Lateral Capital Management, LLC

Does Moore’s Law Support Extraordinary Growth Outside Microchips?

Generally speaking, the category growth expectations of both investors and entrepreneurs are way out of whack with reality. Compared to the 1930s, when the airline, movie and home appliance industries were “founded,” the rate of cost reduction or performance improvement we have made outside of microchips has been very disappointing. As shown in the chart below, the whole notion of Moore’s Law is almost completely restricted to chip-driven businesses. There are very few other industries where the growth percentage gets even close:

What Does This Mean For Early Stage Companies? – Early Stage companies are constantly bombarded by the expectation that everything is moving faster and that the only way for them to succeed is to innovate at the rate of “Moore’s Law” – to double the efficiency of whatever category they are working in every 18 months. However, when you really look at Moore’s Law beyond microchips, you conclude this is an unreasonable expectation. In fact, outside of microchip-dominated categories, innovation proceeds at rates that are lower by orders of magnitude. Gains in performance for most technologies range from 1.5% to 3% per year – as do declines in cost.What Does This Mean for Investors? – Relax. New companies outside of semiconductors or huge, money-losing online businesses shouldn’t be expected to innovate at these extraordinary rates. In turn, they shouldn’t be funded that way: the VC approach of dumping tons of money into software driven companies doesn’t really fit to other industries. If you’re an entrepreneur, the good news is that when approaching these more “boring” categories, you don’t have to improve things by 50% per year! In fact, a 10-20% improvement over a 3-5 year period is enough to completely revolutionize an industry.

Are There Exceptions? – Yes, and we should all be open to them. For example, the number of robots being deployed is on a Moore’s Law-like exponential curve – doubling every 3-6 months. By 2025, robots could reach critical mass in many manufacturing sectors. One example: Electronics contract manufacturer Flextronics has stopped its long-time practice of moving assembly work from country to country; chasing the lowest labor rates; a process known as labor arbitrage. Instead, Flextronics is now replacing laborers with robots in China, where they already have all the other infrastructures. It’s a separate discussion, but there is a question about the point at which robots begin to disrupt the ability of people to enjoy, as Thomas Jefferson called it, “meaningful work.”

Source: These insights came originally from a presentation by PayPal founder Peter Thiel.