§Academia Constraints

Decoupling from market discipline is like cave diving

Current value capture mechanisms are crude

When should an idea that smells like research be a startup?

§Corporate R+D Constraints

Bell Labs is one of the few examples of an innovation org that was aligned with its money factory

Startups are good at point changes

Systemic decay theory of stagnation

Ideally corporate R+D enables work on a general purpose technology before it’s specialized

There are many tight feedback loops built into the ARPA model

Things that are not paper-worthy enough for academia and not product-focused enough for a startup

One function of a private ARPA is to fill in the gap once filled by corporate R+D

There are many important innovations that are just bad investments

Startup Constraints - essay

The market in for-profit organizations is fairly efficient

Profit-maximizing organizational structures can hamstring technologies whose impact depends on them

It is easier to have a multipoint mutation in technology than in evolution

PARPA could walk the line between profit and non profit

Startups  need to spend effort on sales, marketing, and productization

Startups and Academia are bad at addressing structural constraints

The Architected Innov􏰂ation Institute - Engineering Scientific Revolutions

An institution riffing on the ARPA Model could enable paradigm shifts that are not happening

# §Startup Constraints
- [[Startups need to make a lot of money or have a lot of users]]

- [[Startups need to conform to investor timescales]]
- [[Venture capital doesn’t work for things that only realize their value on long timescales]]
- [[Startups need an exit strategy]]
- [[Startups need a great story]]
- [[Startups need to produce a scalable product]] 
- [[Startups need to break development into correctly sized stages]]
- [[Startups need specific growth curves]]
- [[If a project has massive possible upside and low enough risk it is venture fundable]]
- [[Scalability and venture fundability happens when you turn a process innovation into a tool innovation]]
- [[Startups are good at point changes]]

- [[Startup Constraints - essay]]

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Illiquid self-sustaining and investable-profit-levels returns both have several incentive traps

# In order to beat the stock market on average a 20 year project needs to return 4x
Assuming the stock market returns 7% on average, over 20 years it will return 387%. So in order to beat that a 20 year project needs to return ~400% or 4x. 

Of course that doesn’t take into account illiquidity or risk. So in reality you need to be able to expect it to return much more.

### Related
- [[Illiquid self-sustaining and investable-profit-levels returns both have several incentive traps]]
- [[Embedded growth obligations have shifted the cultural narrative to the idea that everything can and needs to be a high-return investment]]
- [[Startups need to conform to investor timescales]]



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PARPAs ideal legal structure comprises both a nonprofit and a for profit

Week of 29 Nov 2020

ICT Distillation

An Institute for Creative Technology - Riffing on ARPA

ICT Outline

Peter van Hardenberg Conversation 20 Nov 2020

# Inverting the normal relationship between an R+D organization and is money factory may enable new classes of activities
Research orgs are typically *subsidiary* to their their money factories. [[Innovation orgs need a money factory]]. Bell Labs was subsidiary to AT&T, PARC to Xerox, DARPA to the DoD and Congress, academic labs to grant givers, etc. This relationship generates so many of the incentives that run counter to producing high-quality and eventually-impactful research. A lot of the specific friction[^1] can be traced back to mismatched [[Buxton Index]]s - research just has a longer timescale than the natural beats of elected officials, quarterly earnings, or fundraising rounds from LPs. 

What if you invert this relationship? ([[TRIZ Methods]] #1) - instead of the revenue generating entity (money factory) being the ‘parent’ org, instead the R+D org becomes the parent. 

What does the distinction between a parent and a child/subsidiary organization mean? Ultimately it’s about power - whose priorities take precedence? In the most extreme sense, if there is a choice between an action that will destroy one organization or another, which gets priority? It’s uncomfortable to talk about inter-organizational power in the same way that it’s uncomfortable to talk about  reaper functions ([[Reaper functions beat culture decks]].)  This power usually takes the form of contracts if the children are external to the parent and budgets if they are internal. To some extent it’s just about which organization came first. If a parent organization could survive before its child came along, it’s a clear proof point that it can survive without the child.[^2]  

It’s tempting to say “ah yes! It will solve the problems!” but that is magical thinking. Inverting the relationship won’t remove the [[Buxton Index]] mismatch, it will just change which direction exerts power. That relationship will create a *different* set of constraints on what happens and what can exist. The inversion is rare enough that there aren’t many case studies but one could imagine projects never shipping because of perfectionist thinking or a hesitance to kill projects that aren’t going anywhere. 

It feels slightly nonsensical to not have the main profit-generating entity as the parent organization because otherwise, where does operating capital come from before the money factories are created? Let’s call this the ‘bootstrapping problem.’ The challenge becomes finding a *transient* source of money that simultaneously puts few enough constraints on the organization that it can do the work to create cash-generating children while at the same time not warping its incentives towards generating cash-children as soon as possible at all costs. 

There are examples of organizations that have pulled off the inversion with varying degrees of success. Organizations like [[Flagship Pioneering]], [[Idealab]], [[Ink and Switch]], [[TandemLaunch]] are all both the ‘parent organization’ and the ‘innovation organization’ while the companies that they spin out are ‘the money factories.’ If you squint, [[Howard Hughes Medical Institute (HHMI)]] also fits this pattern - its funding comes from its foundation, which is the subsidiary organization.  HHMI is especially noteworthy because unlike the others, its survival isn’t contingent on spinning out companies, which is a double-edged sword. On the one hand companies are a powerful technology dispersion mechanism [[Dispersion can happen in three ways - selling technology directly, open-sourcing technology, building an organization around it]] but on the other hand, [[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]].  

How did each of these organizations address the bootstrapping problem? [[Flagship Pioneering]], [[Idealab]],  [[TandemLaunch]] and their ilk - “researchy startup studios” - are explicitly out to create high-growth, venture-backable startups. This goal allows them to bootstrap with for-profit investment capital. It also incentivizes them towards projects that can become high growth startups on a short timescale. [[Ink and Switch]] has bootstrapped with a combination of sources - investment, ‘friendly investment’[^3], and consulting with companies on the implementation of different areas of their research. [[Howard Hughes Medical Institute (HHMI)]] kind of cheated by starting already sitting on top of a massive endowment. The upshot is that there isn’t a well-worn path for an innovation organization to get to a point where its operating capital can consistently come from subsidiary organizations if it wants to work on things that might not want to become high-growth startups. Charting different possible approaches to the bootstrapping problem is the focus of [[How does money work in PARPA?]].

### Related
- [[PARPA will eventually spin out companies]]
- [[Dispersion can happen in three ways - selling technology directly, open-sourcing technology, building an organization around it]]
- Many thanks to [[Peter van Hardenberg conversation 16 Aug 2021]] for planting this idea in my head
- It’s probably worth distinguishing 

[^1]: Things like how [[R&D orgs are always on the side of an org chart - The lab is always separated from the mothership]],  [[Rewards in a big company operate on one timescale and R&D happens on another timescale]],  [[Startups need to conform to investor timescales]], [[Startups need specific growth curves]] etc.
[^2]: Though of course circumstances could have changed to make this no longer true
[^3]: ‘Friendly investment’ is what I would call investment from non-professional investors that is some superposition of philanthropy and investment. That is, unlike professional investors who implicitly or explicitly want to see a certain level of growth on a clear timeline, friendly investment is more like an option - if the asset becomes worth something, awesome but if not disappointing but 🤷‍♂️. Of course, [[Friendly investment always runs the risk of becoming unfriendly at any time]] - the classic example is entrepreneurs who get their first startup money from friends and family who have no experience with startup investing. A lot of angel investing could be considered ‘friendly investing.’ 

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§Startup Constraints

Xora has unique structural advantages that could allow it to push the technological frontier

# Startup Constraints - essay
- [[Startups need to make a lot of money or have a lot of users]]
- [[Startups need to conform to investor timescales]]
- [[Startups need an exit strategy]]
- [[Startups need a great story]]
- [[Startups need to produce a scalable product]] 
- [[Startups need to break development into correctly sized stages]]
- [[Startups need specific growth curves]]
- 
### Published
10/2018
## Questions
## Thoughts
## Related
[[§Startup Constraints]]
## Authors
- [[Benjamin Reinhardt]]
## Link
[Startup Constraints](https://benjaminreinhardt.com/startup-constraints/)

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In order to beat the stock market on average a 20 year project needs to return 4x

Inverting the normal relationship between an R+D organization and is money factory may enable new classes of activities

# Startups need to conform to investor timescales
[[Venture capitalists need to fund things that increase valuation in a few years and return in 5-7 years]]



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Benʼs working notes

Startups need to conform to investor timescales

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