Last year, we released the inaugural Future List, a new way of thinking about the durability of the venture industry, along with an op-ed arguing that we need to change our behavioral biases to prioritize solving hard problems. Why? Because without solutions to hard problems, a growing disparity in economic and social opportunity will compound and eventually boil over. While we appreciate and participate in some of Silicon Valley’s niftiest inventions, we also need to turn our attention to the hard problems that the technology industry is theoretically uniquely qualified to try to solve.
Chronic diseases like obesity, diabetes and heart disease are ravaging much of the U.S. and the world. Automation is eliminating the jobs of millions of well-meaning, law-abiding men and women. Weather patterns are increasingly unpredictable, disrupting water and food supplies and displacing millions of people. But despite this trail of breadcrumbs of big problems and big markets, we still find it difficult to fund potentially big solutions. Instead, we keep doubling down on the easy things.
When fledgling consumer apps can raise more in one round than most healthcare, education or climate change companies do in Series A, B and C rounds combined, the participating GPs and LPs have voted loudly with their dollars. When you factor in the prestige of these investors and the downstream signaling to future entrepreneurs, you can see where this starts to go wrong.
It would be one thing to ignore these harder markets because it’s not possible to make money, but that simply isn’t the case. Entrenched incumbents in healthcare, education and energy make hundreds of billions of revenues and profits. The difference, though, is that these markets are challenging and require a longevity that is in short supply in Silicon Valley.
Now it’s unfair to pick on any one investment or group of investors but it is fair to observe that this financing is part of a longstanding pattern of reckless behavior. Easy short-term growth is now so highly valued in Silicon Valley that we often overlook technical innovation, sustainable long-term growth and meaningful progress in markets that matter. Every week adds to the corpus of press releases from companies with quick, fleeting growth overcapitalized beyond rationalization. And after too many years of this, Silicon Valley is now typecast as a monoculture of coastal dilettantes who float from one meaningless endeavor to another, tone deaf to real problems.
To understand where we go from here, let’s consider the concept of the sunk cost fallacy in behavioral economics. Wikipedia defines it as a state “where people justify increased investment of money, time, lives, etc. in a decision, based on the cumulative prior investment (‘sunk costs’), despite new evidence suggesting that the cost, beginning immediately, of continuing the decision outweighs the expected benefit. These decisions are irrational in their current context but in alignment with decisions and actions previously made.”
I would offer that we are in this state now. The last decade could be summarized as follows: easy money, easy decisions, easy growth and easy markups resulting in more easy money, more easy decisions, more easy growth and so on. The problem is that the cost of these decisions now outweighs the benefits. We’ve now raised more than ever and we’ve spent more than ever. But we (entrepreneurs, employees and investors) individually all own less than ever. Companies all increasingly compete with each other for the same talent, customers and attention, so each company is less successful, on average. And if that weren’t enough, we aren’t meeting the challenges of our time.
It is time for a change. And if we expect to change the state of things we really only have two options. We can change our minds so we make different decisions or we can change the people making the decisions.
The good news is that both are happening. On the heels of the inaugural Future List, there was meaningful progress. The ranks of the venture industry, while changing slowly, did, in fact, change. Women in senior investment roles grew by nearly 40% in a year (from 45 to 62 people). Since last year’s Future List, more than 23% of new investors added were women—nearly one in four. While their overall representation in the industry is still woeful—less than 11%—I take this as good progress. We’ve also seen an increase in black and Hispanic investors, and our industry is younger as a whole. All in all, we are bringing in people who aren’t beholden to “sunk costs” and can hopefully look at this industry with fresh eyes and a more sober sense of what is broken.
To be clear, the point isn’t that hiring women and minorities will create some warm, multicultural blanket that solves what ails us. Rather, it’s that when things are broken you have to address them at their root cause. In our case, it’s an industry that is too detached from real life and also needs to become more courageous about saying yes to hard things. So with more people from different paths, unencumbered by baggage from prior decisions, and the youth and energy to be here to see the hard things through, maybe we can find the capacity to find and support the entrepreneurs that society needs to win.
So now these new investors have an opportunity to muster the courage to identify the hard problems of our time and allocate their attention and capital accordingly. Along the way, we as an industry need to find more ways of celebrating things that are hard rather things that are easy and fast, and we need to develop the patience to dedicate decades to building them if necessary.
The political events of this past year have been a wakeup call for many of us. We have some hard work ahead, starting with fixing trust, truth and franchise. It was also a wakeup call for me personally that our halcyon days are likely coming to an end. There are more upheavals on the horizon and the question is whether we are willing to prepare for them now and do our part–the hard things.