC-level returns by funding research?]]




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It is hard for a private ARPA to capture value without hamstringing impact

The market in for-profit organizations is fairly efficient

# There are many important innovations that are just bad investments
Important innovations[^1] can be bad investments in both an absolute sense because they can’t capture much of the value they create and in a relative sense compared to other possible investments. 

Many innovations are bad investments because you just can’t capture that much of their value. These come in two categories. 
1. Innovations whose value is just inherently hard to capture. Research often falls into this category ([[It is hard to capture value from research]]) especially research that is spread between multiple organizations ([[It is especially hard to capture value from externalized research]].)  Innovations that resemble [[Problems where it is easy to know whether an answer is correct but hard to get to that answer]] are especially hard to capture from - these can be design innovations, just-right-recipes, best practices, etc. 
2. Innovations that would be hamstrung by capturing their value. [[There is a significant class of innovations that would create drastically less value for the world if their value had been captured by their creators]]

There are also innovations that are bad investments relative to other options. Low liquidity, high uncertainty, and long time horizons are all undesirable characteristics of investments and also characteristics of investments in potentially-paradigm-shifting innovations. When the stock market is providing >10% year-over-year returns that are very liquid and (perceived as relatively) low risk you need to have a convincing story that you can do *much* better than that with a low-liquidity, high-uncertainty project that won’t pay out for more than a decade. Limiting ourselves just to people to technology venture investments, you’re up against software companies that have incredible margins because they have low capital costs and often have known sales channels and little true technology risk. VC portfolios are already constructed so that any company they invest in needs to have a chance of a near-infinite valuation in order to pay for all the failure. It’s hard to claim a potential payoff higher than the one they already expect, so you’re effectively asking them to accept higher risk for the same potential reward.  [[If you need to have the possibility of near infinite returns on VC investments how is it possible to invest in higher risk things and expect a return?]]Unfortunately, the attractiveness of software as an investment renders many other innovations “bad investments” by comparison.   

Often the situation is a combination of the two situations - uncertain or even good-but-not-mind-blowing captureable value combines with capital costs, margins, liquidity, or timeline to make an innovation a bad investment for rational investors. 

### Related
- [[§Startup Constraints]]
- [[Can you get VC-level returns by funding research?]]
- [[Is it possible that base rate growth in the market is actually a bad thing for innovation?]]
- [[The market in for-profit organizations is fairly efficient]]

[^1]: Obviously the definition of an “important innovation” is nebulous. 



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