Superconductive FOMO
This month, the tech world went crazy over the supposed creation of a room-temperature superconductive material called LK-99. People rushed to speculate what this discovery could mean to the development of new technologies and what changes it would bring to our everyday lives, including 10x faster supercomputers in our pockets, flying cars, and immense energy savings worldwide. If this material was indeed proven to be a room-temperature superconductor, it would revolutionize humankind.
A few weeks went by and many venture capitalists were already hurrying to get educated and develop a thesis around the space. Then, everything went downhill as it was proven that LK-99 wasn’t actually a superconductor after all. What drove this sudden interest from investors in material science and superconductors was the fear of missing the opportunity to capitalize on this new technology that could lead to enormous results - in other words, Fear of Missing Out (FOMO).
FOMO can be very dangerous for investors, especially in venture capital, an industry that lives and breathes the “next big thing”. New and disruptive technologies usually follow what Gartner calls the Hype Cycle, first getting a lot of hype very fast just to be confronted with the realization that the technology in question might not deliver on the forecasted value.
FOMO can lead investors to make bets on technologies that are at the peak of inflated expectations, increasing the odds of a bad outcome. Below I explain a bit more about the recent superconductor frenzy and go over a few principles I believe to be useful to avoid being seduced by FOMO.
Superconductors, explained
A traditional electrical conductor is any material that allows for the flow of electrical current. Good examples of conductors that we see every day are metals, such as copper, aluminium, and steel, which are commonly present in transmission lines and inside your phone or laptop. Those materials allow the flow of negatively charged electrons (electrical current) similar to how water flows on a river. Because most of these materials have resistance, some of the energy is lost in the form of heat during this flow. This is why you feel your phone or computer getting hot when you use it and why it is estimated that 5% of energy is lost in transmission and distribution.
A superconductor, on the other hand, has no resistance and therefore wastes no energy in the transmission process. Getting a little bit more technical, in a superconductor, electrons form a special bond known as cooper pairs that move in perfect synchronization through the material without scattering or collisions. This also expels the magnetic field from the material, making it possible for superconductors to levitate above magnets.
Until now, superconductive properties were only possible when certain materials were exposed to very low temperatures (~−196°C). This was supposedly going to change this month when a team of South Korean researchers released a paper and video claiming to have created a new superconductive material, called LK-99, that operates at room temperature and pressure.
Ever since the release of this paper, many scientists were skeptical about the authenticity of the discovery. After many researchers tried to replicate LK-99, many of them concluded that this material is not a room-temperature superconductor, putting all hopes of a room-temperature superconductor to rest. In fact, the material seemed to be levitating on the video because of normal ferromagnetism.
What this reminded me of
It is no news that the investment game is much more about psychology than about any type of quantitative or qualitative analysis. And this superconductor chapter, much like other recent hypes like generative AI, blockchain, and virtual reality, reminds us, once again of this fact. So, I take this opportunity to share some principles that I think are valuable when trying to avoid being seduced by FOMO as an investor, not only in VC but in other asset classes too.
Don’t forget about basic business fundamentals. One of the biggest mistakes an investor can make is to invest in something just because people are talking about it, without thinking and evaluating the facts by themselves. Before investing in a generative AI company, for instance, make sure it is delivering clear value by solving a real problem.
Make sure you really understand what you are getting into. While evaluating a potential investment or building an investment thesis in a new field that has clear hype signals, it is important to add a deep technical analysis of the new technology driving the hype, aside from the usual research topics (market dynamics, unit economics, team, etc.). This will help you form your opinion on whether the technology will indeed be disruptive or just “fake hype” and also identify legit teams in the space.
Understand that you won’t surf all the waves. There will be many hype cycles in your lifetime as an investor and, unless you have billions of dollars under management and can hire experts in every existing and emerging field, you won’t be able to capitalize on all of them. It is impossible to deeply understand every new technology that appears to the point in which you can make an educated bet in the segment. That’s part of the game.
Short-term wins don’t necessarily mean long-term success. Every investor will pass on opportunities to invest in companies that will raise large amounts of money at substantially higher valuations. Instead of regretting not joining the cap table earlier, remember what led you to the decision in the first place and that many of these companies won’t make it to the finish line (usually a liquidity event), regardless of how much money they’ve raised. Of course, many investors have made a lot of money by capitalizing on the hype and selling their stakes right before everything starts to fall apart but that’s easier said than done.
FOMO is real and it is something that every investor faces. What separates good investors from average investors is how you will deal with this phenomenon. Taking a few steps back and constantly asking yourself if you’re making a logical decision by yourself and not one driven mainly by the heat of the moment is always helpful.
Dive Deeper
The LK-99 ‘superconductor’ went viral — here’s what the experts think - The Verge
LK-99 isn’t a superconductor — how science sleuths solved the mystery - Dan Garisto
Korean LK-99 Ambient Temperature Superconductor Demo Video Fail - YouTube
The Psychology of Investing: Learning from Warren Buffett - Picture Perfect Portfolios
Thought of the Month
One of the biggest takeaways from Principles by Ray Dalio, one of the best books I’ve read so far, is the concept of second-order thinking. It basically highlights the importance of not thinking only about the immediate consequences of your actions but their long-term effects. Eating fast food, for example, is cheap and tastes good (first-order thinking) but, if you eat it frequently, you can develop health issues (second-order thinking).
“Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.”—Ray Dalio
Chart of the Month
Japan might face a big economic challenge in the long term due to its aging population. The crazy thing is many countries will probably show similar demographics soon.