These days, Highway 101 might be empty, but a virtual debate has started about Silicon Valley: Can the tech world rebuild after the pandemic, and how? Three essays from three generations of technologists all point in one direction: to rebuild for real growth.

They are:

The three essays offered their own nuts and bolts on building real growth. Together, they create  a recipe not for a recovery but for a rebirth.

Ways to true growth: real jobs, a real economy, and real scaling

#Real Jobs

Mr. Grove, in How America Can Create Jobs, published a decade ago, contends that a real economy is a job-creation economy and reminds Silicon Valley that startups don’t create jobs (Yes, he warned us that 10 years ago).

After the 2008 economic crisis, Thomas L. Friedman called for “Start-Ups, Not Bailouts” and “let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs,” Friedman wrote, “it should back startups.”

Mr. Grove denounced that idea:

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Scaling used to work well in Silicon Valley…(until)American companies discovered that they could have their manufacturing and even their engineering done more cheaply overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5 million workers (circa 2010)…But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?

…our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home.

Mr. Grove also did the math for us for the problem we are bound to have today: the cost of American job creation.

First, take the initial investment plus the investment during a company’s IPO. Then divide that by the number of employees working in that company 10 years later. For Intel this worked out to be about $650 per job—$3,600 adjusted for inflation…shows that the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to a hundred thousand dollars today.

Mr. Grove, therefore, concludes:

Long term, we need a job-centric economic theory—and job-centric political leadership—to guide our plans and actions.

#A Real Economy

Mr. Andreessen, in It’s time to build, published during the 2020 COVID-19 lockdown, reminds us America has morphed itself from industry builders to the world’s consumers, and a real economy reboot means a shift back.

In fact, I think building is how we reboot the American dream. The things we build in huge quantities, like computers and TVs, drop rapidly in price. The things we don’t, like housing, schools, and hospitals, skyrocket in price. What’s the American dream? The opportunity to have a home of your own, and a family you can provide for. We need to break the rapidly escalating price curves for housing, education, and healthcare, to make sure that every American can realize the dream, and the only way to do that is to build.

#Real Scaling

Mr. Luttig, the youngest of the three, in When Tailwinds Vanish, made it clear that for internet companies of today, the next wave of scaling will be scaling in real life, not just digitally. Therefore, he predicts:

For the first time in Internet history, startup growth will require a push from the company and not a pull from the market.

And internet companies’ competition will be “an acceleration of zero-sum games”:

True network effects-driven business models are rarer than ever.

Unit economics matter more than ever. Carefully measured growth will win.

Changes to embrace: manufacturing is part of innovation; startup as an asset class; Unturned stones among the incumbents

All three technologists call for building real things, but their prophecies are different.

#Manufacturing IS an essential part of innovation

Mr. Grove rejectedthe idea that manufacturing is only marginal after a garage-style innovation.

A new industry needs an effective ecosystem in which technology knowhow accumulates,

…experience builds on experience, and close relationships develop between supplier and customer… We broke the chain of experience that is so important in technological evolution.

…(When) finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries,..the U.S. (has) lost its lead in batteries 30 years ago when it stopped making consumer electronics devices.

What microprocessors are to computing, batteries are to electric vehicle.

As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.

#Startup as a new asset class (or Sand Hill Sachs are coming)

Mr. Luttig believes the accelerated zero-sum game in the startup world will create a new opportunity: startups’ “financial operationalization,” or as Mr. Luttig calls it, “Sand Hill Sachs.”

..to build the financial layer of tech (startups), similar to what Goldman Sachs did for the rest of corporate America.

What is Goldman Sachs? Goldman is a financial layer on top of corporate America, helping to fuel its growth. They offer services ranging from M&A advice, IPO underwriting, private equity, debt investing, prime brokerage, private wealth management, market making, and investment research.

As the ROI of SG&A spend becomes more predictable, a non-VC financial layer will emerge within Silicon Valley, similarly helping to fuel its growth.

Mr. Luttig says that startup bonds will become a new asset class.

…real-time debt offerings based on operating KPIs, securitization of software ARR, and retail investor-facing SaaS bonds.

ARR securities will become the next bond-like asset class for both institutions and individuals – irresponsible not to have some in your portfolio, as a fixed income product and a balance against equities. And who will make this market? Sand Hill Sachs.

Mr. Luttig adds that startups don’t only need to deal with investment banks before IPO.

In the 2020s, tech advisory services will emerge to help growth-stage startups achieve their financial goals – divorcing companies’ financial strategies from their operational strategies

This trend will require a new type of investment banking for tech, and Mr. Luttig bets on a new type of startups to fill this void:

Why can’t a traditional bank do this themselves? 1) They don’t understand how to underwrite using tech industry metrics (ACVs, churn, LTV, engagement, et al.), and 2) they don’t have the tech DNA to underwrite programmatically, which Sand Hill Sachs will have

This may be a new company, an existing fintech player with distribution in tech, a VC firm, or a bank. My bet would be on a new startup or a late-stage fintech company.

In fact, fintech startups in this layer are already rising:

it is clear that recurring revenue securitization – the notion of selling your future ARR bookings at a discount – is the future. Companies like Pipe and Clearbanc are already starting to destigmatize securitization, and it will only become more culturally normalized in the coming years.

#Stones unturned in the world of incumbents

When “software eats the world” becomes Silicon Valley’s mantra, the world outside of Silicon Valley is called Incumbents.

The epic time of WFH brought on by COVID-19 not only proved even a saturated industry like video conferencing has left stones unturned for applications like Zoom to take over the world overnight, but also, these changes have made every technologist think out loud about where to look for the next exponential growth in the world of incumbents.

Think bits, bites, and even atoms.

Mr. Luttig predicts:

Founders may seize this moment to build new tools to better understand operational investments, create the financial layer of the Internet, or look beyond the Internet to build new platforms in biotech or energy.

Mr. Andressenns thinks atoms:

…energy experts say that all carbon-based electrical power generation on the planet could be replaced by a few thousand new zero-emission nuclear reactors, so let’s build those.

Outside of these three, Balaji Srinivasan, Mr. Andreessens’s former partner at Andreessen Horowitz (and CTO of Coinbase), points out:

The virus has disrupted:

– K-12

– bars

– cities

– retail

– sports

– hotels

– airlines

– offices

– colleges

– subways

– concerts

– medicine

– Hollywood

– immigration

– conferences

– supply chains

– meat packing

– movie theaters

– aircraft carriers

Industries that just opened up to full digitization include medicine, college, K12, law/courts, VR travel, and more.

It will sure keep startups busy.

A U.S. Strategy

Today’s tech debate will always be political. And anything political today will divide and become a target of blame. Nevertheless, Mr. Grove and Mr. Andreessen offered their policy suggestions as Silicon Valley and Washington are getting closer than ever.

Mr. Grove said every VC firm should help its startups create a “U.S. strategy.”

Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China. … VCs should have a partner in charge of every startup’s “U.S. strategy.”

Mr. Grove suggested a tax on offshoring jobs and how to use that tax.

Levy an extra tax on the product of offshored labor…If the result is a trade war, treat it like other wars—fight to win.

Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability— we may have taken for granted

Mr. Grove also shows his confidence in the American spirit.

If profit margins are the problem, we go to work on margins, with exquisite focus.

Mr. Andreessen shared his faith in capitalism and called for a united front between the left and the right.

I’m with Nicholas Stern when he says that capitalism is how we take care of people we don’t know.
The right must fight hard against crony capitalism, regulatory capture, ossified oligopolies, risk-inducing offshoring, and investor-friendly buybacks in lieu of customer-friendly (and, over a longer period of time, even more investor-friendly) innovation. It’s time for full-throated, unapologetic, uncompromised political support from the right for aggressive investment in new products, in new industries, in new factories, in new science, in big leaps forward.
Milton Friedman once said the great public sector mistake is to judge policies and programs by their intentions rather than their results.
The left starts out with a stronger bias toward the public sector in many of these areas. To which I say, prove the superior model! Demonstrate that the public sector can build better hospitals, better schools, better transportation, better cities, better housing. Stop trying to protect the old, the entrenched, the irrelevant; commit the public sector fully to the future.

The silver lining: double down on vision

The pandemic is nearing its end, but the tech world’s new challenges are just beginning. Who is set to rise above? The ones who double down on big visions rather than playing it safe.

Mr. Grove recalls how billions spent on building Intel’s Pentium chip manufacturing plants paid off because Intel learned a hard lesson from making memory chips: While Intel was hesitating building domestic manufacturing plants for memory chips, Japan went ahead and eventually roared into the U.S. market. Not to repeat the history, even with the Pentium chip’s future in doubt, the board gave it the green light.

Mr. Grove recalls:

I still remember how afraid I was as I asked the Intel directors for authorization to spend billions of dollars for factories to produce a product (Pentium chips) that did not exist at the time for a market we could not size.

Mr. Grove reminds us that scaling domestically requires both vision and investment.

The decision to build these (Pentium chip) plants needed to be made years before we knew whether the Pentium chip would work or whether the market would be interested in it.

Mr. Luttig thinks the big changes coming to the tech world will let VCs do what they are best at: betting on big visions.

As a VC, the question becomes: how can you generate alpha through the financial commoditization of Silicon Valley? Thankfully for my industry, there are several risks VCs will continue to be uniquely good at taking:
  • R&D risk – can this technology be built?
  • Founder risk – can this team build it?
  • Vision risk – can this idea become huge?
  • Macro risk – will this startup win in 2030’s political, economic, and competitive climate?

Mr. Andreessen invites not only Silicon Valley but also Washington to join the imagination, to think big and build big things. He asks:

Where are the supersonic aircraft? Where are the millions of delivery drones? Where are the high speed trains, the soaring monorails, the hyperloops, and yes, the flying cars?

The problem is desire. We need to *want* these things. …more than we want to prevent these things

It’s time to build, as Mr. Andreessen says.

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