The Positive Side of Cultural Change
New behaviours and new technology are a powerful combination in both business and society. It's time to take The Sniff Test.
Dear Reader…
It was my birthday last weekend. The Sniff Test featured heavily in the cards from my daughters, including this message. I’m still laughing at the The Long Article warning.
I’ve considered shortening these letters for a while. My caution is the memory of my politics tutor saying the only excuse he’d accept was “I didn’t have time to write a shorter essay”. Brevity does not always save time.
Do reply or let me know in the comments if the length of the essays sometimes stops you reading them. Your feedback is important to me. In the meantime, this week’s letter is 1,500 words rather than the usual 2,000.
Behaviour and Technology
I’ve noted that culture wars occur when fervent new opinions clash with the prevailing view. Older generations are sceptical, recognising rebellious traits from their own youth that fizzled out. Under more supportive conditions, cultural shifts occur when seeds of change fall on fertile ground.
Rex Woodbury makes the persuasive case that it’s the combination of new ideas and technology that creates lasting change. He speaks from the venture capital world, but echoes in many other places.
Change is associated with the young. This is a biological reality, as our sense of adventure is greatest when we feel time is on our hands. We crave our own experiences and must learn lessons for ourselves.
Woodbury’s argument contrasts with tech optimists such as Peter Diamandis. The latter’s Abundance Blog is filled with what he calls breath-taking tech breakthroughs. The belief is that Big Tech solves everything, all the time. Woodbury argues that the intersection of new technology and behaviours gives birth to the most transformative ideas.
Three compelling current trends that Woodbury notes are new attitudes towards work, a newfound emphasis on health and wellness, and the growing importance of sustainability. His past examples are dated, reinforcing that lasting change is periodic.
Instagram was founded in 2010 and purchased by Facebook in 2012. It took advantage of smartphone cameras at a time when people were prepared to live more public lives. Communication made it possible to build networks free from geographic constraints, which enabled photo sharing to go viral. This has transformed lives.
Figma is software that allows teams to cooperate in design. It was released in 2012, one year after a new technology enabled graphics to be rendered in web browsers. Today it is the go-to tool for software developers and a means of collaborating in non technical areas.
Woodbury’s third example is more contentious. Robinhood is a trading application developed in 2013. It came to prominence benefiting from cash handouts to the underemployed during Covid lockdowns. Its success leans on the algorithmic trading of securities that Michael Lewis railed against in Flash Boys.
Robinhood offers commission-free trading. By moving first and being the agent of change, it thrived even as established retail brokerages followed its lead. Just like its namesake, it claims to be working for the people.
Nothing in life is free and doubly so in financial markets. Commission-free trading is possible because Robinhood sells your trades to large institutions. They make money by seeing which way the crowd is moving and getting in a split second ahead.
These institutions profit from hundreds of thousands of trades a day. This has nothing to do with company earnings, potential interest changes and upcoming elections. If you invest for longer time periods when these things matter more, you don’t feel the effects. In any case, zero commissions saves more than you lose.
The concern is that free trading means overtrading. Investors lose money because they disregard the established wisdom to buy and hold. Incentives dictate behaviour and price is the biggest of them all. The implication is that older firms were doing you a favour charging you to trade shares.
All three of Woodbury’s example companies were founded over a decade ago. Since then, technology has been about creating monopolies from global networks, online graphics and high-speed communications. This is a problem for venture capital firms that fund startups.
Venture capital and private equity are similar in principle. Venture-backed firms are earlier in their lifecycle, more risky but with greater potential returns from the occasional winners. Woodbury backs a number of startups in stealth mode, meaning they have yet to launch a product.
Private equity steps in once a firm finds a market for its product. Fresh funding typically supports more sales and marketing. Technology companies are attractive investments, because it is easy and cheap to ship copies of digital products.
There are many attractions of being funded privately. The most important is avoiding the scrutiny applied to companies listed on stock markets. A public listing is a way to cash in, but if you are building for the long-term, you want to stay private and in control as long as possible.
In the aftermath of the financial crisis of 2008-9, regulations tightened on banks. Since then, intermediaries have sprung up to do what banks used to do. Trading firms make markets in place of investment banks. Private equity backs more of the companies that banks used to lend to.
Readers of The Sniff Test can decide whether this makes the financial world a safer place, or just a different one. The internet was supposed to eliminate middle men, as Amazon destroyed the book shop. But as a result of regulatory change, which determines behaviour almost as much as price does, digital technology is a well-spring of financial intermediaries.
Too Big Not To Fail
Private equity has become too successful. To get its money back and repay investors it must sell companies it invests in. This means listing on the stock market, or selling to a company that itself is listed.
The peak of private market exits was several years ago. The industry is burdened by billions of unsold investments and its investors are restless, because they need a regular flow of cash to pay pensioners.
What’s more, cash rich Big Tech is cherry-picking the best new startups and cutting out much of the need for private capital. As business is cyclical, and you are either rising or falling but never stable, hitting the limits of growth is the Wile E. Coyote moment.
The Pillars Crumble
Against this backdrop Woodbury launched Daybreak. He invests in behavioural changes such as personalised buying experiences, IVF and egg freezing, and circular fashion. Two of these take advantage of AI, which is the game changing technology of our time.
It is easy to be cynical. Woodbury comes from a big investment house with an established network. His idea of artisanal venture capital recapturing the origins of the industry, is born out of necessity.
The top two private equity firms have captured almost half of all fundraising this year. The majority of individual stock market investing in the US flows through three companies. The hedge fund industry is dominated by six giant firms. Individual financial freedom has meant the biggest funds with the best marketing taking the lion’s share of business.
Daybreak is being built in public. There is a trend for new businesses to be developed this way, with founders charting highs and lows on social media. It is an antidote to the influencers claiming untold successes and presenting unrealistic lifestyles.
This transparency is behind a lot of cultural change. The desire to choose your own image is the kernel of the gender wars. Pride means standing out. Younger people struggle to see why others oppose them being themselves.
Investing on Robinhood, or in cryptocurrency and meme stocks, is a backlash against the opaque nature of financial markets. Health apps and personalised fitness programmes reject one-size fits all advice. Too much received wisdom is based on averages, using outdated thinking that is often not from your country and culture.
Older generations consider the focus on individual desires to be selfish. Frequent articles are penned about debt-laden youngsters with unnecessary Starbucks habits. This ignores the big picture.
Contributing to society used to mean finding a job, a partner, buying a house and starting a family. When one or more of those pillars falls, a shift in society is inevitable.
A daily cappuccino does not alter your chances of getting on the housing ladder. Not many want to start a family from their parents’ basement. If you need two degrees to get a decent job, then debt is a necessity not an evil. Maybe the selfish generations are the ones who neglected house building and designed the perverse incentives of the education system.
Last month I wrote about the power of local communities to rekindle meaning in many people’s lives. Physical interaction and mutual dependency is what is lost in a world of big technology.
Yet for those who live most of their lives online, community is far flung. We talk a lot about the negative political consequences of herding people into echo chambers, but there are many positive benefits of digital engagement.
The individualism expressed on line is often a collective response to faceless corporatism. Digital community and support results from sharing expressions of individualism.
What older generations may see as a lack of self awareness, is anything but. It is the cultural shift towards openness and being comfortable with who you are. It is self-healing for a youth to whom we continue to over prescribe anxiety and depression.
Many of today’s cultural wars will be won by the young. What remains to be seen is how rapidly they become the majority view.