My view: look at most of the real problems we face today. They require solutions consisting of:
1) Engineering (what software folks call hardware), especially cross-functional engineering across several fields, such as chemical and electrical.
2) Software, typically including applications of ML.
3) R&D. Research And Development, folks. The thing investors don't want you to do.
Those types of companies will almost never come out of venture capital. They start with a small founder investment (what VCs tell us is called 'bootstrapping'), significantly supported by federal government grants and contracts (the best source of funding for true R&D), and then product development and commercialization.
The ZIRP-era of pure software, VC-driven type of technology entrepreneurship tries to skip all the way to the end, scale beyond all bounds, and exit big and fast. No wonder we're experiencing groupthink, and why the Bay Area is hollowing out: in this form of technology entrepreneurship, there is no deep economic basis for growth.
In short: technology entrepreneurs should take on technology risk. That means raising capital late, not early, because investors will always be skittish about R&D and longer timeframes. And it means following your own vision first and foremost, rather than letting venture capitalists define how you see the world.
Investors are not where the action is. It is founders and early employees who built the likes of Sony, Qualcomm, General Atomics -- each of these, a real technology company.
I spent all of ZIRP while it was happening being bothered by this. It was insanity inducing to watch huge valuations and associated piles of money chasing the most banal and/or impossibly ridiculous ventures for YEARS.
I also used to tell many, many VCs to their face that the only reason they existed at all wasn't because they had any worthwhile insights into investing or innovation, but because tons of massive upstream capital & funds had a choice between definitely essentially losing money investing in bonds or probably losing money funneling it through their brokerage... er... venture fund. The world's least qualified kingmakers minting new American royalty, and we'll all be paying the price for it for decades.
To add insult to injury, now huge numbers of those alsoran VCs are pivoting into "deep tech" investing, and brining their inane-SaaS myopia and completely misaligned expectations along with them.
Why would there be bewilderment? Interest rates are, of course, the cost of money. We saw the cost of money fall to essentially nothing because the demand for money dropped off a cliff. As with anything, the price then fell to compensate. That's your basic supply and demand.
But why would the market no longer have a strong demand for money and see money as being essentially worthless? Because nobody knew what to do with it. That's why we got little out of ZIRP. ZIRP was merely a symptom of the populace not having a strong vision or direction in which to use resources. It was in reaction to the environment it took place in.
Had we had loftier goals and grander visions we'd have gotten more, but the cost would have also been much higher (i.e. ZIRP wouldn't have happened).
ZIRP happened as a long-term back-channel bailout to all the banks & funds holding the downside of the housing & derivatives market collapse. It allowed the financial sector to reinflate several asset classes that should have seen steeeeeeep declines & corrections, so that they didn't have to face insolvency.
Then on the back of that there were all these knock-on effects to cheap money, or more specifically net-negative yield on things that historically were supposed to be slow, safe value stores. One of which was epic amounts of money flooding into VC and VC making the attribution error of their access to money being correlated to their access to ability & insight, but in the prevailing environment there was no correcting feedback function for that either.
So, cheap-money became dumb-money, but sociologically we attribute lots-of-money to intelligence & capability, and from that a decade of Hundreds of Billions of Dollars of trite visionless total crap was born.
> ZIRP happened as a long-term back-channel bailout to all the banks & funds holding the downside of the housing & derivatives market collapse.
ZIRP happened because the US unemployment rate went to 10%, and when that happens central banks tend to drop rates to help the economy get going again:
That was on the monetary side. On the fiscal side, the GOP refused to pass a large enough stimulus package—what was sent through had a large portion (40%) of tax cuts to win bipartisan support, and those, as predicted, didn't do much. So, as can see in the above graph, it was a long slog to get people employed again.
And since the fiscal side didn't do anything (thanks GOP), the Fed had to enact its mandate to fulfil employment, and since rates were already at zero, other measures were done. This is where QE came in, which many (right-leaning) folks said would cause disaster:
> We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
The Keynesians said this was non-sense. The Keynesians were right (again).
And so the long grind to restore employment numbers (while watching inflation) continued for the entirety of the time Obama was in office because the GOP didn't want to help on the fiscal side. And so that left the monetary side and ZIRP and QE.
So if you don't want long-term ZIRP on the monetary side, perhaps the fiscal folks should do their jobs.
> in the prevailing environment there was no correcting feedback function for that either.
Right. The correcting function should have been everyone else noticing that they could borrow for essentially nothing and use that to fund their grand visions. The increase in demand would have necessitated an increase in interest rates to slow activity. Just as eventually happened when people finally felt they could do something with money (i.e. expansion in economic sectors where supply shocks suggested [no doubt incorrectly – but that will be another problem for another day] that increased production was needed).
It didn't happen because the vision was lacking. What was anyone going to do with it? Nobody knew what to do it. As such, nobody was borrowing in any meaningful way. At best they borrowed to buy houses, but certainly not for productive activities. Those with money didn't know what to do with it either. Lending it to those who had a vision wasn't an option. So, they simply plowed it into whatever was fashionable. And as a result, we didn't get much more than fashion in return.
We gained a vision around correcting the supply shocks that occurred in the early 2020s. The price of many goods went sky high due to lack of supply, so people started demanding money again so that they could ramp up production in response. Thus the price of money (i.e. interest rates) increased on that newfound demand.
You are right that it is probably not a suitable long-term vision. In fact, it seems most everyone is convinced that interest rates are going to head back towards ZIRP again soon because they don't see any long-term vision out there to sustain that demand. You are good company here.
I suspect it was really a matter of how VC sold itself in a ZIRP environment. They were "the yield guys" in an environment where there was no yield.
They could have advertised themselves as "we're making big long term investments in serious innovation that will maybe pay out in the distant future" and they probably could have raised money that way in an environment where money was basically free, but not as much. So instead we got "we're making the world a better place through paxos algorithms for consensus protocols."
For some of this, it shouldn't be private capital (such as infrastructure improvements) funding it, it should be public funds. The venture capital model is not a good fit for that, simply based on the evidence available, IE the distinct lack of funding for non-software solutions in the space.
SpaceX is a wonderful example of this as well. Elon Musk funded SpaceX, then investors followed much later, mostly due to StarLink and its potential, I imagine.
We need better government funding and we definitely need to re-evaulate how grants are structured, the funding tends to be very narrowly specified that you can't solve adjacent problems with the funding as it would be a violation of the terms of the grant. That sort of thing needs to be better accounted for and it isn't today, at least not always.
I thought one of the underlying reasons for ZIRP was a massive public underinvestment. Basically the supply of government debt was so restricted and the demand for it was so high that people were willing in many cases to pay the government to take their money.
1) Engineering (what software folks call hardware), especially cross-functional engineering across several fields, such as chemical and electrical.
2) Software, typically including applications of ML.
3) R&D. Research And Development, folks. The thing investors don't want you to do.
Those types of companies will almost never come out of venture capital. They start with a small founder investment (what VCs tell us is called 'bootstrapping'), significantly supported by federal government grants and contracts (the best source of funding for true R&D), and then product development and commercialization.
The ZIRP-era of pure software, VC-driven type of technology entrepreneurship tries to skip all the way to the end, scale beyond all bounds, and exit big and fast. No wonder we're experiencing groupthink, and why the Bay Area is hollowing out: in this form of technology entrepreneurship, there is no deep economic basis for growth.
In short: technology entrepreneurs should take on technology risk. That means raising capital late, not early, because investors will always be skittish about R&D and longer timeframes. And it means following your own vision first and foremost, rather than letting venture capitalists define how you see the world.
Investors are not where the action is. It is founders and early employees who built the likes of Sony, Qualcomm, General Atomics -- each of these, a real technology company.