Sparta, LARPs, Ivies

This is the once-a-week free edition of The Diff. Paid subscribers get at least three issues each week. Topics in the last week:

• Assessing which part of the travel industry—business or leisure—and  which players—traditional hotels or home-sharing—recovers first.
• Garfield as the Minimum Viable Multinational Media Conglomerate.
• The perverse economics of whistleblower rewards: give people a free option on a bad thing, and you should expect more of it.
• A review of Samsung Rising, and the “multiple-pockets” theory of finance.

Sparta, LARPs, and Ivies

Sparta will be a popular historical topic forever, because part of  teaching history is keeping antsy students entertained, and the entire  concept of Sparta sounds like it was invented by a twelve-year-old boy.  Training from an early age for nonstop war? Awesome. Being fed a  starvation diet and told that the only thing wrong with stealing food is  getting caught? Rad. Fighting a suicidal last stand outnumbered twenty-to-one? Cool!

We’ve inherited more ideas from Athens (representative government, philosophy, cancel culture, but the idea of Sparta is something we’ll have for a long time.

Which is weird, because the Spartans lost. Not just in a glorious  way, at Thermopylae, but in a much more gradual, depressing way. Sparta  was important for a while, faded into irrelevance, lost some  insignificant wars, and eventually merged with a larger political unit  that was later absorbed into Rome. If the Spartan military was the most  badass fighting force of all time, surely the nation-state that beat  them would have an even more stellar reputation. (It was the Boeotians. I  had to Google.)

One reason Sparta stuck around in the collective consciousness: rich  kids. Long after Sparta was defeated by Boeotians, and eventually  conquered by Rome, upper-class Romans would send their sons to train in  Sparta. (This means that when the Founders LARPed as ancient Romans, they were LARPing as ancient LARPers. And when modern writers LARP as founders, they have reached the fourth degree: LARPing as LARPers who LARPed LARPers.)

Usually, failure is overdetermined, but success is not, and Sparta was successful for a long time. It was also static:  they had a very well-defined system, and a strict social hierarchy.  Unlike other city-states, they didn’t really use money, because there  wasn’t much to buy; professional soldiers can only carry so much  equipment, and everyone who wasn’t a soldier or a member of their family  was some variety of slave with no property rights whatsoever.

One way to look at Sparta was that they were a failure of premature  optimization. A deeply unequal system can either collapse when the  majority rebels, or get very good at repression; Sparta chose the  latter. In a near-subsistence economy, the cost of weapons relative to  disposable income is prohibitively high, so a small number of well-armed  people can, in fact, keep a large-and-restive population under control.  (More recently, although still quite a long time ago, roughly 20,000  British soldiers and administrators maintained Britain’s control over  India, a country whose population at the time was roughly 300 million.  This didn’t last forever, but went on for a surprisingly long time.)

But a city-state that’s perfectly optimized for one set of  circumstances is not well-designed to deal with change. And if part of  its meta-optimization is a strong sense of tradition and skepticism of  change, then it’s eventually going to be left behind. It’s very hard to  piece together ancient economic history, but lead emissions gradually rose in the centuries after Sparta was founded,  which indicates more mining activity—and thus cheaper weaponry—which  meant that over time, elite militaries mattered less than big ones.

I worry about this story—a country with a narrative but few original  ideas, that’s perfectly adapted to particular circumstances and loathe  to question them. It seems like something that could happen anywhere.

Clearly, some of the US economy is geared towards true innovation. But a lot  is designed around optimization. Banking, consulting, and private  equity are all industries built to match up ideas, assets, and  people—not to change any of them. And while big tech companies have  improved our lives in myriad ways, they, too, spend most of their  resources optimizing something that was built a long time ago. Most of  Google’s revenue comes from AdWords, launched in 2000; Facebook’s core  product, the News Feed, dates back to 2006. These products have changed a  lot since launch, but those changes are, comparatively, tweaks.  Fundamentally, the idea of AdWords was commercial content related to the  implied intent of a search query; the idea of the news feed was a  stream of content that could include commercial messages relevant to the  user. There are many ways these products can change, but it’s hard to  imagine a future where Google or Facebook launches something that  replaces them.

Academia is supposed to be a source for new ideas, but there, too,  there’s a template: the  university-to-grad-school-to-postdoc-to-professorship-to-tenure track  forces exceptionally smart people to design their lives around a very  particular, hyper-competitive career track after which they can do something original. It makes them impressively bland.  It’s not impossible for someone to get tenure and then start exploring  bold and risky ideas, but the entire process seems designed to filter  those people out. You have to have a Donnie Brasco-level commitment to keeping weirdness under wraps. Going crazy is another option.

It might make sense that a country, like a company, would focus more  on optimization than innovation over time. We’re rich enough to waste a  lot, which means that reducing waste—in the form of misallocated capital  and under-diffused best practices—is valuable. But the parallels are  worth meditating on. After all, Sparta was not the only distant land rich kids would visit to get an education.

Covid-19 Updates

• Supply chain impacts from lockdowns can be much larger than the direct impact of the lockdowns, in theory and in practice. This is something I highlighted a while back.  The economic and public health arguments intersect when the question  switches from “how long a lockdown can we afford” to “how can we make  the right lockdown as affordable as possible?” And right now, that means  diving deep into supply chains to figure out which suppliers of  intermediate goods and financing are feeling unusually stressed. (We’d  probably get 80% of the way there with one Bloomberg function.)
• Related: a deep, supply-chain-aware writeup of why there aren’t enough masks.  The most solvable of these is the working capital constraint:  manufacturers literally can’t afford to make as many masks as they need.  Well worth-reading; this piece singlehandedly turns “Why aren’t there  enough masks?” from a rhetorical question to a question with good  answers.
• Fast Grants is working fast,  and has distributed $7m. From the post: “The project was announced  April 8, 2020, only eight days ago.  And Fast Grants was conceived of  only about a week before that, and with zero dedicated funding at the  time.”
• Stimulus payments have led to a material boost in ad performance, though some recipients have other spending plans.

Elsewhere

Out-Aggregating Amazon

Amazon is somewhat notorious for building its own Basics version of best-selling third-party products. This is, depending on who you ask, a monstrous antitrust violation or exactly what every retailer in history has done. Either way, it’s an opportunity: Thrasio  has raised funds to beat Amazon to the punch, buying out companies with  top-selling third-party products. It’s a hybrid case of software and PE competing to eat the world.

YC Undoes Something That Doesn’t Scale

Y Combinator has slowly increased how much cash it offers to  companies. The original deal was pegged to a grad student stipend, they  eventually upped it to $150k, and they later raised a growth fund to invest pro-rata in YC companies' Series A rounds.

They’re now pulling back on that. YC has always understood signaling very well: a big chunk of the wealth they create is providing a better signal of skill than universities.  So they’re executing this in a sensible way: they still reserve the  right to make follow-on investments, albeit at smaller scale, and  they’re only investing once a company gets a term sheet from a lead  investor.

This says something interesting about the efficient frontier in venture. The two hard problems in VC are 1) deal flow: getting access to the best companies, and 2) managing convexity: continuously reinvesting in the best of those  to maximize the option value of pro-rata rights, founder relationships,  and a better understanding of the company in question. YC has basically  redefined dealflow, to the point that other early-stage investors have  to optimize around YC. But the convexity-management part of the venture  equation clearly comes into play early. YC’s alpha from acceptance to  demo day is unparalleled.

Once a YC-funded company raises their Series A, the market  inefficiency has vanished, and at YC scale it asymptotically approaches a  venture index fund. Not terrible; investment management firms have had  exclusive high-alpha vehicles and much lower-alpha index-tracking  alternatives before, and anyone in a position to write a check to RIEF) knows it’s not Medallion.  But YC has the same problem Jack Bogle had in the 70s: the minimum size  of an accurate index fund is fairly high, whether it’s buying a market  cap-weighted basked of 500 stocks (you try it) or buying 7% of dozens of A rounds.