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

First, there’s the 

My hunch is that outside of a few 

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



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Uncertainty always involves risk but risk does not always involve uncertainty

# High-risk research is a malnomer
The idea of `high risk` research implies a known distribution of outcomes and (rationally) leads to risk management and optimizing for expected value. However, truly new research is *high uncertainty* but not necessarily high risk. 

[[Donald Braben]] uses the example of a skydiver. While skydiving is considered a ‘high risk’ activity, few skydivers think that their particular skydive has a high chance of failure. (Otherwise they probably wouldn’t do it.) They know their own skills and have checked their own equipment. Yes, you might say, but people have done tens or hundreds of millions of skydives. We actually have enough samples that we can model the underlying distribution. We know that skydiver’s risk better than she does.  However, the idea that *every* skydive is drawn from the same underlying distribution is patently false. 

In this situation, you and the skydiver *disagree* about the underlying outcome distribution. That is, it’s an *uncertain* situation. However (and this is going beyond Braben) skydiving is a sufficiently constrained domain that perhaps a master skydiver could know an underlying possibility distribution that both you and the skydiver would agree to. In this case skydiving becomes a knowably uncertain situation.

Research (which here I’m using as shorthand for never-been-done-before work) on the other hand is *unknowably* unknowable - it’s impossible for anybody to say a priori what the distribution of outcomes from the work looks like. As Braben points out, the honest researcher probably has both the best sense of the underlying distribution and has the most [[Skin in the game (SITG)]] (they’re the one wasting years of their life if the project goes nowhere.) 

`On the other hand, if it were decreed that the risks of skydiving had to be managed by those paying to enjoy the spectacle — that is, the spectators had to take full responsibility for anything that might happen — it is most unlikely that any jumps would take place`

`Why should academic researchers embark on major quests *if their funding agency expects most of them to fail?* That is what sponsoring high-risk research implies` 

`In research, the adoption of “best value for money” policies means effectively, that funding agencies give the highest priorities to the projects deemed to have the lowest risk of failure.`([[brabenScientificFreedomElixir2008]])

As Braben points out, the language of risk applied to research incentivizes either to suppression of high-uncertainty (ie. Actually novel) work or (in the case of programs that are supposed to support “high-risk” research) encourages researchers to stop managing their own risk, which *actually* increases the chance of failure, further poisoning the perception of high uncertainty work that gets *called* high-risk. 

### Related
- [[Uncertainty always involves risk but risk does not always involve uncertainty]]
- [[Malnomers are terms for things that actually create actively worse outcomes]]
- [[People giving out grants try to derisk them as much as possible]]
- [[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?]]
- [[Evaluating transformative research programmes: A case study of the NSF Small Grants for Exploratory Research programme]]



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High-risk research is a malnomer

# 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?
# 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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Decoupling from market discipline is like cave diving

Embedded growth obligations have shifted the cultural narrative to the idea that everything can and needs to be a high-return investment

# Is it possible that base rate growth in the market is actually a bad thing for innovation?
# Is it possible that base rate growth in the market is actually a bad thing for innovation
All risky investments are benchmarked against what you can get by investing in the stock market. If the stock market actually went up at a lower rate you would need to invest in riskier things to get better returns. 

On the other hand, if base rate growth didn’t exist people wouldn’t have money to invest in the first place?



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

Efficiency biases systems towards false negatives

The market in for-profit organizations is fairly efficient

Malcolm Handley conversation 21 Sep 2021

Magic Leap is a good case study of a potentially amazing technology killed by startup constraints

# 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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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?

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

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