I previously wrote about how starting a company is less risky than people think. This piece is a follow up to that piece as well as my piece on building personal moats.

To recap: remember, there’s two types of risks:

Job Risk: the chance your job will no longer exist

Career Risk: the chance your long-term career will be negatively affected

Founding a company might have job risk, but it often has little career risk. It’s an example of an asymmetric bet—a bet that, if it works, will have tremendous upside, and if it doesn’t, will still generate optionality.

I think the ways we’re taught to think about these concepts is backwards: we think something is risky (e.g. starting a company) when it actually buys optionality, and we think we’re buying optionality (e.g. joining Goldman Sachs) when we’re actually taking a big risk. In starting a company, we’re capping our downside—assuming the privilege to afford it—and in joining Goldman Sachs etc, we’re capping our upside.

In short, I think the mistake we make is not understanding that taking more risk, when the benefits are asymmetric, often creates more optionality.

Consider starting a company for example—the bigger risk is not that you fail, it’s that, if you don’t start enough companies, you don’t get enough actual shots on goal to actually create a big company.

I want to talk about asymmetric bets more broadly and how people should pursue them—particularly early in their career—as their downside is often just their time. 

As an example, let’s consider crypto investing over the last few years: 

If you think about it, many prominent crypto fund managers are in their early/mid 20s, whereas most successful tech VCs are often 2x their age.

There’s no axiomatic reason for this age difference. VCs in theory should have the same advantages: investing acumen, operating experience, relationships, etc.

Why is this not the case? In my opinion, it’s a form of the Innovator’s Dilemma at work:

In 2014, it was far easier for VCs to cater to existing customers (traditional tech startups) than to sacrifice that and explore this new space (crypto) that was weird, unproven, and entailed reputational risk.

Consider Kyle Samani, one of the aforementioned young hedge fund managers.

In 2016, he was 26, unemployed, unknown, and playing a lot of video games. He soon got into crypto.

In 2015/2016, Crypto had the following attributes, among others:

1) The financial opportunity was still largely unclear.

2) Specializing in crypto entailed social & reputational risk.

3) You needed to spend a lot of focused time in different social/intellectual circles to get smart.

In 2015, if you had something to lose, it was a lot harder to get into crypto. It was financially risky. It took a lot of time. You also took real reputation risk—if it didn’t work, you’d look dumb. 

And no to mention there was already this tried and true way of making money, so why risk it on this new, unknown thing?

So in 2015, the best person suited to get into crypto was someone who didn’t have a lot at stake—financially or reputationally. Or, in other words, a young, unemployed, unknown person with lots of time on their hands. (Bonus points if you had a cartoon twitter avatar.)

It’s worth emphasizing that the biggest risk was neither financial nor did it have to do with time—it was the reputational risk.

Kyle was used to that. Before starting a crypto fund he started a company built on top of Google Glass. People still make memes of him to this day for that.

However, his risks had an asymmetric payoff: If he’s right, he wins big. If he’s not, who cares — he’d have learned a lot and built a network by being where the cutting edge was. And he’s 26, people forget. Indeed. Years spent on failed ideas are often forgotten when success comes along.

You’re not known for your losses, you’re known for your wins.

e.g. Ever heard of Reid Hoffman’s "SocialNet"? Nope, because LinkedIn & Greylock.

e.g. Ever heard of Marc Andreessen’s “Ning”? Nope, because Netscape & a16z.

As I mentioned last time, I spent three years working on a rap battle website. I looked dumb before, during, and after. Some people thought it was ingenious. And not just my grandma. 

If you’re young, you can always blame it on youth, or find some way to rationalize it post-facto. (“rapt.fm could have been huge. It was ahead of its time.”)

And indeed, as time went on I did look ahead of my time. A website streaming rap battles recently raised over $100M. As Marc Andreessen says, there are no dumb ideas. Only early ones.

Joining Product Hunt was also an asymmetric opportunity: If it failed, I’d still have built an incredible network. There’s no other experience I could have pursued that would have set me up to start On Deck and Village Global. 

Asymmetric opportunities usually have meaningful upside in a success case, and meaningful learning or development in a downside case. If the downside case is still one of the best case scenarios you can imagine, then that’s an easy asymmetric bet to take. In addition to pursuing things that have meaningful upside (and thus some risk), asymmetric bets can also involve taking a bet in risky spaces that other people aren’t pursuing:

Many ambitious people, even though they understand intellectually how smart risk brings optionality, still prefer the more conventional paths of accumulating optionality.

They compete insanely hard to accumulate options for the future instead of figuring out what they really want to do & doing that instead.

I’d argue we are trained to optimize for optionality from a young age:

“I don't know what I’m gonna do with my life so I’m gonna get a degree.”

“I don’t know what to do with this degree so I’m gonna get a grad degree.”

“I don’t know what to do with this grad degree, so I’m gonna get a consulting job to figure out what I truly want.”

It’s like spending your whole life filling up the gas tank without ever driving.

Why does this happen? Because people don’t want to look dumb, even for a short period of time. 

And that’s the biggest mistake I think young people make: They’re afraid to look dumb, so they follow safe paths that cap their downside, not realizing that they also cap their upside. 

And said paths are often tournament-style competitions, perhaps not as safe as they think.

The irony is that, in failing to take risks, we fail to gain the optionality that comes from doing so. 

Risk-taking brings its own optionality. Especially when you’re young, accumulate optionality through the skills you gain, knowledge you acquire, and the unique experiences you undergo.

Accumulate optionality through differentiation, not conformity!

I’d even take this one step further to say if what you’re doing doesn’t seem dumb to somebody, or just plain weird, maybe it’s just not interesting enough. 

If you’re not afraid to look dumb for a certain period of time, you can benefit from a sort of social-cultural arbitrage—you’ll take high upside bets others won’t take, and you’ll keep trying when your last try fails.

But to the extent that one wants to be seen as “smart,” the goal isn’t to look smart every step of the way; it’s to look “smart” at the end of your journey — often you have to look dumb for a certain period of time to get there. This is why Steve Jobs told Stanford's 2005 graduating class to "stay foolish."

Sometimes, however, you’ll look dumb forever, so pursue something that, even if it bombs, the pursuit was its own reward.

Even if it’s a website for real-time rap battles.

Read of the week: Contra Krugman by Robert Murphy. It’s funny (and inspiring) how some people can do such amazing work purely motivated by proving other people wrong. Unrelated, but Antonio Garcia Martinez’s interview of Martin Gurri is also fantastic.

Listen of the week: Philosophize This is a fantastic podcast. I’ve been listening front to back. I also released a podcast today with Keith Rabois and Jacob Helberg on China and the election.

Watch of the week: Patrice O’Neal on white people’s love of Radiohead. Hilarious.

Cosign of the week: Speaking of rap battles, the big homie Frak battled Dizaster, one of the best battle rappers of all time, and while he lost the battle, he won the popular vote 3-1. Here’s a clip. Stay tuned for his upcoming album and for the full battle release.

Until next time,

Erik

P.S. Speaking of asymmetric bets, On Deck is envisioning a demo day early next year for people who want to self-IPO. Stay tuned for more information.

My favorite career advice is to develop a “personal moat.”

A personal moat is a set of unique and accumulating competitive advantages in the context of your career.

Like company moats, your personal moat should be a competitive advantage specific to you that's not only durable, but compounds over time. 

This should be something that's:

• Hard to learn and hard to do (but perhaps easier for you)

• Impossible without rare and/or valuable skills

• Unique to your own talents & interests

• Legible, in the sense that your expertise should be easy to describe, easy to share, and makes people want to do both for you

Some examples include:

Tyler Cowen: He specialized as a generalist, spending decades writing & reading all day. To recreate his encyclopedic brain would take 1-2 decades of deep work.

Elad Gil: He invested in more than a dozen unicorns and then wrote the "High Growth Handbook" to teach others about scaling startups. To match his track record would take 1-2 decades of hard work plus luck.

Tim Ferris: He has garnered a massive loyal following by posting unique content for years. Building the same following would take hard work plus luck, at a minimum.

There's no playbook for how you could invest in 10+ unicorns like Elad, build a loyal & captive audience like Tim, or become a walking encyclopedia like Tyler. All of these take decades. You must find something special—specific to you—that drives increasing, compounding value overtime.

How can you find your personal moat? 

Ask others: What’s something that’s easy for me to do but hard for others? What's something I have that’s very difficult for people to reverse engineer?

Another concept is Ikigai: the intersection of what you love, what you’re good at, and what the world needs.

It’s important to know that moats change over time as conditions change. Before the arrival of recorded music, what used to be scarce was the actual music itself — required an in-person artist. After recorded music, the music itself became abundant and what became scarce was curation, distribution, and self space.

Similarly, in careers, what used to be (more) scarce were things like ideas, money, and exclusive relationships. In the internet economy, what has become scarce are things like specific knowledge and rare & valuable skills.

Here's a quick litmus test: If there is a solid Quora post with step by step instructions on how to do something, or if thousands of people have done it, then it’s likely not a durable or a unique personal moat. If there’s a playbook for it, then how defensible is it? (Unless you're the world's best at it. But if you’re trying to build a moat, don’t enter the rat race unless you’re the fastest rat!)

Ideally you want this personal moat to help you build career capital in your sleep. 

We talk a lot about “passive income,” but not as much about “passive social capital” or “passive knowledge gaining” — that’s what you gain if you build an asset that grows over time without intensive constant effort to sustain it (h/t Andrew Chen). A few examples include starting a company, an angel portfolio, a newsletter, or a podcast (Don’t mind if I do…)

How can you find your personal moat? 

Ask others: What’s something that’s easy for me to do but hard for others? What's a skill or asset I have that’s very difficult for people to reverse engineer?

You want to build a competitive advantage that will endure over time. You don’t want to build a competitive advantage that is fleeting or that will get commoditized.  Some awards, for example, may have been impressive early on, but as they have expanded significantly they’ve become more diluted and thus no longer as impressive. You want to have skills and accomplishments that are undeniably valuable and indisputably impressive.

Some other hacks to build moats include picking something that isn’t big now, but will be in the future (e.g. crypto in 2016), something that relies on exclusive relationships that you can access (e.g. enterprise healthcare, access to LPs), or something that is legibly impressive or valuable but has no playbook. (e.g. Tyler Cowen, Tim Ferris, Elad Gil examples)

If you were magically given 10,000 hours to be amazing at something, what would it be? The more clarity you have on this response, the better off you’ll be.

It could be the intersection of a few skills. Scott Adams popularized the idea of finding the intersection of 2-3 things you’re best at even if you’re not best at any of them individually. He wasn’t neither the best cartoonist nor the best writer nor the best entrepreneur, but he was the best combination. It could be a combination of expertise, relationships, sensibilities, and skills that you’ve accumulated over the years. If you’re just starting out, ideally it picks up where your childhood left off. Now, I spent my childhood trying to make the NBA. So if like me, you misallocated your childhood in the skills department, you have to be more creative. Later on, I realized I could apply the self-discipline and systems thinking I deployed when trying to be good at basketball into other fields, and found some that better fit my natural abilities.

Should you specialize or generalize? Either could work, but you have to actually be good at something. That’s a key concept.  If you’re a generalist, you want to be the best at the intersection of a few different skills, even if it’s a few disparate things. The challenge is it's easy to lie to yourself & say that you're a generalist when in reality you've tried a bunch of things and you've flaked out when things got hard and then tried something else. You want to be at least great at one thing, and then apply that lens or skill to other categories. Some people who you think are generalists have also specialized. Malcolm Gladwell for example writes about lots of topics, but he's mastered the art of translating academic work for a mass audience. Tyler Cowen self-defines himself as specializing as a generalist, but he spent a couple decades going deep on economics.

In future pieces, I’ll write more about more specifics of moats and how to build them, detailing examples and how they relate to other aspects of career building. For now, I wanted to explain the concept as I’ll be referring to it regularly.

In conclusion, discover what’s easy for you but hard for others, then get so good they can’t ignore you, and then leverage that to accrue social and financial capital. Don’t skip steps 1 & 2.

Read of the week: Get So Good They Can’t Ignore You, by Cal Newport

Listen of the week: Matt Ridley on the Naval Podcast. I also went on Pomp’s podcast.

Watch of the week: Craig Stewart Youtube channel on Rene Girard.

Cosign of the week: Dani Grant. Follow her and check out Jam. Let me know if you want beta access.

Until next week,

Erik

Note: I released this last year as a Medium post, but I am resurfacing it because On Deck wants to create a fellowship for people who want to “Self-IPO”, or otherwise personally tokenize themselves. We will likely announce it before the year ends, and we’re interested in talking to people who want to join the fellowship and help make it a reality. I’ve long talked about Kickstarter for people, but perhaps, for something as crazy as this, before you build the platform, first you have to build the community of willing participants. (“Here’s to the crazy ones….”)

Introduction

Imagine a world where you had a personal board of advisors — the people you most admire and respect — and you gave them upside in your future earnings in exchange for helping you (e.g our good friend Mr. Mike Merrill.)

Imagine if there was a “Kickstarter for people” where you could support up-and-coming artists, developers, entrepreneurs — when they need the cash the most, and most importantly, you’d only profit when they profit.

Imagine if you could diversify by pooling 1% of your future income with your ten smartest friends.

Now think about how much you’d go out of your way to help, say, your brother-in-law or step-siblings. Probably much more than a stranger. Why is that?

To pose a thought experiment: If you didn’t know your cousins were related to you, you might treat them like any other person. But because we have this social context of an “extended family,” you have a sort of genetic equity in them — a feeling that your fates are shared and it’s your responsibility to support them.

This begs the question: How can we create the social context needed for people to truly care about others outside of their extended family?

If you believe that markets and trade have helped the world become a less violent place — because why hurt someone when it’ll also take money out of your pocket? — then you should believe that adding more markets (with proper safeguards) will make the world even less violent.

This is the hope of income share agreements (ISAs).

ISAs align economic incentives in ways that encourage us to help others beyond our extended family, give people economic opportunity who don’t have it today, and free people from the shackles of debt.

What are these ISAs you speak of?

An Income Share Agreement is a financial arrangement where an individual or organization provides something of value to a recipient, who, in exchange, agrees to pay back a percentage of their income for a certain period of time.

In the context of education, ISAs are a debt-free alternative to loans.

Rather than go into debt, students receive interest-free funding from an investor or benefactor. In exchange, the student agrees to share a percentage of future income with their counterparty. They come in different shapes and sizes, but almost always with terms that take into account a plethora of potential scenarios.

“Part of the elegance of an ISA is that the lender only wants a share of income when the borrower is getting a regular income “If you’re unemployed or underemployed, they’re not interested… you’re automatically getting a suspension of payments when you’re not doing well.”

- Mark Kantrowitz, a leading national expert on student loans who has testified before Congress about student aid policy.

There is a long and storied history of income share agreements, but they’ve only recently become popular due to the rise of Lambda School, a school that lets students attend for free and, if they do well after school, pay a percentage of their income until they pay Lambda back.

Wait, a popular meme sarcastically asks, did you just invent taxes?

No. Lambda only gets paid if and only if the student earns a certain amount after graduation. In other words, incentives are aligned. The student is the customer. Not the government. Not the state. Not the parents.

To be sure, it’s early days for ISAs: Adverse selection, legalization, concerns about individuals being corporations (derivatives? Shorting people?!) — there’s a lot left to figure out.

Still, it’s an idea that once you see, you can’t unsee.

Here’s a hypothetical story to help you picture how ISAs work:

Picture Janet, a Senior at Davidson High School. She has a 4.0 GPA, is captain of the debate team and star center forward of the Varsity Soccer team. She’s a shoo-in for a top 20 university, but her parents can’t afford it even with a scholarship, so she’s not even going to apply, and is headed for State. Then she learns from a news article that she’s a pretty good bet as someone who’s going to succeed down the road, and that might allow her to put some much needed cash towards her education. She goes for it, makes a profile on an ISA, and sure enough, a few strangers bet $50,000 on her college education! She immediately gets to work filling out Ivy League scholarship applications.

Throughout college, she keeps in touch with her investors, they give her advice, and because of her interest in politics, one even helps her get an internship with a governor’s election campaign over the summer. Once she graduates, she knows the clock is ticking — at 23 she’ll need to start paying back the investors 5% of her after tax income, so she hustles to work her way through the ranks.

From age 23 to 33, the payback period, Janet becomes a lawyer at a top tier firm, and the investors make a 3x cash on cash return

The above is purely hypothetical.

ISAs for traditional higher education are much more complicated than say, vocational training, where there is more direct alignment of ‘skills-development-to-job’ pathway for students. But, the beauty of ISAs is in their flexibility, so there is lots of room for innovation.

So: this is the dream — why hasn’t it happened yet?

ISAs and other related instances of securitizing human capital have been tried. Here’s a brief history:

Economist Milton Friedman Proposes Use of ISAs in Education —

In modern times, the first notable mention of the concept of ISAs was by Nobel-prize winning economist Milton Friedman in his 1955 essay The Role of Government in Education.

In a section devoted specifically to vocational and professional education, Friedman proposed that an investor could buy a share in a student’s future earning prospects.

It’s worth noting that the barriers to adoption that Friedman identified back in the 1950s still hold true today:

1. The potential high costs of administration;

2. The sheer novelty of the idea;

3. The reluctance to think of investments in human beings as comparable to investments in physical assets; and

4. Legal and conventional limitations by suitable financial intermediaries

Society might not have been ready for ISAs in the 1950s, but 16 years later, another Nobel Prize-winning economist, James Tobin, would help launch the first ISA option for college students at Yale University.

Yale experiments with ISAs —

In the 1970s, Yale University ran an experiment called the Tuition Postponement Option (“TPO”). The TPO was a student loan program that enabled groups of undergraduates to pay off loans as a “cohort” by committing a portion of their future annual income.

Students who signed up for the program (3,300 in total) were to pay four percent of their annual income for every $1,000 borrowed until the entire group’s debt had been paid off. High earners could buy out early, paying 150% of what was borrowed plus interest.

Within each cohort, many low earners defaulted, while the highest earners bought out early, leaving a disproportionate debt burden for the remaining graduates.

Administrators also did not account for the changes to the tax code and skyrocketing inflation in the 1980s, which only exacerbated the inequitable arrangement.

“We’re all glad it’s come to an end,” It was an experiment that had good intentions but several design flaws.” — Yale President Richard Levin.

While the TPO is generally considered a failure, it was the first instance of a major university offering ISAs and a useful example for how not to structure ISAs — specifically, pooling students by cohort and allowing the highest earning students to buy out early.

ISAs as a Financial Aid Option —

It would be decades after Yale’s failed experiment before universities started experimenting again with ISAs, but today a company called Vemo Education is leading the way.

This is a crucial point: Vemo isn’t competing directly with loans, but instead is unlocking other sorts of value (i.e., helping students better choose their college). The key here is that Vemo links an individual’s fortunes to the institution’s fortunes. The company helps universities signal value to students by helping them offer ISAs that signal that the university wants to better align cost with value of its higher education program.

The first company that Vemo partnered with to offer ISAs was PurdueUniversity.

In 2016, Purdue University began partnering with Vemo Education to offer students an ISA tuition option through its “Back a Boiler” ISA Fund. They started with a $2 million fund, and since then have raised another $10.2 million and have issued 759 contracts totaling $9.5 million to students.

Purdue markets its ISA offering as an alternative to private student loans and Parent PLUS Loans. Students of any major can get $10,000 per year in ISA funding at rates that vary between 1.73% and 5.00% of their monthly income. Purdue caps payments at 2.5x the ISA amount that students take out and payment is waived for students making less than $20,000 in annual income.

In the last few years, Vemo has emerged as the leading partner for higher education institutions looking to develop, launch and implement ISAs. In 2017, Vemo powered $23M of ISAs for college students across the US.

Upstart: A Short-Lived Attempt at “Kickstarter for People” —

Fintech company Upstart initially launched with a model of “crowdfunding for education”. However, they eventually pivoted to offering traditional loans when they realized that their initial model was simply not viable.

Why? Not enough supply.

The fact that only accredited investors (over $1m in net worth) could invest severely limited the total potential funders on the site. And yet, while Upstart never got enough traction (they pivoted successfully), they paved the way for a platform like it to eventually be built.

ISAs for Vocational Training —

While Upstart failed to gain traction, technical educational bootcamps have seen tremendous growth while offering their students ISAs to finance their education.

And Lambda School is leading the way.

Lambda School is an online bootcamp that trains students to become software engineers at no upfront cost. Instead of paying tuition, students agree to pay 17% of their income for the first two years that they’re employed. Lambda School includes a $50,000 minimum income threshold and caps total payments at an aggregate $30,000. They also give students the option to pay $20,000 upfront if they’d rather not receive an ISA.

Lambda School students enroll for nine months and end up with 1,500–2,000 hours of training, comparable to the level of training they’d receive during a CS-focused portion of a four-year CS degree.

“Lambda School looks like a charity from the outside, but we’re really more like a hedge fund.

We bet that smart, hardworking people are fundamentally undervalued, and we can apply some cash and leverage to fix that, taking a cut.” — Austin Allred (Lambda School CEO)

In our opinion, Lambda is legitimizing ISAs and may just be the wedge that makes ISAs mainstream.

An Outlook for the Future of ISAs

Given where we are today, and with the potential for this type of financial innovation, what might the future look like?

There are three major themes in particular that get us excited for the future of ISAs: aggregation, novel incentive structures, and crypto.

Aggregation —

We believe that it’s possible to pool together various segments of people to decrease overall risk of that population and provide more to each individual person.

If we assume that each individual is fairly independent from each other, this should be a possibility. As risk declines, your expected return should increase. And as your expected return increases, more investors and ISA providers will likely jump in to provide even more capital for more people.

“There is no reason you have to do this at the individual level. Most likely, it will first occur in larger aggregated groups — based on either geography, education, or other group characteristics. As with the housing market, it is important to aggregate enough individual sample points to reduce risk.” — Dave McClure

Another take on aggregation could be an individual electing to group together with their close friends or peers.

This can have the magical benefit of further aligning incentives with those around you, increasing the value of cooperation, lowering downside risk, and promoting more potential risk taking or thinking outside the box, all of which should have the benefit of increasing economic growth.

In addition to that, being able to take a more active role in a friend’s life (helping when need be, sharing in their wins, supporting in their losses, etc.) can be an extremely rewarding experience. That said, there are some definite downsides and risks to be aware of with these types of arrangements.

Novel Incentive Structures —

How can we create financial products to incentivize service provides (i.e. teachers, doctors, etc.) where they are indirectly having massive impacts to income from future generations?

Just imagine if every teacher was able to take even just a tiny percentage of every one of their students’ future earnings the difference that tweak could make. Teachers today unfortunately don’t make nearly as much money as they should given the significant consequences they have on future generations. A great teacher can create the spark for the next Einstein or Elon Musk. A terrible teacher could damage the potential Einstein or Elon Musk enough where they never realize their potential. Imagine how many more incredible people we could have.

There will always be incredible teachers regardless of monetary return, but we bet there could be more. It all comes down to aligning incentives.

This same thinking can be applied to other service providers like doctors. Currently, doctors are paid the same amount (all else equal) whether they succeed or not in a life-saving surgery. But what if the service provider also took a tiny fraction of future earnings from their patient? Incentives are more aligned. That doctor may not even realize it, but they likely would work a bit harder knowing what’s at stake.

Crypto —

Crypto can securitize so much more than we currently do; in essence, we could tokenize ourselves and all future income. Once those personal tokens exist, they can be traded instantly anywhere on the world with infinite divisibility. Arbitrageurs and professional traders could create new financial products (i.e. ISA aggregations) and buy / sell with each other to price things to near perfection.

What’s next?

We’d love to continue the conversation! This is a fascinating space with a ton of opportunity. If you’re thinking about or building anything here, feel free to leave your comments or reach out to talk more.

Special shoutout to David Weinstein & Jake Hallac for their help writing as well as Ray Batra, Dani Grant, Zander Adell, Dave McClure, Sam Lessin and Alex Marcus for their help reviewing / editing!

***

Appendix: Addressing Common Concerns —

Isn’t giving up the legal right to a portion of future income equivalent to modern-day indentured servitude?

Quick refresher: Indentured servants were immigrants who bargained away their labor (and freedom) for four-to-seven years in exchange for passage to the British colonies, room, board and freedom dues (a prearranged severance). Most of these immigrants were English men who came to British colonies in the 17th century.

On the surface this seems like a decent deal, but not so fast. They could be sold, lent out or inherited. Only 40% of indentured servants lived to complete the terms of their contracts. Masters traded laborers as property and disciplined them with impunity, all lawful at the time.

Rebuttal: We are in no way advocating a return to indentured servitude (voluntary or otherwise). Modern-day ISAs must be structured to have proper governance, ensure alignment of interests and contain legal covenants that protect both parties.

We are advocating for ISAs that (i) are voluntary, (ii) do not force the recipient to work for the investor, and (iii) are a promise to share future income, not an obligation to repay a debt.

ISAs are unregulated. How do we structure and enforce ISAs without a legal framework to rely on?

Our Response: ISAs offered by Lambda School, Holberton School and other companies are legal under current US law. To the best of our knowledge, all companies offering ISAs operate according to best practices (i.e., consumer disclosure and borrower protections) as set forth in proposed federal legislation.

The Investing in Student Success Act (H.R.3432, S.268) has been proposed in both the US House of Representatives and the US Senate. Under this legislation, ISAs would be classified as qualified education loans (rather than equity or debt securities), making them dischargeable in bankruptcy. Furthermore, the bill would exempt ISAs from being considered an investment company under the Investment Company Act of 1940.

Importantly, the bill includes consumer protections (i.e., required disclosures, payback periods, payback caps, and limits on income share amounts). The bill also includes tax stipulations that preclude ISA recipients from owning any taxes and limiting taxes for investors to apply to profits earned from ISAs.

Given that ISAs are riskier than student loans, but don’t require the same qualifications, aren’t ISAs prone to adverse selection?

Quick refresher: Adverse selection describes a situation in which one party has information that the other does not have. To fight adverse selection, insurance companies reduce exposure to large claims by limiting coverage of raising premiums.

Our Response: In September 2018, Purdue University published a research study that looked into adverse selection in ISAs. The study concluded that there was no adverse selection by student ability among borrowers. However, ISA providers need to properly structure the ISA so as not to cap a recipient’s upside by too much. In addition, this risk can be mitigated by (i) offering a structured educational curriculum for high-income jobs and (ii) an application process that ensures that students have the ability and motivation to complete a given vocational program.

Couldn’t ISAs result in lack of diversity and discriminatory practices?

Our Response: Properly structured ISAs paired with effective offerings (i.e., skills-based training, career development assistance) have the potential to mitigate inequality and discriminatory practices. ISA programs like Lambda School require students to be motivated to succeed and have enough income to complete the program, but in no way discriminate based on age, gender or ethnicity.

However, as ISAs become more common, new legislation must include explicit protections to guard against discrimination in administration of ISAs (especially given that it’s unclear whether the Equal Credit Opportunity Act would apply to ISAs since they aren’t technically loans).

Can’t students simply refuse to pay once they start earning income after graduation?

Our Response: ISA providers like Lambda School are already starting to negotiate directly with employers to ensure that students have a job after completing the curriculum. These relationships mitigate the risk of a student refusing to pay. Lambda School is able to do this because it’s developed such a strong curriculum. Furthermore, students face reputation risk should they try to avoid meeting their obligations to the ISA provider.

Future legislation should address instances where a student avoids payment or chooses to take a job with no salary (i.e., a student completes a coding bootcamp, but has a change of heart and goes to work at a non-profit that pays below the minimum income threshold.

Equity is expensive (relative to debt), so wouldn’t students be better off sticking with traditional debt financing?

Our Response: ISAs are not for everyone. ISA’s are best suited for people with greater expected volatility in their future earnings (instead of people with a strong likelihood of a certain amount of salary). This is similar to new businesses choosing between equity investment vs. debt to finance their operations. Businesses with clear expectations of future cashflows generally benefit more from debt vs. equity. Individuals looking to finance their education are no different. Similarly, ISA’s don’t need to be all or nothing. Individuals can choose to capitalize their education with a mix of student loans + ISA’s to get a more optimal mix.

Read of the week: The Diff by Byrne Hobart. If you’re not subscribed, you’re missing out. Not just because Byrne is prolific and great—think Tyler Cowen meets Ben Thompson—but also because his sheer output of quality work is so impressive it inspires you to step your game up, regardless of what game you’re playing.

Watch of the week: Harry Mack again freestyling over Omegle. Like Byrne, he’s so good you can’t reverse engineer how he does it. It’d be fun On Deck to have a freestyle rap course at some point, and Harry or someone that good to run it. Rapt.fm didn’t work out but I haven’t put the idea to bed. ;)

Listen of the week: David Gornoski on Bob Murphy’s podcast. David is a Christian and Girard scholar who’s got a host of eclectic opinions on various topics.

Cosign of the week: Chloe Valdary. Check out her organization, Theory of Enchantment.

Until next week,

Erik

Last week I wrote “The World According to Peter Thiel”. This week I want to dive into The Sovereign Individual, one of the books that most influenced Peter’s worldview, and explore how that relates to venture capital. Balaji Srinivasan turned me onto the book originally. His line on the book is that, if most books can be described in a single sentence, The Sovereign Individual is a book where many individual sentences can be expanded into their own book.

Written over twenty years ago, it’s amazing how much the book predicted correctly: The iPhone. Crypto. Rising inequality and corresponding unrest. The transformation from economic to cultural marxism. Rampant hyper capitalism. Even the rise of political correctness.

To be sure, the authors wrote other books, which had less correct predictions. But still. The Sovereign Individual was on the money. Both in what it has predicted to date, and also in the framework it gives us to help predict the future

First I’ll summarize the book and then I’ll describe the investment thesis that corresponds with it.

The basic thesis of the book is that technology, particularly the internet, will lead to unbundling & modularizing of government.

Put simply: We'll transition from being a "citizen" of government to a "customer" of government, where governments compete to earn our business. 

The “citizen” construct implies that you exist to serve the government. Recall JFK’s famous speech: “Ask not what your country can do for you, but what can you do for your country.”

The customer construct, on the other hand, implies that governments exist to serve you. That governments, like any businesses, compete over earning your trust. And, just like in the private sector, this competition leads to better products, better service, and more innovation. The market serves as a filter—corrupt governments die out, and better and more competent ones remain. If Amazon and Apple provide excellent products and services, there’s no reason governments can’t either. Imagine housing, education, and healthcare, at the quality level of Apple and Amazon, for everyone.

What will cause the change from citizens to customers? Protection: When individual protection is hard, we rely on others to protect us—governments for example protect us externally with the military and internally with the police.

When technology makes protection easier, we rely less on the government to serve that existential role, which leaves governments with less power as a result. 

The book claims that this phenomenon is the story of our time—that technology gives individuals and small groups the protection of a nation state—and as a result we will rely less on governments to protect us, since we’ll be more able to protect ourselves. 

Long ago, this phenomenon—technology enabled protection leading to less reliance on external security—also occurred with chivalry. Chivalry wasn’t a romantic notion as much as it was practical—it was a protective mechanism against violence, before we had governments. As soon as better protective mechanisms emerged (e.g. government police and security), chivalry wasn’t needed as much anymore, and it became an anachronism.  The book predicts citizenship will go the way of chivalry, and instead of being citizens of governments, we’ll be customers of them.

Here’s one implication of that: Customers can more easily leave and choose the option that works best for them. In future we’ll choose our jurisdictions and governments the way we chose our insurance policies or religions. Back then, choosing your religion was crazy, the way choosing our governments today seems crazy—or at least infeasible for most people. Soon, the book predicts, it’ll become normal.

The authors detail how this transformation—from citizen to customer—has mirrored other previous transformations in history, particularly how the agricultural and industrial eras led to the rise and fall of the church. Here is a radically simplified summary of the author’s retelling

The agricultural revolution led to some big changes over the hunter-gatherer era. We now had private property, long-term planning, and the specialization of violence, because now there was something to steal, namely food.

In the chaos of the agricultural revolution, The Church developed the moral authority to provide ethical frameworks. When the printing press emerged, however, it undermined the church monopoly on truth as it simultaneously created a new market for heresy. The church responded by banning books, similar to how governments today try to suppress encryption technology. 

In hindsight, this makes sense. The more that people read, the less the church could maintain its monopoly on moral truth. Similar with governments, the more people build decentralized and sovereignty-enabling technology, the less that governments have a monopoly on violence. Which is why nation-states have a natural interest to fight wars—wars make nations and governments indispensable.

The Church was perfect for feudalism (legally, morally, culturally), but ill-fitted for the Industrial Age, because nation-states which were more effective for wars. Similarly, the state was perfect for the industrial era (economies of scale, centralization of violence) but ill-fitted for the Information Age, where decentralization is more important to better align knowledge and power.

What’s better for the Information Age? The Sovereign individual. 

People didn’t mind giving money to church when there was no other use for it, but after they could invest and earn money, giving money to the church made less sense. Same with taxes and governments. As soon as you rely less on the government to protect you, and (more importantly) notice other options for governance, you start to more critically evaluate where your tax dollars are going. As competition emerges, you start to shop around. 

Democracy in particular was most effective in building up the power of the state. This may sound intuitive, but democratic capitalism was an even more effective statecraft than communism, because it allowed people to at least earn money before it took a large percentage of it. 

People see democracy & communism as different systems, but zooming out, they both rely on government allocation of resources. Similar to how people see Keynes & Friedman as different but, when compared to Austrian economics, they’re both governments manipulating the money supply in diff ways. 

Democracy and governments more broadly were perfect for the industrial production era.

But, some people ask, won’t governments control the internet?

Governments have never established staple monopolies of violence over sea…. Meaning they won’t get cyberspace either, an infinite realm without physical boundaries 

One other thing the book claims is that, until recently, technology has always led to increasing centralization. And for the first time, this trend is going to be reversed. That's what enables the Sovereign Individual.

OK. So that’s the book. What’s the investment thesis associated with it? In other words, how do we get rich? Well well well...

Zooming out….The internet is the great equalizer. On the internet, anyone globally can get a great education and build a portfolio. 

The fact that anyone can build a portfolio means we’ll rely less on artificial gate-keepers of quality (e.g academia & media) 

The fact that anyone can get a great education means people in developing countries can gain the same skills as people in developed countries.

This means companies will be able to hire people in developing countries at a lower cost.

This will raise growth and tax revenue in developing countries, but decrease it in developed countries.

To make up for lost revenue, developed countries will print money, raise taxes, and make it hard to leave (e.g. MMT, QE, Wealth Tax, Exit Tax)

Printing money means there'll be an increased demand for non-inflatable money, like bitcoin. 

Increased tax means there will be an increased demand for charter cities. As mentioned, people will become customers of governments instead of merely citizens.

Let’s look at how several sectors may be affected:

Read of the week: The Once and Future Liberal: After Identity Politics by Mark Lilla.

Listen of the week: Justin Murphy on Internet Vitalism

Watch of the week: My friends at Krazam with an outtakes video.

Cosign of the week: Nasjaq is trying to fix the problem Peter Thiel spoke about, that nearly all sci-fi is dystopian, by making videos highlighting awe-inspiring technology.

Until next week,

Erik

Update: On Deck announced our $3M fundraise and our long-term company vision. We’re hiring across positions.

When we look at the technological progress each of us has seen in our respective lifetimes, the consensus is that we’re doing great and everything is moving super fast. Almost too fast. We can sit around and debate whether it’s utopian or dystopian, but it's happening nonetheless. 

Contrary to popular belief, Peter Thiel believes that technological growth has stalled, and that it has been this way for a while. Below is his summarized perspective, paraphrasing and quoting his interviews and writings:

His claim is that we've had this narrow cone of progress around the world of bits—around software & IT — but not atoms. The iPhones that distract us from our environment also distract us from how strangely old & unchanged our current environment is. If you were to be in any room in 1973, everything would look the same except for our phones. This explains his old Founders Fund tagline: “We wanted flying cars, instead we got 140 characters.”

In the 50s and 60s, technology meant atoms and bits. It meant biotech and medical devices. It meant nuclear power, new forms of energy, underwater cities, the green revolution in agriculture, space travel, supersonic aviation, flying cars, etc. But, today, our only progress is in the realm of computers.

For one, we're no longer moving faster. Take travel speeds as one example — sailing ships became increasingly fast in the 16th through 18th centuries, so too did railroads in the 19th century, and still-faster cars and airplanes were being created in the 20th century. But this macro trend reversed in 2003 with the Concorde failure.

Our space progress has stalled as well. In 1969, Neil Armstrong became the first person on the moon. We haven't been back to the moon since 1972, and with the final Shuttle flight in 2011, the US will be without the ability to send an astronaut into orbit for the first time since it began its manned space program.

The 1969 narrative was: we landed on the moon in July of 1969 and Woodstock started three weeks later. In fact, that’s actually a good way to describe the cultural shift.

Today, we live in a world where we've been working on the Star Trek computer in Silicon Valley, but we don't have anything else from Star Trek. We don't have the warp drive, we don't have the transporter, and we can't re-engineer matter in this cornucopian world where there is no scarcity.

Zooming out, people don’t understand how important economic growth is. It’s the only thing sustaining the planet. Without it, we go into a malthusian war. 

Indeed: The only way our societies have worked for at least 250 years is by economic growth. Parliamentary democracies are built on an ever-expanding pie that they can continue subdividing. Once the pie is no longer expanding, everything turns zero-sum. (Remember the 1930s? Yeah… Not a good decade for growth...)

This is how governments work — everyone compromises: more for you, you, and you. But this only works when the pie is growing. If there’s no economic growth, then we have gridlock — a zero sum game, with a loser for every winner.

Since the 1970s, the rate of economic growth has declined. From 1932 to 1972 average income in the US went up 350%. From 1972 to 2001, average income went up only 22%. So what accounts for this drastic discrepancy?

Thiel argues there has been too much globalization, or horizontal progress, at the expense of true innovation, or vertical progress . Horizontal progress would be like taking the typewriter and copying it all over the world. Vertical progress would be turning the typewriter into a word processor. Or, to use a Thielism, going from zero to one.

We haven’t had enough technological progress to make up for the slowdown. While the computer revolution has been significant, it’s not enough to make a dent in California, let alone the global economy.

Another issue? People are making money betting against progress. For example, Warren Buffet’s single best investment is in the railroad industry — which is a bet that the 21st century will look more like the 19th century than the 20th century, bringing us back to the days of rail and coal, instead of the new cleantech future.

Decline has not only been felt economically, it’s been felt culturally. We’ve lowered our expectations in many different ways. 

Consider healthcare: Nixon declared the War on Cancer in 1970 and said that we would defeat cancer in 1976 by the bicentennial. Today we couldn’t declare war on Alzheimers, even though 1/3 of 85 year olds suffer from it.

Consider infrastructure: The Golden Gate Bridge was built in three-and-a-half years in the 1930s. Today, it’s taken seven years to build an access road that costs more than the original bridge, in real dollars. We expect less from our governments than ever before. 

Consider entertainment: Name one sci-fi film in the last 25 years in which tech is portrayed in a positive light, in which it’s not dystopian, it doesn’t kill people, it doesn’t destroy the world, etc. Instead, we have one sort of catastrophic, anti-technological scenario after another.

It’s hard to remember this, but our government was once high tech, too: The Apollo program put a man on the moon. But today our government is broken. Our newest fighter jets can’t even fly in the rain. That is a staggering decline for the country that completed the Manhattan project.

We’ve absorbed it in our perceptions of ourselves too. We used to refer to the first world and the third world. Now we call them developed and developing countries — the implication behind developed being that there is no more growth to go.

The Google propaganda is that we have runaway technological progress, and that many people will be left behind — we need to take care of them. But this doesn't show up in any of the data. We have 3.5% unemployment and the productivity numbers are still anemic. We've actually had *less* automation: kindergarten teachers, nurses, yoga instructors — all these non tradable service sector jobs — are fairly immune to automation.

If we truly had this sort of runaway automation, you could get to 3 or 4% GDP growth, and at that level, we would be able to solve these social problems. Then there would be a lot more room for various social programs. If automation is happening, then we'll see it in the productivity numbers. And, given sufficient automation, then eventually maybe we’ll need something like UBI. 

On the flip side, if automation is not happening and you try to implement something like UBI, then you just blow up the economy. Even a Marxist thinks you have to first get the capitalists to do things before you can redistribute stuff.

Depending who you ask, there are different explanations for this economic slowdown: The libertarian explanation is that we’ve regulated too much, and as a result it’s too expensive to innovate. The liberal explanation is that we need to invest more in education and training scientists and engineers. The conservative explanation is that a military arms race drove innovation.

Thiel thinks it’s regulation: If we think back to the days of the Cold War, why did brilliant people in the Soviet Union become grandmaster chess players? Because they weren’t allowed to do anything else... Same with why so many brilliant rocket scientists went into Wall Street; because, as Thiel argues, they couldn't use their skills due to overregulation.

Today, we’re "not allowed" to develop new drugs with the FDA charging $1.3 billion per new drug. We're not allowed to fly supersonic jets because they’re too noisy. We're not allowed to build nuclear power plants. We've outlawed the world of atoms, so people focus on bits.

Thiel also thinks it’s culture: We’ve stopped believing in the future. We’ve become either too optimistic or too pessimistic about the future, either way it means there’s nothing we can do: if you're optimistic, the future will take care of itself. If you're pessimistic, we're headed to the apocalypse. When really it's up to us. Extreme optimism and extreme pessimism are both equally wrong. We should always come back to the question of individual agency and not these large historic forces. There's always room for history, for new ideas, and these things are never definitively decided either way.

“Think a lot harder about the future...try to think concretely about what you want to do...there's always a question: where is the frontier? Where are some pockets of innovation where you can do some new things and not be in a crazed competition?”

Three possible technological frontiers:

Cyberspace: The hope of the Internet is that these new worlds will impact and force change on the existing social and political order. The limitation of the Internet is that these new worlds are virtual and that any escape may be more imaginary than real. Still TBD.

Outerspace: Because the vast reaches of outer space represent a limitless frontier, they also represent a limitless possibility for an escape from world politics. But we are still ways away from being ready for this.

Seasteading: Between cyberspace & outer space lies the possibility of settling the oceans. The tech involved is more tentative than the Internet, but more realistic than space travel. We may have reached the stage at which it will soon be economically feasible...

In conclusion, quoting Thiel: “We’ve spent 40 years wandering in the desert, and we think that it’s an enchanted forest. If we’re to find a way out of this desert and into the future, the first step is to see that we’ve been in a desert.”

Read of the week: David Shor’s Unified Theory of American Politics

Listen of the week: Bruno Maçães on Palladium

Watch of the week: Harry Mack freestyling

Cosign of the week: Anirudh Pai is a fascinating thinker. I just had him on the podcast.

Until next week,

Erik