The human niche is communication & coordination. Hominids figured out stone tools about 2.5 million years ago and controlled fire about a million years later. Economic person has been busy at work developing better tools, but our genus seems to have a default handle on coordination with others around us. That is, in the spatial realm. Other animals do this too, we’ve simply come up with even more canny ways to coordinate with complete strangers, simultaneously and across space (language and money, 60,000 and 5,000 ish years ago), and relatively recently, on the other side of the planet (control of electromagnetic radiation, among other things). What is truly remarkable is that around 200,000 years ago, Homo sapiens and other species close on the genetic line figured out how to communicate and coordinate over time, with individuals in the future. They did this via artwork, rituals, language, and later, writing (5,000 years ago, probably because of money, which is funny).
Coordinating information to others through time is literally what allows for exponential growth over time, and when this is done in the context of creation and building as humans (and in particular, economic person) are wont to do, this coordination over time allows for some truly spectacular creations indeed.
Monuments like Gobkli Tepe and Stonehenge are some of the most awe-inspiring construction projects, no doubt because of the amount of time that these ancient sites took to build. Gobkli Tepe likely took primitive workers decades to build and is a monument to the neolithic revolution. Stonehenge, likely built in a less-coordinated manner, was nonetheless built for the sake of rituals over the course of 1,400 years. Similarly, humans have built extraordinary sites for ritual like the Egyptian Great Pyramids, the Mayan Chicken Itza, the Buddhists’ Angkor Wat, and the English York Minster Cathedral. We’ve also built massive monuments to power, trade, and defense, like China’s Great Wall, the Nabataeans’ Petra (and their artificial oasis), and the modern Sagrada Familia. All of these marvels of physical construction are instances of projects that took humans decades, hundreds, and in the case of the Great Wall, thousands of years to coordinate and complete. We are still working on the Sagrada Familia.
It’s not just physical construction projects that can span and compound in both complexity and scale over time. Carefully architectured legal documents come to mind, such as the United States Constitution that established the current oldest continuous democracy on the planet. In the same vein, Hamilton’s First Central Bank, which spanned 20 years, is an exemplary instance of an abstract project built over the course of decades — even Clay’s American System enduring in the 1800s, though it evolved over time and protectionism with it, is something I’d consider an enduring project over decades, though we are wandering into grey territory. More recently, China’s build-out of an impressive, more-or-less centrally planned high-speed rail network starting with Deng Xiaoping’s initiatives in the 1990s has hit 38,000 km of coverage. It’s a globally idiosyncratic multi-decade feat.
To clarify what at this point might seem like a hodgepodge of things people have done over all of human history: I’m specifically narrowing in on the projects that meet the following criteria
- They have tangible outputs, and both abstract and tangible inputs (i.e. they’re innovative and become physical in some way).
- They are wholistically (or at least concurrently) planned. These are not projects that are open-ended or meant to evolve into something gradually.
The second criterion is the vital distinction I want to make. The technologies we develop, the cities we build, and most innovation we do is in small, discrete innovation steps that evolve over time, responding in minute ways to diminutive constraints and requirements. And rightfully so. When economic person sets out to create something, it is most efficient and convenient to either build something well understood (like a mixed-use apartment building) or innovate in a way most convex to the upside. The latter means low-cost, quick, and extremely scalable (software! more on this later). The former means predictable cash flow but the often expensive physical scale (not unlike the monuments of man I waxed about just a moment ago).
Again, this evolution of human creation is certainly augmented by our unique ability to convey complex information through time as well as disseminate it over vast distances, to a very high number of people, and more recently, in an insanely low amount of time. This is the process through which the major technological inflection points experienced by humanity, and crucially all of the steps in between, occurred. It’s importance and natural occurrence should not be discounted.
However, there is another element here that without which the more recent technological revolutions and global colonization (in all of its glory and shame) would have been precluded, or at least stunted. It started with the introduction of the joint-stock, limited liability corporation, steamrolled into high percentages of circulating capital for investment, and culminated in the image of the modern global banking or financing system. In short, it’s capitalism. In long, it’s the specific system of using accumulated capital for reinvestment and continuous growth.
Obviously, there are important discussions to be had about the merits and alternatives of such a methodology, but let’s take capitalism for granted for a moment.
Paying for Expensive Stuff
There are two overarching ways to partake in this definition of capitalism (though they are not mutually exclusive). One is to throw a lot of capital at a myriad of promising innovations and hope that one creates a niche in the market and scales: Venture. The other is to throw a lot of capital at a single project’s land and labor that will create a surplus of supply: Project finance, as it were.
Venture finance itself an incredibly diverse industry, is focused on startup or early-stage investments with a high-risk profile. The risk stems from commercialization, new solutions, lengthy unpredictable development periods, and opaque time horizons. Often, venture investments are concerned with equity stakes, known as carry, without the contractual obligation of repayment. For venture debt investments, loans are made against the company balance sheet and are often calibrated to the latest capital raise – venture debt relies on venture capital investments as a primary source of repayment for the loan. There are some interesting capital structures where lenders receive warrants on the company’s common equity as part of compensation for higher default risk. One of the more obvious and common of these are convertible notes, where the investor earns a value accrued over time and is credited with equity in the venture once a certain threshold is reached or the debt is repaid. Essentially, venture debt is done in the name of reducing shareholder dilution in the face of highly capital intensive and risky early-stage projects.
But venture finance is just one (a notably sexy & popular one, at that) formalization of investment in the industry. There are a ton of other classes of investment that have been invented, from grants, to rolling funds, to crowdfunding, to traditional commercial debt, to growth equity, to various other forms of non-dilutive investment like licensing, tax credits, etc. I think Project finance, which some ways stands at the opposite end of the investment spectrum from venture, deserves some love. While venture is for risky builds and acceleration of ideas, in energy, food, water, and transportation (read: infrastructure), that formula doesn’t apply. Enter project finance.
Project finance is needed in the immediate and medium-term to deploy and commercialize projects, typically those with intensive capital costs – think projects like setting up a production line, putting a datacenter online, or energy harvesting like wind or laying oil pipelines (or in the case of expansion/brownfield projects, reworking old pipelines). Compared to the higher cost of capital of high-risk projects, the projects that are financed here are typically lower risk, established technologies with lower cost of capital backed by the future cash flows of the project secured by company tangible assets or other debt. There are a few other important things to know about this audaciously complex financing method. First, the assets of the project are wrapped up into a special purpose vehicle (SPV) which exists as an entity somewhat distinct from the borrower for limiting potential recourse (penalties for lack of debt payment). The visibility into future cash flows of the project is key, as these are what is used to fund the project finance debt. This is not to say that these cash flows are not complex; this debt is not always cheap either and the risk is a function of how predictable the project that is being financed truly is. Despite that, it is an extremely powerful tool for commercializing technology at a large scale. Most deals in the industry are easily over $500mm and financiers are willing to pour billions into SPVs via structures like senior debt plus “sponsor equity” on projects that are proven to 100x or so over decades. It’s a great way to park capital as productively and securely as possible.
When done correctly, it’s perfect for all funds, including massive pension funds, in a low interest rate environment – everyone agreed on this in the past few decades. It’s why the World Bank Group started the Global Infrastructure Facility to structure and resource this sort of investment at a global scale. I would argue that, because of the implications of commercializing technologies at such a scale, systems should be in place to incentivize it in high-interest rate environments as well, where capital typically gets sucked into bank spreads and anyone investing in debt like insurers. Money should just be cheaper (to an extent) if used to invest in (green!) infrastructure projects. We could easily do this, the Fed already printed $6 trillion for the pandemic.
It’s entirely fair that venture gets the limelight that it does, the market here is trying to find optimizations for long-term and short(er)-term investment projects with the cost of capital. Society needs capital to accelerate new ideas into the real world, where they may start to have an impact. In my opinion though, it’s unfair to both the masses and the investors with high-risk appetites to burden the latter entirely with the cost of innovation and building prototypes. And, in the case of problems with massive physical scale like climate change or colonizing the solar system or global health, it’s impertinent to the planet, to the species. More capital needs to move into this space. This is precisely the reason why we are seeing innovation prizes of unprecedented size from the likes of XPRIZE and Elon Musk’s $100mm Carbon Capture Challenge.
Building high-risk at lofty scale
There’s this idea that is catching on — maybe slightly lagging the global front — in American enterprise called New Industrialism. Neo-industrialism. Whatever. Basically, it’s an American sentiment derivative of the decline in manufacturing and construction since 2000, spurred in part by China entering the global market, in part the housing crisis, in part restrictive environmental policies (not faulting the intentions, faulting the results) that have been piling on since the 70s, and perhaps we’ll call the COVID-19 Pandemic the latest blow.
It’s people waking up to the crisis of manufacturing, housing, infrastructure, and green-energy (which is basically just an infrastructure problem). I don’t think that this issue is immured as an American problem: rather, projects of this sort of scale, as I mentioned earlier, come with the result of creating a healthier world and healthier denizens. Noah Smith does a great round up of it, and I’ve been following Works in Progress for a while now – definitely worth checking out.
I think a lot of people have heard of this idea through Marc Andreessen’s “It’s Time to Build” essay, in which he tries to argue for New Industrialism. Good job, Marc. You get a lot of stuff right, but you’re still the guy who has pumped money into software titans – internet browsers and GitHub are forgivable (I guess), but Facebook, Twitter, the monstrosity that is LinkedIn? And now your a16z wolves are shilling cryptographic currency alternatives for purchasing artificially scarce property on the internet and .jpgs? Get out of the way, man.
The glut in software investment is practically antithetical to widespread investment in the sort of tangible, full-scale commercialization of innovative projects that New Industrialism calls for. These are projects like taller skyscrapers, more doctors & automated healthcare, faster & abundant transportation, green and well-distributed power supply, infrastructure in orbit and beyond. There has been a boon of building systems with electrons since the 70s, the same cannot be said of atoms, at least in the United States. In low interest rate environments, we have been investing in and scaling software projects that could still happen in higher interest rate environments – their ability to scale and low operating costs see to that. We should be taking the oversupply of capital in these instances and plugging it relentless into highly capital-intensive tangible projects. Again, these projects are grounded in cash flow projects that are rooted in the projection of real-valued goods. Energy and transportation, for the most part, can be highly robust against inflation. Moreover, highly innovative infrastructure projects will be convexly deflationary, as technology is, which further bolsters the values of the uncertainty in future cash flows. Also, why should the market even reward companies that leverage a low-intensity of capital and equity raises to deliver technologies that aren’t even that deflationary. Facebook makes a ton of money because it captures people’s time and attention in order to sell it. How is that at all productive. How is that not itself a bubble waiting to burst? Social Media is probably the best example, but the same rule applies to all of software basically: their scale and cash flows are so prone to exponential growth because operating margins are low, not necessarily because they are producing a value that is inherently greater than or of equal value to the money they make (anything besides this is just super inflationary). There are so many more moving parts here, sure, but generally I think it’s easy to see why the latest cloud security software is a bit different than the latest way to distribute electricity on the grid.
So what if project financiers are usually the less-risky type? What is stopping those with higher risk tolerances from stepping in and funding the innovative and incredibly expensive aerospace and green-tech-grid-overhaul projects that we all imagine characterize our future. Perhaps it can only be done by a certain rarified mind (cough Elon). The opportunity cost of high-risk equity in spaces like software and the lack of high-quality commercialization projects might be to blame. Perhaps it is all about incentives. Perhaps more innovative financing structures can be used to incentivize investment in the space, like more aggressive debt/equity swaps or socialized recourse loans. After all, successfully decarbonizing the grid and electrifying power is in the interest of not only our generation but those of the future. If there were structures that pulled amounts of capital typically reserved for the predictable cash flows of project finance into the riskier projects that require seemingly inane amounts of capital, who knows what we could accomplish. We haven’t truly harnessed the power of the free-market to create trailblazing monuments of the modern era analogous to the decade or century-long construction projects undertaken by those that came before us. The closest we Americans have come to these feats, in my opinion, were the transcontinental railroad, depression-era construction projects, or the Space Race. And really only one of these was undertaken by private entities’ interests.
Or what if those groups and individuals with immense financial power simply adjusted their risk tolerances by an order of magnitude in the name of some common vision for humanity. Everyone with that amount of capital leads a comfortable existence anyways. Perhaps something out of the ordinary could be done to bolster long-term capital investment in what requires capital on the order of project financing but with a risk profile akin to an unexplored technology.
When the ancients built Stonehenge and the Great Pyramids and Petra, it took them both years and an unimaginable amount of capital. How did their societies band together to pull off these feats? Yes, they likely utilized the labor of slaves, something we (in theory) have risen above. Instead of that, we have capitalism. Yes, they were often driven by religion or powerful rulers. We have futurism and democratic policy making.
It’s been time for venture to stop bleeding our attention spans dry and take notes from project finance: there are projects out there that cost ludicrous amounts but by one yardstick or another, be it the common good of humankind, futurism, or good ‘ole traditional cash flows, have ludicrous value propositions in kind.
For the most part, it’s been happening. We’re building spaceships to Mars with VC money. Let’s charge down this path for the next century and construct technologic monuments.
Some final thoughts
Projects that would make green energy more available to more impoverished regions, as it often isn’t, are arguably more valuable then any environmental review or future cash flow projection would perceive them to be: they only get one side of the story. Here is where investing in these projects with traditional financial schemes is flawed conceptually. Money is traditionally a mechanism of storing information about “real value” and when it is invested at a certain rate or risk level, it is thus conveying information about the expected “real value” of this investment, be it a new technology or future cash flows.
In other words, invested money is only ever going to measure the value of future money (or equivalent securities). If we want something good that costs a lot, it needs to be worth a lot of future money.
If we truly want to rock the technological monument boat, let’s pretend we are going to do something like colonize another planet or, God forbid, terraform it. Or perhaps we decide to build some massive energy harvesting mechanism in orbit. Maybe even moving to completely renewable energy on the planet-scale is of a comparable magnitude of capital intensity. The trillions of current dollars in capital that a project of such scale would require make it practically impossible to achieve with modern financing techniques, even with the highly risk tolerant “project venture” I’ve been talking about. They’re so long term, so far-fetched, they aren’t worth “future money” – but we all know they are worth something spectacular. And yet people are talking about these things like they are within our technological capability because they are. We still marvel at how the primitive societies millennia ago erected the structures that they did – this is no different. I think it is time to take seriously the surplus of capital that we have in certain sectors like software, media, consumer retail & food and start to imagine what we could achieve if we started putting that surplus to work on our time’s true monuments.
To Be Determined 
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