sometimes we use the same technology for centuries before we suddenly invent a new material or process, and realize that we need to adapt existing technology to suit. Other times, it’s the other way around: we invent a new technology, like the incredibly strong fiber Kevlar, and then find purposes for it—in this case, bulletproof vests.
Chesterton’s Fence, described by G. K. Chesterton himself as follows:There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
Most private equity firms are paid on the 2-and-20 model: a 2 percent annual fixed fee on all the money it invests and 20 percent of all profits above a certain threshold. The United States taxes money made from investments—so-called capital gains—at a lower level than money made through ordinary labor, whether at a factory or in an office. The distinction is ambiguous and unfair, but even more so, private equity firms have convinced the IRS that their 20 percent income should be taxed at the lower capital gains rate than at the higher ordinary income rate.
First, because private equity firms own the companies they buy for just a few years, they must extract money from them exceedingly fast; there’s simply not much reason for them to consider the long-term health of the companies they buy. Second, because private equity firms invest little of their own money but receive an outsized share of potential profits, they are encouraged to take huge risks. In practice, this means loading companies up with debt and extracting onerous fees. And third, partly because legally separate funds technically own the companies, private equity firms are rarely held responsible for the debts and actions of the companies they run. These facts of short-term, high-risk, and low-consequence ownership explain why private equity firms’ efforts to make companies profitable so often prove disastrous for everyone except the private equity firms themselves.
Private equity firms are different from investment banks, which originally centered on helping other businesses buy one another or issue stock. They are also different from hedge funds, which tend to buy and sell public securities, such as stocks and bonds. Rather than buying individual securities, private equity firms buy whole companies. And rather than doing so on behalf of other businesses, they do so for themselves.
we started by working with the sales team to generate a list of signals that would tell them that an opportunity wasn’t worth pursuing. To do that, we sent out the following prompt to the sellers and the sales leadership: Imagine you were pursuing a lead that came through an RFP (request for proposal) or RFI (request for information). It’s six months from now, and you have lost the deal. Looking back, you realize there were early signals that the deal was not going to close. What were they?
By definition, anybody who has succeeded at something has stuck with it. That’s a statement of fact, always true in hindsight. But that doesn’t mean that the inverse is true, that if you stick to something, you will succeed at it.
The monkeys for the hyperloop to be viable were things like whether you could safely load and unload passengers or cargo, and whether you could get the system up to speed and get it to brake without incident. A couple hundred yards of track wouldn’t tell you anything about whether you could conquer those challenges. In fact, Teller and the team at X figured out that you would have to build practically the whole thing before you knew whether it worked. You would have to build a bunch of pedestals before you could find out if the monkeys were intractable. They quickly decided not to pursue it. One of Teller’s valuable insights is that pedestal-building creates the illusion of progress rather than actual progress itself.
