Weekly Insider (Senate, Solar & The World's Greatest Gift)

First: Matthew Nordan, President of Lux Research, gave a captivating testimony on nanotech yesterday in front of the Senate about the National Nanotech Initiative. Quoting Matthew, “The NNI has funded prodigious research in areas ranging from noninvasive cancer therapies to high-efficiency solar panels. But moreover, it’s spurred a renaissance of materials science development in the private sector. U.S. corporations like GE and Motorola spent $2.4 billion on nanotech R&D last year – 23% more than government spending at the federal and state levels combined – and venture capitalists put $632 million into U.S.-based nanotech start-ups, four times the annual figure before the NNI began.”



Second: Take this with a grain of salt. Recent conversations and scuttlebutt revealed that an alarming number of my hedge fund friends are short solar or looking at putting puts on. Of course, they know that markets can stay irrational longer than they can stay solvent, but they are calling the solar boom, “watt-coms” and seeing lots of patterns in common with the dot.com debacle. One CEO of a public solar company apparently told his audience he’d be raising new money every year. When an investor questioned him about dilution, the CEO snapped back: all my investors rent my stock anyway (meaning they were speculators not long-term holders).



From a technology view, let me be clear: solar is Occam's razor—it simply makes sense. But from an investors view, it’s the razor’s edge—good luck. Here's my controversial view: solar will end up as the Global Crossing of energy. Whereas the unintended consequences of biofools, er-biofuels are now being deemed "crimes against humanity"...the unintended consequences of solar will eventually be the exact opposite, what I’ll call "a gift for mankind".



When I say gift: it’s not what you think. Unfortunately the mass of VCs and public market investors flocking like Icarus to the sun will experience how cynically true the wisdom of 17th century French writer Pierre Corneille’s words are: “The manner of giving is worth more than the gift.”



Worth—as in billions of dollars being lost to give it. Startups are already marketing to municipalities and city bureaucrats to buy panels that people and recessionary roofs (corporations) aren't. Here's my prediction: The big winner? Africa.



Solar is to Africa as Global Crossing was to the world a decade ago. The latter helped do a great public good, connecting the world—by laying massive fiber with cheap capital provided on flawed (or fraudulent) assumptions. It was an invisible emerging market tax on speculators—that is: speculators subsidized massive infrastructure buildout. The local people in foreign lands ended up being the real winners. Solar too, at great expense to its private investors is doing a great good for the public. I predict Africa, with low or no baseload power will be the biggest beneficiary.



As William Wordsworth wrote: “Pleasure is spread through the earth; In stray gifts to be claimed by whoever shall find.” Eventually, some years from now, some opportunistic entrepreneur will buy up excess panels and capacity and distribute distressed solar power assets to a distributed population (in Africa). As I’m so found of quoting so often from Jim Surowiecki: in greed and avarice lies the hope of progress.

Weekly Insider (Timeless Space & the Mismeasure of Risk)

Some may cry cynicism at the suggestion, but skepticism is a choice filter through which the assertions of anyone with authority should be passed—lest the credulous, gullible and unsuspecting be easily duped. Ask yourself: how might this person benefit by telling me this? Is their appeal one to prevent my loss or to enable their gain?



Astronomer Martin Rees was quoted this week, saying “As in all explorations of uncharted domains, there may be a risk but there is a hidden cost of saying no." I liked that quote, but abhorred his book written a few years back. Interestingly, in the U.K. the book was called, “Our Final Century”. While in the US—where fear has become Pavlov’s bell, conditioning the masses to a call to action—the book was called: “Our Final Hour: A Scientist's Warning: How Terror, Error, and Environmental Disaster Threaten Humankind's Future In This Century - On Earth and Beyond.”



In short the book says this: the odds we’re all going to die this century are about 50%--from the effects of destructive technology.



Of course, were you an astronomer, like Reese you too would follow the wisdom of Ben Franklin, “would you persuade: speak of Interest not of Reason”. And what greater appeal to interest is there, than not dying? Viewed through the lens of incentive-caused bias (Rees’ own self-interest), his proposed answer to this “crisis” serves any astronomer whose advice would need seeking and whose field needs funding. His answer: Go to outer-space!



In his own words: "Once the threshold is crossed when there is a self-sustaining level of life in space, then life's long-range future will be secure irrespective of any of the risks on Earth (with the single exception of the catastrophic destruction of space itself). Will this happen before our technical civilization disintegrates, leaving this as a might-have-been? Will the self-sustaining space communities be established before a catastrophe sets back the prospect of any such enterprise, perhaps foreclosing it for ever? We live at what could be a defining moment for the cosmos, not just for our Earth."



Our credulity always amazes me. Consider that according to the Journal of Consumer Research, U.S. businesses lose nearly $1 Billion every Friday 13th because some people are superstitious and won’t come to work, travel or make decisions on the date. Or consider that last month N.Y. State lotto officials had to shut down betting on the number combo “871” because too many people bet on it. Why that number? It was the hotel room Spitzer used. Talk about recency-bias and availability-bias!



Of course we have terrible innate grasps of very low probability things, vastly over inflating the salient and available and under appreciating the unimagined.



Consider in markets what I’ve now dubbed “The Mismeasure of Risk”: volatility. Price movement isn’t risk (the real risk is that you don’t have money when you need it). Volatility is opportunity. And it allows for more rapid transfer between people with vastly different expectations of the future. The wilder the price swings, the more likely you are to bump into someone who completely disagrees with you and is willing to trade their claims on the future for yours. And this overreaction of counterparties allows you to either buy pieces of businesses (which are in your opinion attractively priced with even higher expected returns—from someone with the precisely opposite view) or conversely sell pieces of business you already own at much higher prices to people with much higher expectations. Volatility increases the odds you can do both.



Time is what matters most. Just as time is the friend of the great business and the enemy of the not-so great business, so to time, like volatility, makes friends with the long-term investor and antagonizes the short-term one.



I predict (nay, hope) lots of things will change in investment management in the coming years. The way risk is measured for one. Just because everyone else uses the same wrong measure doesn’t mean it’s worth anything. Sharpe Ratios and Beta are the opposite of fax machines. The more people that use them, the worse the system is. I enjoy taunting my friends at hedge funds and fund-of-funds who report monthly numbers or allow their investors to withdraw every month. How can you possibly make long-term decisions when your investors expect and demand steady linear performance? Expecting the implausible leads to attaining the inevitable—blow-ups and permanent loss of money. And that is the real risk.



Consider this; diners don't demand from a chef, Le Cirque quality in McDonald’s minutes. Those that want McDonalds go and get it. Should not investor-chefs and their LP-patrons be the same? Imagine star chef Jean-Gorges quickly ladling out his concoction to his clients, spoon by uncooked spoon, for fear of his clientele uprooting and walking out the door before their palate could rebel. The patient investor like that patient patron is rewarded with a much more fulfilling experience.



Asset managers without long-term lock-ups (or with impatient clientele) are surely more likely to be asset gatherers—appealing to the poorer judgment of their clients who want instant returns and low volatility. Those asset managers are no different than politicians—winning votes with popular short-term promises at the expense of long-term consequences. Politicians figure the next guy will be left holding the bag and have to deal with the mess. Short-term money managers, figure their clients will.



As in every recession, some self-help author will come along and console the masses (surely rocketed by Oprah’s help) telling them to stop and smell the roses, slow-down and remember that there’s more to life than money and all is not lost when money is. Of course during frenzied boom times, a different incarnation of the self-help guru peddles the paradigm of the uber-productive, (“5 minute meetings”, “getting stuff done”, “seize every second”). As George Carlin said, “It’s never just a game when you’re winning.”



But I will say this: there’s something to be said—about time and permanence, the lasting business, the lasting building, the lasting idea, the timeless principle—those timeless things. Walk through Old Europe or New York and contrast the details of the Flatiron Building with the flat iron buildings erected in weeks. Detailed architecture, like detailed literature or detailed letters or conversations used to matter more and people had the time to appreciate it. In a world of twitters, texts, six-second sound bites and finger-popping food bites, the universal lament is “we just don’t have the time.” Like I said earlier, perhaps its time that matters most. Perhaps, in fairness, it’s because those all those less appreciated timeless things are also lifeless. They’ll still be there when we won’t. Perhaps seizing every moment of life is just the way some of us cope with the fight against entropy and time’s arrow. But this weekend take the time to appreciate something or someone you take for granted.

Weekly Insider (Frequencies, Complexity & Fleeced Flocks)

While traveling late last night, from MIT to Cornell for entrepreneurship events, the radio station in the car seemed to get caught between two different FM transmissions from two neighboring cities. With a crackling of static, the song I had been listening to was being slowly replaced by a different new song. I liked the new song better, but it faded in and out. So I tuned it in—by stepping on the gas, accelerating towards a conjured image of a bleeping radio tower shooting out lightning bolt waves—just like those old black and white ads just before they say “we interrupt this broadcast…”



My point is this: new and persuasive ideas can take hold of you just as that song did. They draw you in and make you accelerate towards the people originating the signal—and away from some old idea you held. For some short period of time, the two ideas might intersect, amplify or cancel each other, leaving you confused, despite F. Scott Fitzgerald’s claim that the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function. Eventually old ideas like old songs get replaced by new ones.



And remember all new ideas are just combinations (usually with mutations) of old ideas, just as all new molecules are different combinations of atoms pulled from the periodic table of elements.



Here’s something interesting to consider on the complex interaction of old things. As you increase the number of components you have in a system, the possible ways those components can interact grows even more quickly. Imagine you have two subsystems, let’s call them X and Y. Let’s also say each is made up of 5 parts. If you only consider two-way interaction between the parts, there are 55 determinants. (Here’s the math; 5 X-parts, 5 Y-parts, 10 interactions between the X-parts, 10 interactions between the Y-parts and 25 interactions between X-parts and Y-parts).



Now consider this: Only 18% (10 out of 55) of the determinants of the system come from the individual effects of parts in X and Y while 82% (45 out of 55) come from their interactions. Remember: this is a system with only two subsystems each with 5 parts. Now imagine having a system where two subsystems X and Y are each made up of 100 parts. Now 99% of what happens occurs because of the interactions between the parts. Here’s the math: (100 X-parts, 100 y-parts, 4,950 interactions of X-parts, 4,950 interactions of Y-parts and 10,000 interactions between X-parts and Y-parts).



Think about this: this is a mildly complex system with only 100 variables and already the individual inputs are less relevant than the output of their interactions! Now remember this when you scratch your head at even far more complex systems that test the credibility—(of weather forecasters, stocks market pundits and anyone else who lays claim to predict the future of complex systems like weather or markets)--and the credulity of those who flock. Remember, eventually flocks get fleeced.

Weekly Insider (Lightning, Thunder & TV)

As I noted recently, forget the debate and deliberations over recession. We’re in one, just by virtue that suspicion of recession gives people pause and they slow their spending. The truth is this: by the time we get data, we’re in the next quarter and reacting to prior data. And remember this: 100% of the information you have is from the past, yet 100% of the value of the decisions you make and actions you take (based on that data) lies in the future—which is, as yet, unknown.



Biology, physics and astronomy offer analogies for reflection. Light travels faster than sound. About five times faster. We first see the lightning bolt dance followed by the thunder clap’s applause. And there’s information in the silence—as the duration of delay gives us rough information as to the distance from downpours. Count the seconds between flash and boom and divide by 5 and it’s roughly how far in miles the lightning struck. (And remember at any time there are 2,000 thunderstorms happening somewhere on the earth, each producing over 100 lightning strikes a second—that’s over 8 million lightning bolts every day).



Our brain processes sights quicker than sounds yet we’re still always reacting visually to the (nearer) past. When we see, we see light bouncing off an object. Yet split milliseconds pass between the lightning bolts of light striking our eye and the maelstrom of neural activity that processes it. We are observing the past.



Consider the sun. Light travels at about 186,300 miles per second. A beam of light from the sun takes about 480 seconds or 8 minutes to reach Earth. Our closest star, Alpha Centauri is 4.35 light years away (how far light travels in one year). If we saddled up and rode that light beam it would take 4.35 years to reach the star. So when we see it, we see the past: the star as it was 4.35 years ago. Shakespeare might’ve been remiss to know his star-crossed lovers were wishing upon a future by looking upon the past.



Speaking of a ray of light, my Lux Capital partner Larry Bock is doing something remarkable and admirable. He’s pulling together a huge science festival for middle school kids to be held next year 2009 in San Diego. The people supporting it: Nobel Laureates, CTOs, and some of the most prominent scientists and entrepreneurs. It’s called the San Diego Science Festival and if you want to get involved early: email Jeremy at jbabendure@ucsd.edu



There are two things young kids need to have: first, the right heroes and second, a deep desire to learn. The former can help inspire the latter. But there’s no replacement for either.



According to Science magazine, nearly half of Americans cannot name a “role model” scientist, living or dead. And only 11% can come up with the name of a living one.



Scientists are not seen as role models. When asked who today's youth look to as role models, most named an entertainer (31%), athlete (19%) or parent (17%). But when asked about science role models, 44% could not identify one.



When they can name someone, Bill Gates and Al Gore are the most cited—6% of the sample—the same percentage as Albert Einstein. Al Gore as scientist! Talk about availability bias.



There’s also a study (from Pew Research) that found for every 5 hours of US cable TV news, only 1 minute is devoted to science. Over 10 minutes are spent on celebrity news and nearly 30 minutes on crime. Here are the stats:

In the average five hours of cable news:

* 35 minutes about campaigns and elections
* 36 minutes about the debate over U.S. foreign policy
* 26 minutes or more of crime
* 12 minutes of accidents and disasters
* 10 minutes of celebrity and entertainment

On the other hand, one would have seen:

* 1 minute and 25 seconds about the environment
* 1 minute and 22 seconds about education
* 1 minute about science and technology
* 3 minutes and 34 seconds about the economy
* 3 minutes and 46 seconds about health and health care



Think about this! We spend 10 times more attention celebrating celebrities than inspiring a new generation of innovators and entrepreneurs.



Other studies suggest our national high-school graduation rate is worsening. I’m sure the statistics are debatable but I continue to observe (anecdotally) this troubling trend. If you’ve got 100 students in a school and only 60 graduate, what happens to the other 40? Do they have your trust to manage your money? Would you give them your tax dollars to make national decisions on your behalf? Would you get in an airplane designed by their hands? If this trend continues, the rank of the skill-less swell and the future intellectual deficit widens. We’ve just sold off another piece of our future.



And that means more people with less competitive education, less differentiated skills, less money (for the absence of both) and less opportunity. Think of it like this: in a competitive game with one of the best home field advantages in the world, a growing number of players on-deck seem to be mediocre and ill-equipped to compete. If our home team is weak, we’ll need to import players with star talent. Who would’ve thought a 7-foot-6 Chinese player would be the tallest player in the NBA and the center of the Houston Rockets. Or that a Japanese player would be an all-star on the Yankees. Why won’t the CEOs, scientists and entrepreneurs of the future be the same?



Remember this: if we don’t value something, someone else will. Communist Russia and China tried to hold all as equal—but one group was clearly more equal than others: the scientists. They were always held in high esteem, whereas US scientists have not been and I see a rising trend of US scientists increasingly consulting for foreign companies. Again: if we don’t value something, someone else will.



What I worry about is this: we celebrate those that make noise (and divert our attention like a cymbal-clapping simian) instead of those that make cures (scientists). We divert our attention and our time to a nation of performers, models and “adults” who compete to see if they are smarter than fifth graders.



To spend four hours being entertained is to spend 25% of your waking life and your day staring at flickering radiation that tickles your visual cortex. Don’t get me wrong: I love TV and I watch a lot of it. But I read deeply and widely. And I’m competitive. I love playing sports, but tire of watching them. Years ago I calculated that while my primate peers watched 6-8 hours of football on Sundays, and another 6-8 hours of basketball during the week, I could be learning something they weren’t. They were celebrating the competitive talents of others—I wanted to develop my own. I was a bigger fan of my own future (and my own future family) than I was of the all-star (and his family) on TV who could bounce a ball better or run in tights faster.



The most valuable investment you can make is in yourself. To trade learning or creating something new today for idle (or Idol) entertainment tonight will have consequences you feel tomorrow. In this, tequila shots and TV shows share something. The monarchy of centuries past sat imbibing on food and drink while being entertained by jesters. We’re all kings now. And a future dethroning for many of us will surely, but should not, come as a surprise.



We hyperbolically discount the future, a vestige of our evolutionary ancestors. We choose $100 today over $110 tomorrow (yet $110 a year and one day from now over $100 a year from now). And in so doing, we push up the value of the trivial, the wasteful, the bacchanal, and the debauched; and we devalue and discard the long-term patient diligent and highly contributory.



In education, most prescriptions look at the supply side: more teachers, more school supplies. I believe it’s a demand problem and kids need to want to learn, like they need to want to eat healthy foods. Putting more apples in front of them doesn’t make them pick apples over candy.

Too often we act on symptoms and mistake effects for causes. Consider the anecdote of the man by the river. He sees a girl floating by yelling for help. He jumps in and saves her. Minutes later, another girl goes by. The man jumps in again, saving the second girl and then another passes by. It turns out some villain is throwing girls off a bridge up the river. The man fixed the symptoms but not the root problem.

I implore you to learn something new and interesting this week--and even better, inspire someone else to.