What kind of return do we want on our investment?

I had never spoken with someone so enthusiastic about what they could do with trash. A young, slender man from a city in India I was unfamiliar with explained to me how his machine transformed plastic refuse into an economically and environmentally superior substitute for concrete. This sort of techno-optimism fodder for “your daily reason to feel good” clickbait article provokes, but rarely maintains my optimism upon closer inspection. I listened, impressed by the person I was talking to, but unsure what to make of his elevator pitch.

Then he reached into his backpack and handed me a very real block of “Plascrete”. We’ve spent so much of the last 20 years inundated with ideas that were abstract software application propositions at best, and vaporware at worst, it was jarring to hold the physical manifestation of someone’s “big idea”. I spent the rest of the conversation, and a good chunk of my evening at the “unconference” being hosted by Emergent Ventures, thinking about the economic ramifications of Plascrete. What it could mean for developing countries to have a substitute for concrete that is 24 times stronger yet somehow 4 times cheaper – what it would mean for infrastructure and vertical housing construction. What the streets might look like picked clean of plastic bags and refuse. What happens to the lower tail of the wage distribution after the marginal product of trash-picking labor quintuples. How forecasted carbon emissions from developing countries might shift if the expected carbon footprint of construction were massively reduced.

But this post isn’t about Plascrete or the projected impact of any particular innovation. What I’m interested in this moment is the market for private venture capital.

The model of modern venture capital is built around the biggest of wins, those home run investments whose returns compensate for the more than 90% that largely fail. For the strategy to function, of course, means that every investment has to carry the possibility of prodigious returns, in the realm of 10 to 20-times investment, which limits the industries and technological categories under consideration. Tight profit margins are out. Factories, physical capital are out. Anything that might carry an inherent limitation to rapid scaling are out. What’s in are network consumer goods and zero marginal cost (e.g. software) products. So what does that leave out? Explicitly physical goods, such as inputs into shelter or food, things that require upfront investment in equipment where those costs increase with the scale of your output aspirations.

But that’s actually only the beginning of our problems. What about goods with enormous positive externalities, i.e. social benefits, that exist without the possibility of traditional property rights and monetization? Even if a private venture fund is culturally interested in such things, they are constrained by their model – any reduction in potential home run returns from their investment puts the short run solvency of their fund at risk, something unlikely to be tolerated by their investors. These problems are only compounded when considering positive externality generating technologies that are burdened with traditional physical capital needs and historically normal limits to scaling. Even if your product offers 100X social returns, that’s not going to keep the lights on for a series of high risk investments with private returns that top out at 5X.

Innovations whose adoption offers enormous positive externalities are, in theory, exactly why public support for general science exists (whether or not such things should fall within the domain of public funding agencies is a whole different question that I have no immediate interest in addressing). Let me simply say here that these hypothetical products require expertise in delivering a product to market and the capacity to appropriately take on risk. These are not the comparative advantages of large federal science funding agencies. Which leaves us with the dilemma motivating this entire rambling thought exercise. There seems to be an important gap in the market- and government-based institutions for funding innovation.

What I want to consider is the possibility of elevating the status and profile of private venture capital that goes towards profitable, self-sustaining technologies whose returns might only be considered prodigious if we include the broader positive externalities they have on human lives. The kinds of effects whose value may in fact scale exponentially as they diffuse through communities and networks, but will never be internalized into profits via property rights. I want to consider the reconstruction of the risk profile of an entire portfolio to optimize the ability of a fund to support these sorts of innovations in perpetuity. Earning returns sufficient to produce returns sufficient to self-sustain with a minimum of (if any) long run philanthropic subsidy.

Private capital with such a focus would find a niche that modern venture funds are unmotivated to serve and public scientific agencies are ill-equipped to support. Private funds focused on innovations with externally scaling returns would, in my half-baked hypothesis, would take on a two-tier model. The first tier would be composed of small investments scattered across a large number of very small grants (which is essentially the entire model of Emergent Ventures – I’m essentially plagiarizing the model I saw evidence of through two days of conversations with their grant recipients). These grants would predominantly be interested in people. These human lottery tickets would pursue their initial ideas through the proof-of-concept stages. Some would succeed, most will not, but all will benefit from their first connection to the broad international network of technology talent and talent-seekers. The small number who do succeed in producing compelling evidence of technological advancement would then enter the second tier, where large investments would be sought for a prototype and eventual distribution. What’s important to remember is that this remains a private good that must still enter and pass the market test. What distinguishes it is not an inability to economically self-sustain, but rather it’s inability to create profits so grandiose that it can subsidize a portfolio of failed moonshots. It’s prospective profitability need only justify it’s own independent risk of failure. This is not to say the bar is actually lower than traditional venture capital. While the profitability bar is lower, it must exceed a second, in many ways more difficult bar – it must produce a direct and attributable positive externality, be it through health, safety, or environmental channels. Its consumption must improve lives of not just its consumers, but those entirely uninvolved in its production or purchase.

I’m not an expert in venture capital or speculative philanthropy, but after the last week I can’t shake the idea that Michael Kremer was even more right than we realized: more people => more ideas => more economic growth. There are billions lottery tickets lying on the ground all over the developed world. We need to invent newer and better ways of picking more of them up.

3 thoughts on “What kind of return do we want on our investment?

  1. Scott Buchanan November 16, 2021 / 1:00 pm

    Good point (even apart from the social returns angle): ” Factories, physical capital are out. Anything that might carry an inherent limitation to rapid scaling are out. What’s in are network consumer goods and zero marginal cost (e.g. software) products. So what does that leave out? Explicitly physical goods, such as inputs into shelter or food,”


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