Podcast #2: Exploring the Nature of Value for Businesses and Investors

Hello everybody and welcome to another episode of the Momenta Edge Podcast. I am Ed Maguire the Insights partner, and in our podcast series we endeavour to bring creative thinkers, doers, and writers to share their ideas in a longer form, in conversational form, so that we can explore the implications of innovation technology, related to connected industry and the economy at large. 

Today we’ve got a guest who I discovered through reading a book which was recommended on a blockchain blog, Nick Gogerty, the author of ‘The Nature of Value – How to Invest in the Adaptive Economy’, and when I started reading it, it just made an enormous amount of sense to me that there were parallels in nature, and the creation of economic value that he’s laid out in great detail. It’s an eminently readable book, it tied in with some of the work by Kevin Kelly of whom I am a huge fan of his work, ‘What Technology Wants’, and ‘Out of Control’, which are classics of thinking. Nick is also the co-founder of SolarCoin, and in our prior conversation Nick has some views that are pretty closely aligned with our first podcast guest, Tony Seba’, so we’ll talk a little bit about that late later. 

In the first part of the podcast we’ll talk about ‘The Nature of Value’, and the work that he’s done. Nick, it’s great to have you join us. 

Thank you very much, it’s a pleasure to be here with your audience. 

Just to start things off, could you share some of your background, how it brought you to write ‘The Nature of Value’? 

A little bit of a convoluted story, but, many, many years ago I started out very interested in economics as a kid, traded as a teenager, etc. etc. Ran off to college, always decided to learn about economics, microeconomics, investing and quit after six-weeks, then ended up studying cultural anthropology. The reason I was quit was because I found some of the fundamental principles and the let’s say rigor of traditional microeconomics wasn’t very robust or interesting, and I wanted to study something that I could only learn in college, which is cultural anthropology and I figured I could reach business and other thing along the way. 

That being said, I ended up getting an MBA from one of the Grandes École’s in France, on dealing with quantitative approaches to hedge funds, I’ve worked with one of the world’s largest hedge funds. In addition, have been a renewable energy analyst, I’ve also been a chief analyst for a scientific research institute modelled on the MIT Media Lab where I was overseeing 70 PhD projects, everything from AI to quantum computation, to protein folding, material sciences, life sciences, etc. I have a real interest in how things work, how they function, the scientific method, and then an interest in economics, and how our economy works and functions as a process that’s a complex system, which I would argue is pretty much just evolution, evolution as a theory of change. 

Let’s dive into your theory, because I think this is a really interesting parallel that you’re drawing between genes and anodes. Let’s talk about that theory if you could walk through the concept and how that gets expressed, certainly in the book, and in your thinking. 

I’ll start where the book started and then we’ll go from there. The book started originally because I was working with a value-based hedge fund at one point, and obviously interested in the guy behind value, Warren Buffet and Munger. Their thinking approaches and obviously the outcomes had very much a first principled approach, and so the question became, how do they make so much money? How do they do so well? Ultimately the answer was survivability of the company, survivability of excess margins, and then of course the question is, where does ability come from? You keep asking the why and the how questions enough and you end up with a first principled approach. It ended up being about where does innovation come from? Where do new things come from? How do new concepts or ideas in our economy replace or substitute old ones? Who survived, and for how long? 

Those are really interesting questions, and the more I probed into that and asked those questions, it become very obvious that the analogues or the relationship to processes of evolution biology are a one-for-one map, with a few missing components. One of those missing components I labelled an inno, which was short for ‘innovation’, which is basically a unit of change, it’s a unit of innovation in the economy. In genetics we call it a gene, which is just a piece of information that allows for change in the biological expression of a species or a behaviour. In economics I came up with the inno as a playful word. Once I had that piece it was pretty easy to put everything else in place, and then I used an innovation framework, which is one of the few that I’ve come across that’s what I call robust. 

There’s a lot of talk about innovation, and this and that, and most of its junk or garbage, and what I mean by that is, it’s not science, it’s not falsifiable. The model I used which I reference is from the Doblin Group, and it has these 10 sectors of dimensions of innovation, and the Doblin Group spent 30 years researching both the innovation, and the impact it had on margins, sustainability, profitability and other things. That became the core framework for building a first principle thesis of an economy, from innovations which allow for trade, economics etc. etc. 

I thought it was really interesting, and in the book those 10 criteria are business model, networking, enabling process, core process, product performance, product system, service, channel, brand, and customer experience, as you explained there the companies that are able to have strength in all 10 of these criteria are those that have been able to really generate sustainable value over time. As you look at say a startup, we’ll get a little bit deeper into some aspects of competition, but how do you apply this to thinking about start-ups? 

This is the research from Doblin that was really interesting was, there’s a hybrid of correlation between excess profitability, excess margin, and the number of types of innovation that the company has. If all you had was price and you got one point of innovation differentiation, that can be somebody is going to do something about that pretty soon, unless you’ve got some of the others that support that price. 

When I think of start-ups, one of the real challenges and the rule of thumb let’s say in the value is, let’s say you’re in hardware, which the value doesn’t really like hardware, but one of the rules of thumb is unless its 10x better, faster, cheaper etc., they won’t touch it. The reason is because usually those solutions, even if they’re covered by patents etc., are literally engineering problems, and so seminal engineer a slightly better solution, and it will knock out the precursor. The curse of a company, and an important thing using evolution metaphor again, think about companies or industries, it just thinking in terms life-cycle; how long will this company, this product, this service be alive? How long will it make sense?  

What you find is, that the shorter life-cycles for companies or industries associated with single points of differentiation. So, if someone represents a set-up or a new business idea, and we’re going to make… I don’t know, pick a commodity product, or close to one! We’re going to make hamburgers and they’re going to be a little bit cheaper than everyone else, okay, that’s not really super-interesting. An interesting example, and I’ll use an example that’s easy for people to understand, of a company that has multiple dimensions of innovation, because usually people when they hear innovation they think of new bells and whistles, or a new type of whistle, or a thing, but it’s really about the 10 dimensions which are the most interesting. So, a really interesting example of that, in a very staid, boring, and low-margin business is IKEA. 

IKEA clearly differentiate on brand, but anyone can come up with a new brand. They have obviously a price point differentiation; eventually after much struggle at home, at work, you put together the table, or the bookcase, and you’ve got a fairly good affordable bookcase, there are other options you’ve got of stores! Customer experience, I think I read somewhere that IKEA consumes something like 10 percent of all the wood that gets harvested in Europe, or some crazy metric like that. So, obviously there’s huge economy of scale and scope in the enabling processes. In the design if you’ve got 20 Swedish designers obsessing over a bookcase or a thing, but you can spread that cost over massive scale, then you have huge edges, purchasing etc. So, they have many of the footprints and a wildly successful business, albeit one that none of us can invest in because its privately held, but that’s an interesting way of thinking innovation is across multiple dimensions, it’s not about a faster process, or an x or a y. 

Tesla in terms of automobiles, they’re doing interesting things, innovation, in the fact that it’s not just the cars they’re thinking about, they’re thinking obviously about first principles of the battery which drives the function. Distribution, because they don’t have retailers, so they’ve got a few of the things that are interesting. Now, whether or not Tesla becomes the GM killer of the future, etc., it remains to be seen. But if you’re looking at Tesla, it’s not a start-up, but it’s a company everyone’s familiar with, it’s interesting to think about the different pieces beyond just a car, so there’s the business model; the Tesla 3, they took the money upfront. Some other aspects of where they may be moving in terms of electric vehicles, do they end up manufacturing vehicles that are designed because they have such an edge on the data capability for fleet services? Lots of things. 

The real interesting assessment for a company, a start-up, is to take these 10 sectors of innovation, and say, ‘Okay, what have we got here? How much more different is it from someone else?’ and then take a measure of each one of those things, in terms of its anticipated life-cycle. If you and I have restaurants, and I differentiate my product, my pizza is exactly identical, and mines a dollar cheaper than yours, it’s not going to take you very long potentially to drop your price by a dollar. It’s a life-time of that innovation, it’s surely limited, so we say it’s a fairly weak differentiator. If you have lots of strong differentiators of many types so that no single random, out of the blue innovation or entrant can knock you out, then you’ve got something interesting. You have a much more defensible position, and that defensibility and the expected duration of that defensibility is by definition emote.  

One of the interesting factors, it’s in the book and I’m sure all the Buffet and Munger fans out there will know it, is, I can’t remember what it was, but the average age of a Berkshire holding company was something like 90+ years. Just an amazing fact about the durability of the businesses, and the ability to survive and create the cash-flows etc. which fuel that mission. There are some other aspects to Berkshire that are structural around asset allocation that we can talk about later. 

If we move to some of the more mature companies like GM, in the book you talk about how they really evolve from being a force that was leading in many dimensions of innovation, and then over time that degraded, you were contrasting that with Walmart. How do these principles apply to more mature companies? 

I think the thing to look at the company is also to look at the level of maturity in the industry, is the industry acceptable to change? GM faces significant challenges both on the product line, but also the whole business model, the entire auto-sector is going to face some real challenges with electric vehicles and new purchasing behaviors. What I mean by that is two things, autonomous vehicles and electric vehicles. The electric vehicle, the challenges there are due to fewer materials, cheaper price point, so you have margin revenue potential challenges there. The other thing is wear and tear, these vehicles are designed to last for hundreds of thousands of miles, and so all of a sudden, the addressor market shrinks for everybody, that’s a huge issue.  

And then on the buying behavior, if Hoover or GM even gets into the aspect of offering transportation as a service with autonomous vehicles, well, it’s one thing to sell something to the average customer and squeeze a 20 percent margin out, charge for undercoating and God knows what as a service! It’s a whole other thing to negotiate a multi-billion-dollar deal around vehicles. For example, I think it was Uber bought 24,000 Volvos for their fleet, and negotiated the deal, and one can assume that the price paid wasn’t what anyone else would see on the sticker on the lot. So, you’re looking at margin compression, you’re looking at revenue compression, other things, in the face of an industry that’s also going to become more tech driven and it’s going to operate, and I go back to the life cycle thing, the innovation, the operating innovation life cycles of the technology sector in space are a lot faster than those in the auto industry; rolling out a new platform, having to distribute products to dealers in a dealer network, and all the relationships there. So those are a lot of challenges for GM or any incumbent players in that phase. That’s one way to think about it. 

That’s great. Moving a little further downstream you talk about this concept of economic clusters, which is essentially how we think about competition, and how the dynamics play out around these areas of competitive differentiation that arise from innovation. 

That concept of cluster sometimes people would define that as a market, although the term market is overloaded, it gets used for lots and lots of things. The concept of a cluster is really who or what groups are focused around serving some set of needs, and how vulnerable are they? So, markets are closed proxy. The interesting thing about the concept of an economic cluster is again, they live, and they die; they’re born they’re created, and then they move on, eventually they get replaced, nothing is forever. So, it’s helpful when you’re thinking about profits and sustainability margins if you’ve got a company, to really think about the second-order dynamics of who else is in the game, who else is in this cluster that might be competing either symmetrically in a similar way, the way I am, or asymmetrically have some kind of an advantage. 

Thinking about not just your own mover advantage, but what other’s responses is, the second order effects are vitally important. The real case I mentioned, I have two driving factors in the book, I hint about the solar energy industry globally, and how a lot of people confused that growth of the industry, which went from a couple of billion dollars to billions and billions,100-x growth; they confused the growth of the revenue topline with margin capture at the individual entities there. What ended up happening was, solar energy is effectively a commodity, whoever can deliver the cheapest watt wins, whoever can give me the watts for the fewest dollars. Their technology evolved so quickly in that space, and there were very few barriers to enter that competitive cost, or that marketplace, that someone will come up with an edge or some advantage, and within 2, 3, 4 whatever years it would be gone.  

It’s the classic case of thinking in clusters, and also thinking about what’s the differentiation? Effectively the point of differentiation for many of the solar providers was a price differentiation driven by let’s say a single piece of technology, or type of technology. In that case the moment that cluster which was very price-defined, the moment someone came by and said, ‘Hey, I will sell you ‘x’ 5 cents cheaper’, it was done. So, a bit like two gas stations right next to each other, one of them’s got fuel for $3, and the other one has fuel for $3.10, and assuming everything is equal, you can see how it would play out over time. 

Exactly, and I think it’s quite interesting, you talk about this concept of competitive balance and instability that emerges as clusters mature. Again, if you’re a large company thinking about clusters, a lot of times there’s this belief that the state of a cluster is going to be static. And I guess that also ties into the concept of mote, and that’s not the case, so how does your work really address the relationship between competitive motes, and the change that happens through clusters and ongoing innovation? 

The first question is the correct one to ask which you mentioned, is change. Just assume that the change is inevitable and that eventually every company or industry is going to die, or change in some new unrecognizable form, and that is a very powerful thing to acknowledge. That is a powerful thing to acknowledge because it will ask, okay when? When and why, let’s play that game. If when and why is far enough out, 20-30 years then okay, then we’ve got something, we can look at margins and all the rest. If you can’t come up with the when and why then that’s just conserving its own right. 

An interesting example of a company with an interesting cluster dynamic, where the cluster of competitors is forcibly removed almost by physical space, it would be a company like a Home Depot where they own a space, they define the market. Or, its like the example I give in the book, again these are well worn but the reason I’m mentioning them is because it’s logical to attach Walmart in small towns. Walmart goes in, they dominate the small town, and they have the competitive edge for as long as the small town exists. Those are interesting ways to think about clusters and the durability of a cluster, so if you as company can go in and define a cluster, that’s really interesting.  You asked about large companies, and that’s tough because a lot of large companies aren’t really good at defining their different markets or products. They do lots of things and say, ‘We’re this big company…’ etc.  

A really interesting example of a guy who did an excellent job, recognising the power of focus in clusters was Steve Jobs when he went back to Apple. He stepped away, came back in roughly in 2000 and Apple was making printers, cartridges, and everything, and it was the classic case of people said, ‘We can slap our logo on it, we’ll have an eco-system of products blah, blah, blah, he came in and said, ‘No, we’re going to have four products’. This is before the iPad, and the iPhone etc., but he was going to rationalise the line. He drew an access for the professional and the amateur user, and the desktop, and the mobile. ‘Here are four quadrants, these are our clusters, we’re going to own them. We’re getting out of every other business, it’s time we actually got out of the retail store relationships’, until they could re-enter and control the entire user experience. That’s an interesting case of going in and redefining the market and the cluster to something that was meaningful and useful. It would be an interesting case study in that. 

So, if you’re a large company, like you said, if you’re the chief strategist or head of a large company, I think rationalizing and sometimes shrinking the product line can be a good thing, unless that’s part of your competitive advantage which one can argue, Amazon for example, let’s just go with the product, the platform is the edge, you want to have zillions of other products that you’re a gateway for.  

Of course, Amazon is certainly operating on many of those dimensions of innovation simultaneously. So, for large companies that are industrial, the companies that Momenta  works with, we span from start-ups to existing companies, but in many well-established industrial and technology firms that do have established competitive motes, how do you think about maybe the traditional way that strategists and businesses have thought about their competitive motes, and if you could talk about how there are certainly some risks to misappropriating value, misappropriating the perception of value, across if you’re a large company what you perceive is your unique mote. 

That is the huge risk, the manager of the organisation, there’s courtesy of the organisation or business line, a couple of key responsibilities and one of them is having the right vision, and communicating it over and over again, which probably protects the key business or the key asset, and that might be a relationship with customers, it may be a product etc., and then of course the capital allocation which is the function of determining how do you protect shareholder value. I would just say it’s not really easy, firstly obviously if it was everyone would do it and everybody’s businesses would be successful, it’s very competitive out there. 

I think if possible have a process and a very robust one, and the reason I say a process is because a lot of decisions around innovation of capital allocation become very emotional, and it can be very personal. It’s very easy to rationalise especially if you’ve been with the company for x-number of years, or it’s a brand that’s been around forever, to keep going with it, ‘This is going to work, we’re the best’. I’ll give you an example, I guest lecture at Colombia University in the value investing program for fun and I really enjoy it. One of the cases I teach I go in and I say, ‘We’re going to study imaging, three imaging companies. We’ll study their innovation and how they look on these 10 sectors of innovation…’ whatever.  

The three imaging companies, two are startups, and one is the Giant Imaging Company, the first startup raised $30 million from 12 people, has all the right bells and whistles in terms of the differentiators. The second one is the $45 billion company that has no points of real differentiation in a dying market. Then the last one is another start up. I go through, I explain the companies, and then I go back, and I tell the students to revisit them again. The first two companies are actually Kodak, but Kodak in 1880 and 1890, and Kodak in 1997, then the last company is GoPro. I wrote this case study up when GoPro does ITO. I explained why Kodak was such a great startup and how nothing changed, and it literally looks like the Apple of its day, they had Kodak stores, they differentiated in almost 10 sectors. We fast forward to 1997, great brand, great everything, obviously the company is bankrupt by 2012 effectively. Then I highlight why GoPro’s point of differentiation, and the expected lifecycles for those sectors they had that are probably good for three to four years. And then after that they’ve got nothing. 

That’s a useful exercise to look at some other company and say, ‘What are our points of differentiation?’ so you look at your own company, and ‘How long are those points of differentiation going to last’? So, if I’m GM, I’ve got a dealer network and that’s a killer advantage, how long is that going to be an advantage for? Will the laws and regulations change? Will a Tesla show up? What’s the barrier to entry to create a new car? You used to have to have billions of dollars of capital, you used to have all this and that. A new electric car doesn’t need a whole platform and engine, somebody may opensource them etc., and so instead of having to produce let’s say half a million units to have a viable company, is the minimal viable competitor entrance now 20,000 units, 50,000 units? 

Understand where your points of strength are, and then really have somebody probe to see how long those are going to last and what can change them, but I would argue definitely it would have to be a process. 

I thought what was really fascinating in the book is, how you’re discussing the different velocities of industry, innovation cycles, and really why its very difficult in some industries which are fast-moving say, to be able to calculate sustainable competitive advantage, and value creation over the long-term, vs other established industries where there are well-defined competitive dynamics, I guess where the clusters are relatively stable. Certainly, as venture investors at Momenta we also are trying to figure out where those seedlings are going to be. So, how do you apply your theories, or your principles to identify value that’s really at nascent stages, and that may be in fast moving industries? 

The only way to do that, and it’s very, very tough, which is why young companies need to be discounted heavily in terms of their risk coefficient is, what are the uncertainty of new entrants, and what is the point of differentiation? I’m a very high-tech guy, I work in blockchain and all of this and that, and yet one of the more interesting companies to an investor might be Sherwin Williams, they’ve sold paint for 100-plus years for a margin, because you know where its going, you know where it’s been. In terms of trying to assess small or high growth companies in terms of what’s going to be differentiable and stable, I think its really trying to pick out again out the 10 innovation categories where somebody has more of those, where they’re going to have lock-in. 

For example, a lot of the thing that’s been the thing for the last 10-years, but will be as much on a go forward base, social media, it was where are all the eye-balls going to go, and where are the advertisers with great content? Facebook has lots of lock-in, but how big can that get? Those things are interesting, it’s tougher in a pure tech space, so I advise some really interesting start-ups in the biotech world and other areas, they can do two things, first thing, how much better are they than ‘x’? If they’re differentiating on a single feature performance aspect, then you need to know how much better they are.  

Then the really interesting thing, I think we spoke about this earlier, one of the most interesting pieces of research that I came across in the book that I’d read before but never really internalized, is, ‘The Power of the Experience Curve’. For those who aren’t familiar with the concept of the experienced curve it’s the following, it’s a phenomenon that works across economies, and across disciplines almost universally, for the doubling of production of a thing. Manufacturing of a thing, whether its solar panels, a watch, cars, airplanes, whatever, for every doubling of the production of those things there’s a reduction in cost of x-percent. So, in solar energy, every time you double the number of solar panels shifts of whatever type, the cost drops roughly about 20 percent. Over time its managed in units of things produced, literally the economy, think of it like a giant macro processing machine with all this stuff we produce flowing through it, and every time it doubles the production of an amount of things, cost drops.  

Well, that’s a really interesting phenomena to be aware of, because I can’t predict which scientist is going to come up with some new form of solar-cell, or who’s going to make a 10x Terra-factory instead of a Giga-factory for batteries. But what I can do is, I can take the curve, a cost performance curve and say, ‘Here, I think the market’s going to grow x, y, z. And by the way, if it’s going to grow by x, y, z, in terms of units shipped, or x-x-number of things delivered, the cost to do that is probably going to drop by this much percentage. Then the question is, if I’ve got the startup, or the company, or the capital allocation, am I going to be the person, or my firm, or my investment, my capital allocation going to be the one that’s going to make that cut? How long do we have, if we’re on a single cost performance factor? 

A lot of startups they come at things and they say, it’s engineers, or brilliant scientists, I used to work in a basic researching institute, ‘We’ll come up with x, its 10x better than anything else out there, we’ll make a million dollars’. ‘Well actually is 10x better than anything out there? Now, ask yourself the question, how much is the market going to grow? And by the way, that growth really isn’t your friend. The paradox of growth is as the market grows the costs to produce that thing is going to keep going down’, and erode your margins, and that paradox is very-very poorly understood by a lot of people. As I mentioned earlier, the solar industry thing, yes, market grew by a factor of maybe 100x, but the cost for each unit of solar energy also decreased by a huge amount, and literally hundreds of corpses of companies that were brilliant and had a moment in the sun for 2-5 years are gone. 

That’s a perfect jumping off point, because I wanted to move to your experience and your views on the big mass of transformation that’s happening in the energy industry. We’ve spoken a bit about Tony Seba’s thinking, but again going back to your experience as an analyst when solar was first getting started, there was a lot of argument that it certainly wasn’t as cost-effective as existing carbon-based fuel energy generation. But what we’ve seen certainly in the last decade is, I think arguably we’ve passed the tipping-point in many regions where it’s already the cheapest form of energy.  

We’d love to get your perspective on what challenged the industry, and how your thinking evolved, also where you see the market evolving from here? 

The thing is, as opposed to my opinion I’ll reference data points. For those who want, a lot of this stuff is online, even from my book a lot of the graphics and images are online, nature, value, you can find that stuff. The big driver and evidence around energy is this thing called Swanson’s Law. Swanson’s Law is like Moores Law, but it’s correctly stated in terms of units shipped and cost drop. Every time you double the number of solar units shipped, the cost drops by 20 percent. Now, imagine if every time we shipped twice as much oil, the cost dropped by 20 percent, it used to, oil is a very mature industry, its not a fast-growth industry. They’ll ship every year maybe two to three percent whatever per annum, solar growth 20 to 40 percent per annum, which means its cost function is dropping much-much faster. This experience curve effect has been recorded for the last 40 or 50 years, so it’s a fairly good bet that it will probably continue for some time. 

The other factor that’s going to really drive solar in terms of the energy transaction is cheap storage. This is the lesser-known story, Tony Seba your early guest totally nailed it the correct way, in that storage, again it’s all about the manufacturing of storage, so we’ll just call it a battery, whatever it is. The number of batteries shipped is going to go through the roof, because every electric vehicle out there is going to need batteries, battery technology, and so what used to cost roughly $1,000 for a kWh of storage is now about 200, and $1,000 six or seven years ago, it will approach 100. As the batteries get cheaper it becomes more interesting for people to put batteries in their home, or to put extra solar panels on their roof, because they can store the energy which is going to accelerate the demand for solar energy, and the batteries, etc. etc. 

So, you’re looking at a situation where I think it was a year and half or two ago when the International Renewable Energy Association said, ‘Solar energy is cheaper than any fossil fuel, any fuel whatever it is, nuclear, etc. in 30 countries. That was two-years ago, well probably quite a few more countries, that curve is accelerating, and its not accelerating at a linear rate, its accelerating at exponential rates. The metaphor I use for that is, I gave it to you earlier about two gas stations, one sells $3, the other one sells for $3.10 across the street, who’s going to be around in five years? The question for energy is, lets imagine that solar was at parody at the same price as diesel or crude oil, imagine if gasoline or crude oil prices had gone from $140 down to $10 or $20, and were never going back up. The real challenge for coal, or traditional fossil fuel is this market. So, you’ve got baseload equivalent solar coming in at 7c a kWh, and you’ve got the raw energy without storage coming in at 2.5c in some places, 1.8c, that’s 30 percent of the cost of coal in many countries. 

What’s happening is, this curve is unfolding extremely quickly, and again we’ll think in lifecycles. The power industry thinks in terms of capital, capex cycles, PPA, fuel agreements in 20-30-year cycles and operating cycles, and facilities; nuclear facilities 50 maybe even 80 years. You’ve got a solar cycle that’s driven by tech, it’s digital, its smart, and its operating in Silicon Valley-type cycles in innovation and getting cheaper. The metaphor I use is, one is the astroid and one is the dinosaur, it’s going to be a real challenge. It’s not going to be an easy transition by any stretch of the imagination because those traditional fuels reflect many people’s jobs and lives, and trillions of dollars of debt that sits in investment portfolios and other things. So that can be really challenging as those efforts turn upside down, and bonds default, and countries end up nationalizing some of those things. 

It’s interesting, you might even see for instance a country whose economy has depended on oil experts launching their own crypto-currency! 

Yeah, we’ll see how that one works! I don’t know enough about the Venezuelan Central Bank to see whether they’ll just depopulate or inflate it, or whatever, its an interesting experiment, we’ll say that. 

That’s for sure. I wanted to drill into SolarCoin and understand a little bit of that. We haven’t really talked much about blockchain, and what’s interesting about this entire conversation was, it was your work and your connection of blockchain that spurred my interest in ‘The Nature of Value’ in the first place. Tell us a little bit about your involvement and the goals of SolarCoin. 

That’s an interesting one. My book is ‘The Nature of Value’, and it’s trying to understand what the first principles are, where did that kind of value emerge from, and then how does an economy work, what’s it’s whole purpose as a system. One of the interesting things they found, that came across, that came up with, was the theory for the value of currency. That sounds fairly trivial, but it’s actually not! current economics really has no theory of value, for the absolute value of as currency. Traditional economics has a theory of value for the relative value of a currency, i.e. if I can buy one apple with a dollar, and all of a sudden there are twice as many dollars out there tomorrow, it will probably cost me $2 to buy the same apple, its relative supply and demand function. 

That being said, why that dollar or two is worth an apple, the absolute value is kind of a mystery. So, I’m working on a paper with a friend from Columbia University here in New York, and we’re coming up with the theory of value for currency. Would you believe, it’s quite interesting, we’ve done research across 100 economies, currency issuances, etc. that understand currency is a protocol and a belief system etc. The reason it’s interesting is, the figures and the theory tie-out for gold, and for bitcoin earlier before it became highly speculative, in terms of putting a valuation on it, and each currency is the positive economic eternality.  

Where I’m going with all of that is up to 4 years ago I launched a project, co-founded, called SolarCoin which was an experiment which I think is very interesting, using a currency as a positive economic externality to reward solar energy production, basically saying solar energy is a really interesting thing, it’s probably a net positive to have more energy that’s clean and renewable, let’s link these things together. And so, we grow these economic actors for the participants in this SolarCoin network by distributing or issuing the currency into circulation every time someone globally produces one Mwh of solar energy. And so far, the data in terms of the participants in the network, and the theory of currency is holding true. So, right now its distributing to 56 countries and we expect it to become very interesting over the coming years. The goal is to create an incentive to accelerate solar energy uptake over the next 40 years. 

That’s something that we’re very much believers in. At Momenta Partners we worked with both tradition energy, or traditional oil and gas, and clean energy companies, and I think there’s a lot of change coming. But, you can really see the writing on the wall with the experience curve is a powerful force, and it ultimately is going to drive a really rapid change I think certainly within our lifetime. That’s really fascinating. 

The last question I always like to ask people is, whether there are any resources or books that you commonly like to recommend to friends or colleagues? It doesn’t have to be tech or investing books, but just really interesting resources that you find worthy enough to share with people. 

If you need to learn something you find it on the internet, interesting frameworks for thinking about things, or new discoveries of something that’s already out there that gives you fresh eyes to see it, to paraphrase the big philosopher. One of the more recent books which was an interesting read was, ‘Sapiens’… 

Oh yes, by Yuval Noah Harari. 

Exactly, really interesting. And, ‘Homo Deus’, which is the sequel is good as well. Sapiens was interesting because I referenced some of it in my thing about currency in the concept of the inner-subjective, the thing that so much of our value is not subjective, and it’s not objective, it’s culture, it’s belief, it’s protocol that’s long, etc. I would say by the way, for any of your clients who are in the utility industry, if they have solar facilities we’d be happy to talk to them about getting SolarCoin for their client to customers free of charge distributed. We’re targeting over a million installations this year, we’re looking for monitoring platforms and others who’d be interested in exploring the field. 

The other book that I felt was really interesting when I read it, and I still think it’s a profound insight is a book called, ‘Why Capitalism Won in the West; and Failed in Many Other Places’, by Hernando de Soto, an economist. It’s really worthwhile for understanding the power of property rights, and the concept of dead capital. Dead capital is let’s say, you lived in Egypt and you and your family squatted in a home in an apartment for three generations, you’ve owned this apartment, you don’t have your formal title to the apartment, you don’t formally own it. If you go to sell it, let’s say on the market if you had the title it would be worth $100,000. If you go to sell it because you don’t have the title, you informally own it, all your neighbours know who you are, for 70 years you’ve occupied it, you might get $50,000. So, the dealt up there is $50,000, it’s what’s called dead capital. 

That’s really interesting because dead capital hinders economic growth. I studied cultural anthropology to focus on sustainable economic development, really interested in why some people are getting really rich, and why are some stuck in relatively challenged situations in different countries, and dead capital is an interesting answer to that question. The amount of dead capital globally, the last estimate I heard was $15-trillion. Now, to put that number in perspective, all the overseas development, all the aid given last year was about $186-billion dollars. What this means is that the resources for the capital which could be used for mortgaging, lending, borrowing, studying, healthcare, taxes, roads, etc. it’s sitting in countries but its poorly recognised due to either poor bureaucracy, or poor what are called soft infrastructure, maybe not the laws themselves but the way they’re implemented and the regulation. 

Blockchain actually has a role to play in that, in terms of land titling… 

Absolutely, I know. It’s fascinating to talk about that yeah. 

So, for me, for my own perspective on say human progress and human development, its one of the most amazing opportunities to provide resources to people that already have them, but they’re just not freed-up, and its something we take for granted. You can get a mortgage on your home, or you could move across town, or get a loan in an emergency, and so you have $15-trillion, I’m sure the number is bigger because that’s a dated figure, $15-trillion in dead capital that’s literally existing amongst the poorest and most vulnerable populations in the world, it just needs to be unlocked with good policy and procedure. 

The other thing that’s fun about the book of ‘Why Capitalism Won in the West’, is it takes you back historically to the US right after the revolution. It said, ‘Here’s the country that’s poor, they had no federal government, they’d just won a guerilla war, kind of. They’ve got no budget, they’ve got a five percent literacy rate, and problems with yellow fever and malaria’. But it’s the US! So, the question is, ‘Okay, how do we solve all those problems?’ And some of it was good property rights, and the implementation of good laws. It’s a fascinating book and a really interesting read about again, a hidden phenomenon; there’s $15-trillion that’s lying around out there, its in the physical world but it can’t be realised to leverage because of a poor organisation. 

Wow! That’s really incredible, I can’t wait to read that.  

Nick, this has been fascinating, you’ve touched on a lot of very fundamental and profound concepts around value creation, and these frameworks for thinking about industries and competition innovation, and evolution, it’s been really-really interesting and valuable speaking to you. I appreciate you taking the time to do this. 

No problem, I hope it’s useful. That’s the most important thing for you and everyone else! 

Absolutely. Thanks to everybody for listening, this is Ed Maguire, Insights Partner at Momenta Partners, bringing you another episode of our Edge Podcast series, and our guest was Nick Gogerty who is the co-founder of SolarCoin, and author of ‘The Nature of Value’. Thanks very much. 

Thank you, Ed.