August 2022 - Invention: A Life by James Dyson

This month we dive into an innovation classic by examining the life of of James Dyson and the creation of his world famous vacuum cleaner.

Tech Themes

IP. James Dyson believes that entrepreneurs should always retain their creations. He is a staunch advocate for patent protection and rights. When we look back at the history of Dyson, we can understand why. As a young entrepreneur, Dyson created the ball-barrow, the first wheelbarrow that used a single round ball instead of two wheels on each leg. With improved design, the product performed well; however, the board forced Dyson out of his company over a disagreement on managing the company's financial situation. Even worse, the company owned the ball barrow's patent, so James walked away with nothing but hard-earned experience and frustration. He set out to make his cyclonic vacuum and famously succeeded after 5,127 prototypes. Dyson then set out to partner with distribution channels and found Amway, a Michigan-based electronics company. In 1984, the two companies agreed on a partnership, and Dyson sent over specifications, design prototypes, and core company IP. However, shortly after that, they canceled the agreement and sued Dyson for fraud. Even worse, Amway launched an exact copy of Dyson's DC01 and was trying to compete against Dyson in the US. Dyson shot back and sued Amway. Over the next seven years, Dyson would struggle through the US court system, ultimately winning his legal case against Amway. "When you've developed a new technology, or created a radically different product, have beaten the skeptics, established awareness, and battled to create a market for it, to discover a similar product from the company that canceled the licensing agreement is sickening as if you've been punched in the solar plexus. You feel outraged by the personal theft and helpless." Dyson eventually settled with Amway in 1991, recouping all of his legal costs and gaining control of his IP.
Testing. Dyson loves testing new products. Every test (and every failure) tells you about your product and how it can be improved. He would often spend hours in his garage making minor adjustments to the cyclonic vacuum, hoping the next time would yield positive results. Over time, Dyson has adapted its testing procedures. While most companies employ some basic tests for defects, Dyson wants its products to fail the tests. Head of Testing Marco Li explains: "Everything we test will fail, in one respect, because the way we test our products we want to make sure it fails. That's the only way we can be sure we know what the limits of our technology are and make sure that what we say on the box isn't the best, but the worst-case scenario." Paradoxically, Dyson finds joy in failing: "It's a never-ending process that is enormously rewarding, and endlessly frustrating. There are countless times an inventor can give up on an idea. By the time I made my 15th prototype, my third child was born. By 2,627, my wife and I were really counting our pennies. By 3,727, my wife was giving art lessons for some extra cash. These were tough times, but each failure brought me closer to solving the problem. It wasn't the final prototype that made the struggle worth it. The process bore the fruit. I just kept at it."
Failure and Entrepreneurship. As detailed above, Dyson's first company ended with heartbreak. He describes it: "I was penniless again with no job and no income. I had three adorable children, a large mortgage to pay, and nothing to show for the past five years of toil. I had also lost my inventions. This was a very low moment and deeply worrying for Deirdre and me. It was deeply upsetting, too. My confidence took a big blow, and it would take some years to regain it." Part of being an entrepreneur is holding steadfast to a goal during times like these. Interestingly, an overview of psychological research on entrepreneurship helps us understand why failure and entrepreneurship are so closely linked. It all comes down to reflection. Only upon concrete failures do entrepreneurs enter a state of deep reflection on experiences that created the failure. After some time, the entrepreneur can become more enthusiastic and open with a new perspective on a problem or issue. The secret is getting to failure quite frequently or "Fail, Fast, Forward."

Business Themes

Never Listen to Consultants or Projections. Often venture capitalists pressure entrepreneurs into following attractive markets or trends. Dyson hates market research. He correctly points out that those doing market research are often wrong, and it makes no sense to trust someone who isn't in the industry building products and talking to customers constantly. As he puts it: "I was also putting into practice ideas I'd learned directly from Jeremy Fry and indirectly from Alec Issigonis: Don't copy the opposition. Don't worry about market research. Both Jeremy and Alec Issigonis might just as well have said "Follow your own star." And this is indeed what successful entrepreneurs do." You have to think differently than the market and competition to really arrive at a unique and differentiated product.
Accidental Success. One unobvious benefit of innovation, testing, trials, and not listening to consultants is "accidental" success. I think of unexpected success as the byproduct of curiosity and hard work. Every every hour you put into a tenuous venture adds a marble to the jar of unintended success. It's only after many hours that the marbles of success spill out. The Dyson Airblade is a clear example of the benefits of unintended innovation. The Dyson team was working on a small vacuum cleaner and had controversially decided to bring motor manufacturing in-house. Similar to Apple, Dyson likes to handle all of its manufacturing in-house, also known as a vertically integrated approach. After years of making motors internally with mixed success, his engineers noticed that one of their motors emitted air in a concentrated line. Although Dyson did not intend to make a hand dryer, it seemed like the perfect application for this new technology. It also was another market dominated by a few players (Excel Dryer, World Dryer) who last innovated a few decades ago. Dyson Airblades are now available all over the world.
James Musk and Elon Dyson. The similarities between James Dyson and Elon Musk are striking. Dyson's Dad died from cancer at an early age, which he acknowledges may have propelled his intensity and desire for control as he got older. Elon Musk had a complicated relationship with his Dad and suffered abuse for many years. Dyson was forced out of his ball-barrow company after the board ousted him as CEO. This company was his first venture, and the experience pushed him to assume complete ownership of Dyson after buying out Jeremy Fry in the 1990s. Elon was betrayed by the board of Zip2, his first company, after he took over following a dispute with former CEO Richard Sorkin. Musk was again fired from Paypal after disagreements with Peter Thiel and Max Levchin. Both founders entered markets that had lacked innovation for years, the vacuum industry and the car industry, with premium-priced products that work exceptionally well. Furthermore, these companies (Dyson, Tesla, and SpaceX) employ a unique design that is unlike other products in their respective markets and prioritize environmental benefits with their design. Although from different times and in different fields, I was surprised by how similar Elon and James are; maybe that's just a crazy person thing.

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March 2022 - Invent and Wander by Jeff Bezos

This month we go back to tech giant Amazon and review all of Jeff Bezos’s letters to shareholders. This book describes Amazon’s journey from e-commerce to cloud to everything in a quick and fascinating read!

Tech Themes

The Customer Focus. These shareholder letters clearly show that Amazon fell in love with its customer and then sought to hammer out traditional operational challenges like cycle times, fulfillment times, and distribution capacity. In the 2008 letter, Bezos calls out: "We have strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery." When a business is so clearly focused on delivering the best customer experience, with completely obvious drivers, its no wonder they succeeded. The entirety of the 2003 letter, entitled "What's good for customers is good for shareholders" is devoted to this idea. The customer is "divinely discontented" and will be very loyal until there is a slightly better service. If you continue to offer lower prices on items, more selection of things to buy, and faster delivery - customers will continue to be happy. Those tenants are not static - you can continually lower prices, add more items, and build more fulfillment centers (while getting faster) to keep customers happy. This learning curve continues in your favor - higher volumes mean cheaper to buy, lower prices means more customers, more items mean more new customers, higher volumes and more selection force the service operations to adjust to ship more. The flywheel continues all for the customer!
Power of Invention. Throughout the shareholder letters, Bezos refers to the power of invention. From the 2018 letter: "We wanted to create a culture of builders - people who are curious, explorers. They like to invent. Even when they're experts, they are "fresh" with a beginner's mind. They see the way we do things as just the way we do things now. A builder's mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again." Bezos sees invention as the ruthless process of trying and failing repeatedly. The importance of invention was also highlighted in our January book 7 Powers, with Hamilton Helmer calling the idea critical to building more and future S curves. Invention is preceded by wandering and taking big bets - the hunch and the boldness. Bezos understands that the stakes for invention have to grow, too: "As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn't growing, you're not going to be inventing at a size that can actually move the needle." Once you make these decisions, you have to be ready to watch the business scale, which sounds easy but requires constant attention to customer demand and value. Amazon's penchant for bold bets may inform Andy Jassy's recent decision to spend $10B making a competitor to Elon Musk/SpaceX's Starlink internet service. This decision is a big, bold bet on the future - we'll see if he is right in time.
Long-Term Focus. Bezos always preached trading off the short-term gain for the long-term relationship. This mindset shows up everywhere at Amazon - selling an item below cost to drive more volumes and give consumers better prices, allowing negative reviews on sites when it means that Amazon may sell fewer products, and providing Prime with ever-faster and free delivery shipments. The list goes on and on - all aspects focused on building a long-term moat and relationship with the customer. However it's important to note that not every decision pans out, and it's critical to recognize when things are going sideways; sometimes, you get an unmistakable punch in the mouth to figure that out. Bezos's 2000 shareholder letter started with, "Ouch. It's been a brutal year for many in the capital markets and certainly for Amazon.com shareholders. As of this writing, our shares are down more than 80 percent from when I wrote you last year." It then went on to highlight something that I didn't see in any other shareholder letter, a mistake: "In retrospect, we significantly underestimated how much time would be available to enter these categories and underestimated how difficult it would be for a single category e-commerce companies to achieve the scale necessary to succeed…With a long enough financing runway, pets.com and living.com may have been able to acquire enough customers to achieve the needed scale. But when the capital markets closed the door on financing internet companies, these companies simply had no choice but to close their doors. As painful as that was, the alternative - investing more of our own capital in these companies to keep them afloat- would have been an even bigger mistake." During the mid to late 90s, Amazon was on an M&A and investment tear, and it wasn't until the bubble crashed that they looked back and realized their mistake. Still, optimizing for the long term means admitting those mistakes and changing Amazon's behavior to improve the business. When thinking long-term, the company continued to operate amazingly well.

Business Themes

Free Cash Flow per Share. Despite historical rhetoric that Bezos forewent profits in favor of growth, his annual shareholder letters continually reinforce the value of upfront cash flows to Amazon's business model. If Amazon could receive cash upfront and manage its working capital cycle (days in inventory + days AR - days AP), it could scale its operations without requiring tons of cash. He valued the free cash flow per share metric so intensely that he spent an entire shareholder letter (2004) walking through an example of how earnings can differ from cash flow in businesses that invest in infrastructure. This maniacal focus on a financial metric is an excellent reminder that Bezos was a hedge fund portfolio manager before starting Amazon. These multiple personas: the hedge fund manager, the operator, the inventor, the engineer - all make Bezos a different type of character and CEO. He clearly understood financials and modeling, something that can seem notoriously absent from public technology CEOs today.
A 1,000 run home-run. Odds and sports have always captivated Warren Buffett, and he frequently liked to use Ted Williams's approach to hitting as a metaphor for investing. Bezos elaborates on this idea in his 2014 Letter (3 Big Ideas): "We all know that if you swing for the fences, you're going to strike out a lot, but you're also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why its important to be bold. Big winners pay for so many experiments." AWS is certainly a case of a 1,000 run home-run. The company incubated the business and first wrote about it in 2006 when they had 240,000 registered developers. By 2015, AWS had 1,000,000 customers, and is now at a $74B+ run-rate. This idea also calls to mind Monish Pabrai's Spawners idea - or the idea that great companies can spawn entirely new massive drivers for their business - Google with Waymo, Amazon with AWS, Apple with the iPhone. These new businesses require a lot of care and experimentation to get right, but they are 1,000 home runs, and taking bold bets is important to realizing them.
High Standards. How does Amazon achieve all that it does? While its culture has been called into question a few times, it's clear that Amazon has high expectations for its employees. The 2017 letter addresses this idea, diving into whether high standards are intrinsic/teachable and universal/domain-specific. Bezos believes that standards are teachable and driven by the environment while high standards tend to be domain-specific - high standards in one area do not mean you have high standards in another. This discussion of standards also calls back to Amazon's 2012 letter entitled "Internally Driven," where Bezos argues that he wants proactive employees. To identify and build a high standards culture, you need to recognize what high standards look like; then, you must have realistic expectations for how hard it should be or how long it will take. He illustrates this with a simple vignette on perfect handstands: "She decided to start her journey by taking a handstand workshop at her yoga studio. She then practiced for a while but wasn't getting the results she wanted. So, she hired a handstand coach. Yes, I know what you're thinking, but evidently this is an actual thing that exists. In the very first lesson, the coach gave her some wonderful advice. 'Most people,' he said, 'think that if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice. If you think you should be able to do it in two weeks, you're just going to end up quitting.' Unrealistic beliefs on scope – often hidden and undiscussed – kill high standards." Companies can develop high standards with clear scope and corresponding challenge recognition.

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May 2020 - Hitchhiker's Guide to the Galaxy by Douglas Adams

We want to recognize the craziness of the world today and the saddening police brutality and systemic racism that continues to occur in the US. This month we opted for a fiction book that may provide a minor break from that current, depressing reality. We want to acknowledge that our reality is messed up, and as a book club we are committed to reading more books about diversity in tech and more books written by a diverse set of authors.

Tech Themes

The Computer knows the answer. There is an overwhelming feeling in society today, that the computer should be able to tell us the answer. Predictive models are everywhere, from personalized AI workflows to sports gambling. Society has become accustomed to the idea that computers will solve problems for us. Interestingly, the novel portrays technology in the opposite light. Marvin, the robot on Zaphod Beeblebrox’s ship is so knowledgeable that even the most complex task seems meaninglessly easy. As a result, Marvin is constantly depressed. Deep Thought, the most powerful computer in history, takes seven million years to come up with an answer to the question of what life is all about. The simplistic forty-two answer, prompts the crowd to ask what the question was to which the answer is forty-two. The computer suggests that earth will provide that question. These examples somewhat reverse the expectations of technology to the reader. We normally think of technology as providing the answer, simplifying our lives and dehumanizing us. At the end of the story it is not Marvin’s heroism that saves the crew from being killed by the Blagulon Kappa cops who are after the Heart of Gold, it is his depression. When Marvin seizes control of the cops computer and explains his life-view, they commit suicide. In these instances, the role of technology is reversed - it is emotion and human nature that can help save the world and provide the answers to the universe.
Not so obvious, Space Travel and Towels. “A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have.” Something so simple as a towel - which seems relatively unimportant in everyday life - is an absolute necessity for space travel and hitchhiking through the galaxy. Frequently throughout technological history, the simple and unimportant things are overlooked in favor of tackling more complex problems and solutions. The largest data breach in history occurred when Equifax overlooked an expired certificate. During early development of the ENIAC, one of the first computing machines, software was looked at as unimportant and was relegated to early female programmers. Little did these sexist hardware programmers realize that software would become the most important aspect of computing. When the first iPhone released, Microsoft CEO Steve Ballmer laughed at the the device, saying it was too expensive and unable to cater to business customers because it didn’t have a keyboard. The incredibly sad, failed launch of space shuttle Challenger was due to cold temperatures causing rubber joint rings to become too stiff for appropriate sealing. Sometimes the value of a technology or a towel is not inherently obvious.
The Guide, the Whole Earth Catalog and the Internet. “The reason why it was published in the form of a micro sub meson electronic component is that if it were printed in normal book form, an interstellar hitchhiker would require several inconveniently large buildings to carry it around in.” The Hitchhiker’s Guide to The Galaxy is a massive electronic guide to help hitchhikers move throughout space. This interestingly mirrors the current state of the internet, which didn’t exist when Douglas Adams wrote Hitchhiker’s Guide to the Galaxy in the early 70s. Prior to the internet, this type of alternative information could be found in the Whole Earth Catalog, a famous magazine that Steve Jobs once called “Google in paperback form, thirty-five years before Google came along.” The Whole Earth Catalog was created by Stewart Brand, a famous writer and technologist, who actually participated with Douglas Englebart in the Mother of All Demos, which featured the introduction of the mouse and video conferencing. Brand wanted a way to publish material that wouldn’t be found in traditional textbooks, including product reviews of the latest technology. When the internet was starting to launch, Brand created The WELL (Whole Earth ‘Lectronic Link) to continue to provide interesting alternative articles and essays. The WELL is credited with being one of the first internet forums, which was originally accessed via dial-up bulletin board system. The internet today very much mirrors the Hitchhiker’s guide to the galaxy: its content is enormous, it isn’t necessarily factual (the Guide is not completely factual either, but based on experience), and its content spans all possible information needed to survive. On top of that, the packaging is described as suspiciously similar to modern smartphones: “He also had a device which looked rather like a largish electronic calculator. This had about a hundred tiny flat press buttons and a screen about four inches square on which any one of a million ‘pages’ could be summoned at a moment's notice.” The internet and mobile computing have come a long way in 50 years; it will be great to watch what happens in the next 50!

Business Themes

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The Business of Space: SpaceX / Virgin Galactic. Elon Musk and Chamath Palihapitiya are outspoken, visionary billionaires. Elon has an incredible track record of under-delivering but still exceeding most people’s wildest expectations. Chamath was an early employee at Facebook and is now a part owner of the Golden State Warriors. He is CEO of a VC-firm turned “technological holding company” and the creator of three public SPACs, one of which now represents Virgin Galactic. A SPAC or Specialty Purpose Acquisition Company is a blank-check company with no commercial operations. A SPAC is normally led by experts in a specific space like software or real estate and these executives raise money to acquire a company. The money raised in an IPO sits in an interest bearing account until the blank-check company has found a company to acquire. If no deal is completed after two years, the SPAC will give money back to their investors. Chamath purchased 49% of Richard Branson's Virgin Galactic space company in 2019. Space is impossibly big and its natural to think that someone who can develop the technology to unlock that vastness to humans would also unlock a fortune. As the Guide puts it: “‘Space,’ it says, ‘is big. Really big. You just won’t believe how vastly, hugely, mindbogglingly big it is. I mean, you may think it’s a long way down the road to the chemist’s, but that’s just peanuts to space.’” But the business of space is in its earliest days. SpaceX relies almost completely on government contracted work which means the company needs an incredible amount of funding to survive because of the capital investment and the uncertain, non-recurring nature of these space contracts. Interestingly, the development of early commercial air travel, in the 1920’s, also had a similar funding issue, and it was up to the Guggenheim family, rich from mining profits, to set up a fund to exclusively contribute to the development of Western Air Express, the world’s first commercial airliner. Virgin Galactic is taking a piece out of Tesla’s playbook by selling future space rides ahead of any commercial launch. Public markets investors including reddit’s wallstreetbets community is piling into Virgin Galactic at the literal moonshot risk of it becoming the space company (Income statement above). Space has always been a billionaire passion, the question remains - can it be a business?
Moore’s Law and Murphy’s Law. Murphy’s law states: “Anything that can go wrong, will go wrong.” Hitchhiker’s Guide to the Galaxy explores this notion repeatedly as Arthur continually finds himself in unbelievably bad circumstances; his house is demolished, his planet is destroyed, he is captured by Vogons, and sure-death missles approach the ship as the crew descends on Magarathea. Arthur continues to survive these dangers with the help of the improbability drive, which the book states is a “a wonderful new method of crossing interstellar distances in a few seconds; without all that tedious mucking about in hyperspace. As the Improbability Drive reaches infinite improbability, it passes through every conceivable point in every conceivable universe almost simultaneously. In other words, you're never sure where you'll end up or even what species you'll be when you get there. It's therefore important to dress accordingly.” In comparison to Murphy’s law, Moore’s Law is the idea that computing power doubles every 18 months. A 2006 Economist article explained Moore’s Law as the opposite of Murphy’s Law: “But his law seems safe for at least another decade—or two to three chip generations—which is as far as he has ever dared to look into the future. As things are made at scales approaching individual atoms, he says, there will surely be limitations. Then again, the law has often met obstacles that appeared insurmountable, before soon surmounting them. In that sense, Mr Moore says, he now sees his law as more beautiful than he had realised. “Moore's Law is a violation of Murphy's Law. Everything gets better and better.” While Moore’s Law has surely reached its current limitations, the question remains where do chips go from here? Some have posited that chips will push towards function specific hardware or purpose built for specific computing tasks like NVIDIA’s graphics cards. The space is large and complex - with companies like Apple licensing ARM technology to build their famous A13 chip while other companies have focused on specific parts of the value chain like TSMC. A big question that still remains is how cloud companies will scale hardware to meet continuing demand from customers. Arthur Dent, like Elon Musk, continues to benefit from infinite improbability - maybe quantum computing is the only way to know if Elon will succeed and what happens next in chip design.
Mentorship. Slartibarfast is a wise, old, planet creator who is plopped into the story to provide Arthur with answers to so many incredible questions. Slartibartfast explains the creation of earth and the interaction with Deep Thought. The interactions between Arthur and Slartibartfast are somewhat akin to traditional business mentorship - when you have none of the answers or you have preconceived ideas of how everything came to be, a mentor can quickly dispel your ideas and provide deep answers. Mentorship has been popular in Silicon Valley, with Bill Campbell mentoring Steve Jobs and several others. Bill was also instrumental in several decisions Ben Horowitz contemplated as he took Opsware through its spinout and sale of its managed services division. Mentors help change perspective and provide guidance.

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December 2019 - The Moon is a Harsh Mistress by Robert A. Heinlein

This futuristic, anti-establishment thriller is one of Elon Musk’s favorite books. While Heinlein’s novel can drag on with little action, The Moon is a Harsh Mistress presents an interesting war story and predicts several technological revolutions.

Tech Themes

Mike, the self-aware computer and IBM. Mycroft Holmes, Heinlein’s self-aware, artificially intelligent computer is a friendly, funny and focused companion to Manny, Wyoh and Prof throughout the novel. Mike’s massive hardware construction is analogous to the way companies are viewing Artificial Intelligence today. Mike’s AI is more closely related to Artificial General Intelligence, which imagines a machine that can go beyond the standard Turing Test, with further abilities to plan, learn, communicate in natural language and act on objects. The 1960s were filled with predictions of futuristic robots and machines. Ideas were popularized not only in books like The Moon is a Harsh Mistress but also in films like 2001: A Space Odyssey, where the intelligent computer, HAL 9000, attempts to overthrow the crew. In 1965, Herbert Simon, a noble prize winner, exclaimed: “machines will be capable, within twenty years, of doing any work a man can do.” As surprising as it may seem today, the dominant technology company of the 1960’s was IBM, known for its System/360 model. Heinlein even mentions Thomas Watson and IBM at Mike’s introduction: “Mike was not official name; I had nicknamed him for Mycroft Holmes, in a story written by Dr. Watson before he founded IBM. This story character would just sit and think--and that's what Mike did. Mike was a fair dinkum thinkum, sharpest computer you'll ever meet.” Mike’s construction is similar to that of present day IBM Watson, who’s computer was able to win Jeopardy, but has struggled to gain traction in the market. IBM and Heinlein approached the computer development in a similar way, Heinlein foresaw a massive computer with tons of hardware linked into it: “They kept hooking hardware into him--decision-action boxes to let him boss other computers, bank on bank of additional memories, more banks of associational neural nets, another tubful of twelve-digit random numbers, a greatly augmented temporary memory. Human brain has around ten-to-the tenth neurons. By third year Mike had better than one and a half times that number of neuristors.” This is the classic IBM approach – leverage all of the hardware possible and create a massive database of query-able information. This actually does work well for information retrieval like Jeopardy, but stumbles precariously on new information and lack of data, which is why IBM has struggled with Watson applications to date.
Artificial General Intelligence. Mike is clearly equipped with artificial general intelligence (AGI); he has the ability to securely communicate in plain language, retrieve any of the world’s information, see via cameras and hear via microphones. As discussed above, Heinlein’s construction of Mike is clearly hardware focused, which makes sense considering the book was published in the sixties, before software was considered important. In contrast to the 1960s, today, AGI is primarily addressed from an algorithmic, software angle. One of the leading research institutions (excluding the massive tech companies) is OpenAI, an organization who’s mission is: “To ensure that artificial general intelligence (AGI)—by which we mean highly autonomous systems that outperform humans at most economically valuable work—benefits all of humanity.” OpenAI was started by several people including Elon Musk and Sam Altman, founder of Y Combinator, a famous startup incubator based in Silicon Valley. OpenAI just raised $1 billion from Microsoft to pursue its artificial algorithms and is likely making the most progress when it comes to AGI. The organization has released numerous modules that allow developers to explore the wide-ranging capabilities of AI, from music creation, to color modulation. But software alone is not going to be enough to achieve full AGI. OpenAI has acknowledged that the largest machine learning training runs have been run on increasingly more hardware: “Of course, the use of massive compute sometimes just exposes the shortcomings of our current algorithms.” As we discussed before (companies are building their own hardware for this purpose, link to building their own hardware), and the degradation of Moore’s Law imposes a serious threat to achieving full Artificial General Intelligence.
Deep Learning, Adam Selene, and Deep Fakes. Heinlein successfully predicted machine’s ability to create novel images. As the group plans to take the rebellion public, Mike is able to create a depiction of Adam Selene that can appear on television and be the face of the revolution: “We waited in silence. Then screen showed neutral gray with a hint of scan lines. Went black again, then a faint light filled middle and congealed into cloudy areas light and dark, ellipsoid. Not a face, but suggestion of face that one sees in cloud patterns covering Terra. It cleared a little and reminded me of pictures alleged to be ectoplasm. A ghost of a face. Suddenly firmed and we saw "Adam Selene." Was a still picture of a mature man. No background, just a face as if trimmed out of a print. Yet was, to me, "Adam Selene." Could not he anybody else.” Image generation and manipulation has long been a hot topic among AI researchers. The research frequently leverages a technique called Deep Learning, which is a play on classically used Artificial Neural Networks. A 2012 landmark paper from the University of Toronto student Ilya Sutskever, who went on to be a founder at OpenAI, applied deep learning to the problem of image classification with incredible success. Deep learning and computer vision have been inseparable ever since. One part of research focuses on a video focused image superimposition technique called Deep Fakes, which became popular earlier this year. As shown here, these videos are essentially merging existing images and footage with a changing facial structure, which is remarkable and scary at the same time. Deep fakes are gaining so much attention that even the government is focused on learning more about them. Heinlein was early to the game, imaging a computer could create a novel image. I can only imagine how he’d feel about Deep Fakes.

Business Themes

Video Conferencing. Manny and the rest of the members of the revolution communicate through encrypted phone conversations and video conferences. While this was certainly ahead of its time, video conferencing was first imagined in the late 1800s. Despite a clear demand for the technology, it took until the late 2000s arguably, to reach appoint where mass video communication was easily accessible for businesses (Zoom Video) and individuals (FaceTime, Skype, etc.) This industry has constantly evolved and there are platforms today that offer both secure chat and video such as Microsoft Teams and Cisco Webex. The entire industry is a lesson in execution. The idea was dreamed up so long ago, but it took hundreds of years and multiple product iterations to get to a de-facto standard in the market. Microsoft purchased Skype in 2011 for $8.5B, the same year that Eric Yuan founded Zoom. This wasn’t Microsoft’s first inroads into video either, in 2003, Microsoft bought Placeware and was supposed to overtake the market. But they didn’t and Webex continued to be a major industry player before getting acquired by Cisco. Over time Skype popularity has waned, and now, Microsoft Teams has a fully functioning video platform separate from Skype – something that Webex did years ago. Markets are constantly in a state of evolution, and its important to see what has worked well. Skype and Zoom both succeeded by appealing to free users, Skype initially focused on free consumers, and Zoom focused on free users within businesses. WebEx has always been enterprise focused but they had to be, because bandwidth costs were too high to support a video platform. Teams will go to market as a next-generation alternate/augmentation of Outlook; it will be interesting to see what happens going forward.
Privacy and Secure Communication. As part of the revolution’s communication, a secure, isolated message system is created whereby not only are conversations fully encrypted and undetected by authorities but also individuals are unable to speak with more than two others in their revolution tree. Today, there are significant concerns about secure communication – people want it, but they also do not. Facebook has declared that they will implement end to end encryption despite warnings from the government not to do so. Other mobile applications like Telegram and Signal promote secure messaging and are frequently used by reporters for anonymous tips. While encryption is beneficial for those messaging, it does raise concerns about who has access to what information. Should a company have access to secure messages? Should the government have access to secure messages? Apple has always stayed strong in its privacy declaration, but has had its own missteps. This is a difficult question and the solution must be well thought out, taking into account unintended consequences of sweeping regulation in any direction.
Conglomerates. LuNoHo Co is the conglomerate that the revolution utilized to build a massive catapult and embezzle funds. While Mike’s microtransaction financial fraud is interesting (“But bear in mind that an auditor must assume that machines are honest.”), the design of LuNoHo Co. which is described as part bank, part engineering firm, and part oil and gas exploitation firm, interestingly addresses the conventional business wisdom of the times. In the 1960s, coming out of World War II, conglomerates began to really take hold across many developing nations. The 1960s were a period of low interest rates, which allowed firms to perform leveraged buyouts of other companies (using low interest loans), sometimes in a completely unrelated set of industries. Activision was once part of Vivendi, a former waste management, energy, construction, water and property conglomerate. The rationale for these moves was often that a much bigger organization could centralize general costs like accounting, finance, legal and other costs that touched every aspect of the business. However, when interest rates rose in the late 70s and early 80s, several conglomerate profits fell, and the synergies promised at the outset of the deal turned out to be more difficult to realize than initially assumed. Conglomerates are incredibly popular in Asia, often times supported by the government. In 2013, McKinsey estimated: “Over the past decade, conglomerates in South Korea accounted for about 80 percent of the largest 50 companies by revenues. In India, the figure is a whopping 90 percent. Meanwhile, China’s conglomerates (excluding state-owned enterprises) represented about 40 percent of its largest 50 companies in 2010, up from less than 20 percent a decade before.” Softbank, the famous Japanese conglomerate and creator of the vision fund, was originally a shrink-wrap software distributor but now is part VC and part Telecommunications provider. We’ve discussed the current state of Chinese internet conglomerates, Alibaba and Tencent who each own several different business lines. Over the coming years, as internet access in Asia grows more pervasive and the potential for economic downturn increases, it will be interesting to see if these conglomerates break apart and focus on their core businesses.

Dig Deeper

May 2019 - The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

This book is a great deep dive on the history of Amazon and how it became the global powerhouse that it is today.

Tech Themes

The Birth of AWS. We’ve looked at the software transition from on premise, license maintenance software to SaaS hosted in the cloud, but let’s dive deep into how the cloud came to be. The first ideas of AWS go back to 2002 when Bezos met with O’Reilly Media, a book publisher who in order to compete with Amazon, had created a way to scrape the latest book rankings off Amazon’s website. O’Reilly suggested creating a set of tools to let developers access Amazon’s rankings, and in 2003 Amazon launched Amazon Web Services (AWS) to create commerce API’s for third parties. Around this time, Amazon had centralized its IT computing resources in a separate building with hardware professionals operating and maintaining the infrastructure for the entire company. While parts of the infrastructure had improved, Amazon was struggling internally to provision and scale its computing resources. In 2004, Chris Pinkham, head of the infrastructure division, relocated to South Africa to open up Amazon’s first office in Cape Town. His first order of business was to figure out the best way to provision resources internally to allow developers to work on all types of applications on Amazon’s servers. Chris elected to use Xen, a computer that sits on top of infrastructure and acts as a controller to allow multiple projects access the same hardware. This led to the development of Elastic Compute Cloud (EC2). During this time, another group within Amazon was working on solving the problem of storing the millions of gigabytes of data Amazon had created. This team was led by Alan Atlas, who could not escape Bezos’ laser focus: “It would always start out fun and happy, with Jeff’s laugh rebounding against the walls. Then something would happen and the meeting would go south and you would fear for your life. I literally thought I’d get fired after everyone one of those meetings.” In March 2006, Amazon launched the Simple Storage Service (S3), and then a few months later launched EC2. Solving internal problems can lead to incredibly successful companies; Slack, for example, originally started as a game development company but couldn’t get the product off the ground and eventually pivoted into the messaging giant that it is today: “Tiny Speck, the company behind Glitch, will continue. We have developed some unique messaging technology with applications outside of the gaming world and a smaller core team will be working to develop new products.”
A9. In the early 2000s, Google arrived on the scene and began to sit in between Amazon and potential sales. Around this time, Amazon’s core business was struggling and a New York Times article even called for Bezos to resign. Google was siphoning off Amazon’s engineers and Bezos knew he had to take big strategic bets in order to ward off Google’s advances. To do that, he hired Udi Manber, a former Yahoo executive with a PhD in computer science who had written the authoritative textbook on Algorithms. In 2003, Udi set up shop in Palo Alto in a new Amazon subsidiary called A9 (shorthand for Algorithms). The new subsidiary’s sole goal was to create a web search engine that could rival Google’s. While A9.com never completely took off, the new development center did improve Amazon’s website search and created Clickriver, the beginning of Amazon’s advertising business, which minted $10B in revenue last year. Udi eventually became VP of Engineering for all of Google’s search products and then its Youtube Division. A9 still exists to tackle Amazon’s biggest supply chain math problems.
Innovation, Lab126 and the Kindle. In 2004, Bezos called Steve Kessel into his office and moved him from his current role as head of Amazon’s successful online books business, to run Amazon Digital, a small and not yet successful part of Amazon. This would become a repeating pattern in Kessel’s career who now finds himself head of all of Amazon’s physical locations, including its Whole Foods subsidiary. Bezos gave Kessel an incredibly abstract goal, “Your job is to kill your own business. I want you to proceed as if your goal is to put everyone selling physical books out of a job.” Bezos wanted Kessel to create a digital reading device. Kessel spent the next few months meeting with executives at Apple and Palm (make of then famous Palm Pilots) to understand the current challenges in creating such a device. Kessel eventually settled into an empty room at A9 and launched Lab126 (1 stands for a, 26 for z – an ode to Bezos’s goal to sell every book A-Z), a new subsidiary of Amazon. After a long development process and several supply chain issues, the Company launched the Kindle in 2007.
Business Themes
Something to prove: Jeff Bezos’s Childhood. What do Jeff Bezos, Steve Jobs, Elon Musk and Larry Ellison (founder of Oracle) all have in common? They all had somewhat troubled upbringings. Jobs and Ellison were famously put up for adoption at young ages. Musk’s parents divorced and Elon endured several years of an embattled relationship with his father. Jeff Bezos was born Jeffrey Preston Jorgenson, on January 12, 1964. Ted Jorgenson, Bezos’s biological father, married his mother, Jackie Gise after Gise became pregnant at age sixteen. The couple had a troubled relationship and Ted was immature and an inattentive father. The couple divorced in 1965. Jacklyn eventually met Miguel Bezos, a Cuban immigrant college student, while she was working the late shift at the Bank of New Mexico’s accounting department. Miguel and Jacklyn were married in 1968 and Jeffrey Jorgenson became Jeffrey Bezos. Several books have theorized the maniacal drive of these entrepreneurs relates back to ultimately prove self-worth after being rejected by loved ones at a young age.
Anti-Competitive Amazon & the Story of Quidsi. Amazon has an internal group dubbed Competitive Intelligence, that’s sole job is to research the products and services of competitors and present results to Jeff Bezos so he can strategically address any places where they may be losing to the competition. In the late 2000s, Competitive Intelligence began tracking a company known as Quidsi, famous for its site Diapers.com, which provided discount baby products that could be purchased on a recurring subscription basis. Quidsi had grown quickly because it had customized its distribution system for baby products. In 2009, competitive intelligence reached out to Quidsi founder, Marc Lore (founder of Jet.com and currently the head of Walmart e-commerce) saying it was looking to invest in the category. After rebuffing the offer, Quidsi soon noticed that Amazon was pricing its baby products 30% cheaper in every category; the company even tried dropping prices lower only to see Amazon pages reset to even lower prices. After a few months, Quidsi knew they couldn’t remain in a price battle for long and launched a sale of the company. Walmart agreed in principle to acquire the business for $900M but upon further diligence reduced its bid, which prompted Lore to call Amazon. Lore and his executive team went to meet with Amazon, and during the meeting, Amazon launched Amazon Mom, which gave 30% discounts on all baby products and allowed participants to purchase products on a recurring basis. At one point, Amazon’s prices dipped so low it was on track to lose $100M in three months in the diapers category alone. Amazon submitted a $540M bid for Quidsi and subsequently entered into an exclusivity period with the Company. As the end to exclusivity grew nearer, Walmart submitted a new bid at $600M, but the Amazon team threatened full on price war if Quidsi went with Walmart, so on November 8, 2010, Quidsi was acquired by Amazon for $540M. One month after the acquisition, Amazon stopped the Amazon Mom program and raised all of its prices back to normal levels. The Federal Trade Commission reviewed the deal for four months (longer than usual), but ultimately allowed the acquisition because it did not create a monopoly in the sale of baby products. Quidsi was ultimately shut down by Amazon in 2017, because it was unable to operate it profitably.
The demanding Jeff Bezos and six page memos. At Amazon, nobody uses powerpoint presentations. Instead, employees write out six page narratives in prose. Bezos believes this helps create clear and concise thinking that gets lost in flashy powerpoint slides. Whenever someone wants to launch new initiative or project, they have to submit a six page memo framed as if a customer might be hearing it for the first time. Each meeting begins with the group reading the document and the discussion begins from there. At times, especially around the release of AWS, these documents grew increasingly complex in length and size given the products being described did not already exist. Bezos often responds intensely to these memos, with bad responses including: “Are you just lazy or incompetent?” and “If I hear that idea again, I’m gonna have to kill myself” and “This document was clearly written by the B team. Can someone get me the A team document? I don’t want to waste my time with the B team document.” Its no wonder Amazon is such a terrible place to work.