Capital Markets & The Commercialization of Applied Science

One thing I'm really interested in is the commercialization of applied science and its potential to increase the standard of living for humans. So how, where (and why) the science is done, how innovations are brought to market, how entrepreneurs leverage existing tech to create new business models, and the role of capital at every step in the process.

When you look at innovations on the scale of vaccines & modern medicine or air travel or the electric grid, or more recently, computers & the internet, you look at their significance and almost see a before/after view of the world when you're thinking about how the world looked before this thing we might now all take for granted, existed. The people dedicating their lives to trying to solve those problems know that, and that drives their work which is amazing and noble. There is, however, the inevitable friction of bringing these advances to a massive audience. What is the proper delivery mechanism for world-changing technology? How should we think about its life cycle - from ideation to experimentation to testing and the incubation of a startup to the growth of a company to a scale where it can have maximum effectiveness in bringing its breakthrough to the world. How should the involved parties - which historically, in the USA, has been an interplay between the government, academia & industry (Bell Labs is one of the best ever examples of this, Xerox Parc too) play their roles to maximize the outcome for all citizens? These are all questions that are really interesting to me. At the risk of being overly idealistic in my worldview, they feel "big," at least enough to merit spending time thinking about them, and they also provide some tangibility in terms of thinking about what investing can be, at least in an ideal form, if not how it always ends up in practice.

I'm not sure exactly what form my exploration will take. Besides a couple things on Wefunder, I've never invested in a startup or early-stage company (although I plan to in the future). Still, I have been reasonably close to people doing so, so I'm in no way an expert on anything regarding early-stage funding, let alone any of the other topics I want to explore, so it would be written more as me documenting what I'm learning. So broadly, capital markets & the commercialization of applied science and all the various ways in which they're intertwined. Can we attempt to systemize any aspects that have led to step function increases in the standard of living in the past? How can a technology investor think about the evolving landscape and the increasing overlap between private & public markets?

I find these to be super interesting questions, and I'm excited to dive in and learn more; if anyone has good resources on these topics, please don't hesitate to share them either in the comments here or dm me on Twitter.

sophie @netcapgirl

with the age of easy money clearly over i feel like there’s a spectrum of possibilities for aspiring founders - on one end you invent or are close to a scientific breakthrough & you start a business to commercialize the innovation. on the other end it’s like leveraging existing

One thing I wrote about briefly in a Twitter thread is how I think, in theory, if you're a tech investor with the goal of constructing a GARPy (growth at a reasonable price) portfolio (which, arguably, is its own form of *value* investing but that's prob going too deep into semantics) you'd be trying to set up a crossover fund because inevitably, some of the best opportunities to own shares in the best companies will be via private markets. Obviously, it's not as easy in practice. There are various challenges in structuring a fund that invests in both private & public securities, liquidity being one of the main concerns for GPs & LPs alike. And of course, skillsets will differ between say, an early stage venture analyst & someone working for a L/S manager. But again, in theory, if you're thinking like an owner and want to own pieces of the best businesses, some of those companies will be traded on a public exchange, some may be targets to be bought by a group of private owners, and some may be raising capital from private markets as they prepare for an eventual initial public offering.

This naturally brings up a discussion about portfolio management. There are two broad categories when thinking about investing - capital preservation (where the main goal is to preserve my capital, ideally growing at a reasonable rate while minimizing risk) and capital growth (the goal is to earn a high rate of return, so I'm willing to take on more risk in my investments). It's not necessarily black and white, but most funds exist somewhere on that spectrum based on the client base they want to attract. On the conservative end of the capital preservation side, a fund might invest solely in government bonds and the highest-grade corporate credit. On the other side would be something like an early-stage VC fund, where the returns follow a power law distribution and can perhaps be compared to a portfolio of call options where the investors risk the loss of their investment (the call premium) but have the chance to earn potentially asymmetric upside from constructing a portfolio in this manner. Philippe Laffont, founder of Coatue Management, has some great threads on how to think about portfolio management as a growth/tech investor.

Philippe Laffont @plaffont

3/ I only made 2 big calls in the first 10 years or so but those were enough. If 90pct of your book goes up 8pct/year (historical public returns) and 10pct doubles, then you are up twice as much as the market and that’s a big number as it compounds.

So in considering the stages of evolution for an idea to go from an early-stage startup to a public company, it's useful to consider the incentives of all those involved. The founder must be incentivized the forgo the opportunity cost of a more stable job. If they are an engineer, this may mean a high salary and stability at an established tech company. It may mean risking tenure at their current institution if they're a scientist. They are (in theory) compensated for this massive risk with the potential for their equity to be worth a life-changing amount of money if & when the company is successful. For early-stage investors, the incentive structure is interesting because they have promised their LPs above-market returns (from essentially a portfolio of call options), but a lot of firms have also promised the world something. In their public relations, many firms pitch themselves as putting capital behind a better future. Which, at the risk of being idealistic & naive, I genuinely think is dope. I'm a tech optimist at heart, and I do honestly believe that commercializing applied science is one of the best chances we have as a species to continue raising the standard of living for future generations. In practice, this only sometimes means that most ambitious moonshots get funded, and often the incentives steer early-stage investors towards chasing companies that promise to deliver the highest returns. Still, if we get a few generational companies from each cycle, it's all for the best. How we can encourage folks in the space to tackle more complex problems in industries with higher capital-intensive requirements and often more regulation is a difficult problem but also one I think is important and worthwhile for anyone who's interested in how the future gets built.

In terms of aligning incentives, I'm not an expert, but there does seem to be a need for greater collaboration between "the Bell Labs triangle," that is, the interplay between academia, the government & industry. And from the investment side, being able to put capital behind companies that are seeking to develop ideas that have the potential for step function progress should be adequately rewarded (not just thinking of potential returns from early or growth stage but also the idea that investors could be more confident in earning reasonable returns in capital intensive/highly regulated industries).

Anyway, I know it's a bit all over the place, so I want to sort of summarize what I'm thinking and what I hope to explore more of -

How can a growth/tech investor think of structuring a portfolio that is some % market beta with some % invested in more asymmetric opportunities, and how would that sort of naturally lead investors to look for companies at all different stages of their evolution in both public and private markets?

How do the mechanics of commercializing applied science work as it is right now? How do the major institutions play their role, and how do the incentives of all participants affect decisions and outcomes?

These are both interesting in their own right. I'm particularly interested in how they overlap. as evidenced by the emergence of crossover funds over the past decade, or so, a growth equity venture investment can have a similar return profile as a small/mid-cap public market investment (sometimes even larger cap stocks can have this sort of return potential). A take-private deal can present investors with the opportunity to own a share of a great company that would add a valuable return stream to their profile (and if you're thinking like an owner, it's the business you care about most of all, and some companies can have more success as a private firm than on the public markets).

Some other thoughts on formats/topics for future posts-

I usually do a bottom-up analysis of companies I'm looking at, but sometimes I do look at trends and companies that are potentially poised to benefit. I could write up my thoughts about some trends now and then and highlight some companies I believe could benefit.

sophie @netcapgirl

trends i think will be important for the next 5-10 years 1) computer revolution hasn’t happened yet 2) disconnect between energy goals & energy realities 3) banking, money & payments on the internet 4) end of globalization as we know it 5) mission critical infrastructure

I could talk about my personal account and how I've managed it since I started investing in 2015.

I've done some book reviews on Twitter, and I could expand on these and make a list of relevant companies & their stocks if it applies to the books I'm reading.

sophie @netcapgirl

this is a great read for anyone who cares abt the future & probably should be mandatory for people in charge of public policy. after the first chapter it becomes painfully apparent how badly we need people in charge who understand both the physical & economic realities of energy

Anyway, that’s all for now. Thanks for reading, stay tuned for the next post and please reach out if you have any thoughts or feedback.