Crouching Tiger Hidden Dragon

While Hollywood is infighting, Silicon Valley looms

Amidst Hollywood's tumultuous landscape, where writers, actors, and studios grapple in disputes and strikes, many believe that resolving these conflicts might restore the industry's “equilibrium”. However, much like the theme of "Crouching Tiger, Hidden Dragon," beneath these visible challenges lurk deeper, more potent forces.

Silicon Valley.

Silicon Valley, endowed with a distinct technological DNA and a penchant for disruption, would, if it chose to enter this space, not just look to dip its toes into the entertainment waters. It would aim to reshape the very currents. Instead of merely borrowing from Hollywood's age-old traditions, Silicon Valley would be set on sculpting a new narrative, one free from historical constraints and anchored in its core metrics, values, and visions. And while Hollywood's luminaries are preoccupied with internal battles, Silicon Valley, the hidden dragon, might very well redefine the contours of the entertainment world, crafting it anew from its very foundations.

First, let's delve into some historical context.

In this issue of The Brief, I'm honing in on Joseph Tainter's influential 1988 work, "The Collapse of Complex Societies," as a lens to shed light on Hollywood's current "Crouching Tiger, Hidden Dragon" scenario. Tainter, an esteemed American anthropologist stationed in New Mexico during his seminal research, delved deep into the patterns that dictate the rise and inevitable decline of civilizations. He postulates that societies often start with a simple structure adept at solving initial challenges. However, as new challenges emerge, they superimpose intricate solutions atop their foundational ones. This burgeoning complexity, though initially viewed as an asset, eventually exacts high costs and diminishing returns. This pattern, as Tainter meticulously outlines in varied historical contexts, might offer insights into the underlying currents reshaping Hollywood today.

In applying his theory, Tainter delves into various historical examples including the Western Roman Empire, the Maya, and the Chacoan society of the American Southwest. The Western Roman Empire initially built a robust system of governance and military expansion that worked well. But over centuries, the society accumulated layer upon layer of complexity, from an ever-expanding bureaucracy to increasingly unproductive military campaigns, making it unsustainable. The Maya civilization similarly became increasingly complex in its religious and social structures, which, over the course of a century, became too resource-intensive to maintain. The rapid decline of the Chacoan society, on the other hand, can be attributed to its complex but fragile irrigation systems, which couldn't withstand prolonged environmental stress. In each case, the collapse was precipitated by the unsustainable demands of ever-increasing complexity, which led to a subsequent period of decentralization and simplification.

IF YOU DIDN’T KNOW. The Chacoan civilization, a subset of the Ancestral Puebloans, flourished in northwestern New Mexico's Chaco Canyon from AD 850 to 1250. Renowned for its advanced architecture, including massive stone "great houses" and ceremonial kivas, this culture became a pivotal center in the Southwest. However, by the 13th century, due to factors like drought, resource depletion, and societal unrest, Chaco Canyon was largely abandoned, with cultural prominence shifting to regions like Mesa Verde and the Rio Grande Valley.

According to Tainter, the conditions conducive to collapse generally involve a combination of internal and external factors that stretch the society's resources and adaptive capabilities to their limits. These conditions might include environmental degradation, resource depletion, societal infighting, external conflicts, or a combination of these factors. When such pressures coincide with diminishing returns on investments in complexity—whether those investments are in governance, military, agriculture, or social structures—the stage is set for potential collapse. This isn't a sudden event but a process, during which societies may go through a period of stress and decline before reaching a tipping point. Tainter's insights serve as a valuable framework for understanding the vulnerabilities inherent in our own complex systems today.

Moreover, the phenomenon of collapse and rebirth is not exclusive to ancient civilizations; it unfolds at the industrial ecosystem level as well. Although not always evident, this natural cycle of birth, death, and rebirth persistently plays out, mirroring the rhythms of nature. At the civilization level, one could look at the socio-economic challenges that precipitated the fall of the Soviet Union or the fiscal crises that led to economic adjustments in countries like Greece and Venezuela.

Similarly, at the industrial ecosystem level, the story is no different. Traditional bookstores, once thriving hubs, dwindled as e-readers like Kindle surged in popularity, offering a new digital realm for literature enthusiasts. The entertainment sector saw a comparable metamorphosis with platforms like Netflix and Hulu, signaling the end for DVD rental giants like Blockbuster. In photography, the dominance of film cameras and brands like Kodak waned with the digital revolution. Each of these transitions represents a testament to the ever-present cycle of decay and renewal that industries and civilizations alike undergo.

Joseph Tainter's theory of societal collapse through increasing complexity can also be applied to the ecosystem of Hollywood—the bustling ecosystem that underpins the film and television industry. Founded on the basic principle of entertainment for profit, Hollywood started as a relatively simple system: studios made films, and people paid to watch them. Over time, however, the industry has had to adapt to numerous challenges, from the advent of television and home video to the rise of digital platforms and globalization. Each new challenge required a complex "band-aid" to maintain profitability. For instance, the blockbuster model was developed as a response to dwindling box office sales, multi-picture deals and cinematic universes emerged to hedge against individual film risks, and complex distribution deals have been struck to navigate the digital age. Each new layer of complexity brings with it higher costs, both economic and creative.

Today, the Hollywood ecosystem is showing classic indications of potential collapse, as outlined by Tainter. The constant pressure for growth is causing a degradation in profits, evident from the high number of expensive box-office failures. Resource depletion manifests in forms like the writers' and actors' strikes, impacting the very labor that produces content. Societal infighting within the industry, over issues like representation and compensation, further strains the system.

However,

Within the complex web of systems, it's misleading to believe that signs of stress in a detailed structure necessarily indicate an imminent collapse. Indeed, a few crucial conditions must converge for a significant transformation or breakdown in an established framework. An external disruption is paramount (e.g. the printing press, the splitting of the atom, the advent of the internet), and in our modern context - it’s advent of artificial intelligence. Concurrently, there needs to be an environment conducive for a new or adjacent contender to rise. Visualize startups, molded by the innovative spirit of Silicon Valley, creating revolutionary foundations and groundbreaking economic and distribution models, sidestepping the revered conventions of the past. The final piece of this transformation puzzle is a multi-faceted catalyst event (e.g. a perfect storm). The ongoing strikes act as the flame, emboldening Silicon Valley into swift action. A generation of kids grows up not valuing television, movies, or even movie starts. Meanwhile, another event occurs - AI advancements, coupled with breakthroughs in CGI technology finally cross the uncanny valley, making virtual beings more cost-efficient than real-life entities. Imagine this perfect storm of events colliding over a one or two year span silently signaling a tectonic shift in the entertainment industry's future landscape.

For a system to go "from" its existing state, according to Tainter, it needs a place to go "to," usually a nearby, less complex, emerging, system that can absorb and repurpose its resources. That nearby neighbor - Silicon Valley.

One enlightening way to underscore the potential for a transition from State A to State B is to juxtapose the two, identifying disparities and overlaps.

A THEME TO REMEMBER. When the advantages of State B significantly outweigh those of State A, a transition, triggered by a confluence of catalyst events, becomes increasingly probable.

In the ensuing discussion, we'll embark on a comparative exploration of Hollywood and Silicon Valley, focusing on three pivotal facets: funding mechanisms, ownership dynamics, and overarching structures. By delving into the intricacies of how Hollywood currently operates and juxtaposing it with the transformative vision Silicon Valley might bring to the table—anchored in its unique value systems—we can gain insight into how the future of the film and television industry might be reimagined.

Here's a comparative overview of television versus startups:

Before delving into the contrasts, it's worth noting the similarities that pique interest. Indeed, these shared characteristics could potentially draw Silicon Valley closer to Hollywood's domain. Television shows embark on their journey with the initial optioning of a script, paralleling a startup's creation of a Minimum Viable Product (MVP) – a basic version of their product designed to test feasibility and interest. The progression of a script to a pilot production is akin to a startup's quest for product-market fit, a term denoting the perfect alignment of a product with the demands and needs of a specific market. This stage is vital for both as they aim to establish their relevance and potential for success. As television ventures advance, securing full season orders and further extensions, startups navigate their own growth pathway represented by the 'J Curve.'

In his 2016 book "The Start-Up J Curve," Howard Love introduced a concept that maps the typical trajectory of a startup. This J Curve details several stages a startup undergoes. It begins with the initial enthusiasm and investment, often followed by a decline into the "Trough of Sorrow," a period marked by challenges, doubts, and stagnation. After navigating these difficulties, the startup reaches a critical inflection point. From here, it starts ascending the curve, leading to steady growth and eventually profitability. This model provides a visual representation of the trials and triumphs startups commonly experience.

And while television shows aspire for extensions or syndication, startups set their sights on milestones like acquisition or even going public, with both aiming for expansive recognition and success.

But that’s where the similarities end. And while it may be the commonalities that capture the attention of Silicon Valley, it’s the differences, the inefficiencies, and the infighting of entrenched incumbents that makes them lick their lips.

All functions, and dysfunctions, emanate from foundation. Most startups, typically structured as C Corp Delaware entities, operate as distinct, investable assets. This framework ensures a streamlined alignment of incentives among stakeholders through equity distribution. Conversely, television shows are managed as internal studio projects. Participants, from actors to crew, are compensated via agent negotiated one-off contracts or union agreements instead of standardized direct equity, creating a different incentive landscape. This foundational difference predisposes television projects to numerous conditions fostering misaligned interests, which can ultimately lead to potential inefficiencies or even a collapse of trust.

Startups are Stakeholder-aligned, where Television Shows are Studio-aligned

In the early stages of a startup's journey, ownership is predominantly in the hands of its founders. Typically, they may start with about 90% of the company's equity. Recognizing the need to incentivize and attract talent, founders often set aside a pool of around 10% of the equity for employees. This equity pool serves as a tool to reward early employees who take a risk by joining the fledgling company. As the startup navigates through various funding rounds, this initial ownership structure gets recalibrated. At the seed stage, fundraising might range from $500,000 to $2 million, with startups parting with 10-25% of their equity. Come Series A, the raise could be between $2 million and $15 million, leading to a dilution of another 15-30%. The Series B round generally brings in $7 million to $50 million, and startups might concede 10-25% of their equity. By the time they hit Series C, attracting investments from $25 million to $100 million or even more, they may distribute another 10-20% to investors. This iterative dilution and the equity set aside for employees ensure that while founders retain a significant portion, there's enough motivation for both investors and employees to drive the company's success.

NO AGENTS. One distinct feature that sets this ecosystem apart from Hollywood is the absence of agents or brokers. Prior to the early 2000s, agent/brokers existed in Silicon Valley, but just after the dot Com bust, when Silicon Valley VCs invested in startups, they added stringent clauses in their contracts ensuring that no agents, brokers, or intermediaries are paid any commissions or fees. Thus, for startups, there is no longer such thing as agents - that’s because standardized norms, plus the market pressure from investors, literally eliminated the role.

Now, let's assume a startup that followed this average trajectory was purchased for $1 billion after Series C. If the founders gave up 20% at seed, 20% at Series A, 20% at Series B, and 15% at Series C, that would total 75% equity held by investors and 25% retained by founders and employees. In a $1 billion acquisition, investors would collectively receive $750 million, distributed according to their respective stakes at each funding round. The remaining $250 million would be shared among the founders, early employees, and anyone else holding the original equity or vested stock options. The exact amounts would vary based on specific agreements, potential preferred returns for certain investors, and other factors not considered in this general overview.

STANDARD AGREEMENTS. The emergence of standardized fundraising agreements has been a pivotal development in the Silicon Valley startup landscape, bringing forth clarity, transparency, and alignment of interests among stakeholders. Chief among these standardized instruments is the Simple Agreement for Future Equity (SAFE), introduced by Y Combinator in 2013. Prior to the adoption of standardized agreements like SAFEs, fundraising was often a quagmire of bespoke terms and conditions - much like Hollywood. Each deal was unique, leading to confusion and lack of transparency for both founders and investors. This non-uniformity not only made the fundraising process more tedious and prolonged, but it also occasionally led to misaligned interests between parties, potentially jeopardizing the startup's long-term vision. With the advent of SAFEs and standardized terms for Series A rounds and beyond, the fundraising process has become significantly more streamlined and predictable. This uniformity ensures that founders and investors are on the same page, reducing potential future conflicts and fostering a more collaborative and trusting investment environment. Also, the advent of SAFEs have massively reduced legal fees as there is no negotiated terms that require a lawyer, or agent for that matter. These standardized agreements underscore the ethos of Silicon Valley: innovation thrives best in a transparent and collaborative ecosystem.

Diving deeper into this 25%: the founder or co-founders, as the visionaries and initial risk-takers, might hold onto a significant portion, say 15%. Key executive roles, such as the CEO (if different from the founder), CTO, COO, and CFO, could collectively share 7%. This would leave the remaining 3% to be distributed amongst early employees, either as equity grants or vested stock options. The exact percentages, of course, can vary widely based on negotiations, the value each role brings, and the specific agreements made during the company's early days.

TRANSPARENCY. Carta, founded by Henry Ward in 2012, revolutionized the world of equity management and ownership structures for startups and private companies. By digitizing and centralizing cap tables, stock option grants, valuations, and more, Carta brought much-needed transparency to the realm of company ownership. This ensured that when companies were acquired or went public, the distribution of proceeds from the sale was clear, transparent, and trusted by all stakeholders. This stands in stark contrast to the television industry, where the nature of residual payouts remains opaque. In TV, residuals are often determined by complex formulas involving reruns, syndication, DVD sales, streaming rights, and more, and the exact amounts can be shrouded in mystery. This lack of clarity can lead to disputes and uncertainty for actors, writers, directors, and other contributors, whereas platforms like Carta ensure clarity and trustworthiness in the distribution of a company's proceeds upon exit.

But it’s not all good news.

In its relentless pursuit of efficiency, Silicon Valley has established investment models that emphasize stakeholder-aligned structures, optimizing outcomes for all involved. This model, deeply rooted in capitalism, brings alignment to stakeholder interests, but also has inherent pitfalls. The core tenet of capitalism, to maximize profits, can introduce potentially perilous tendencies.

In the Silicon Valley paradigm, for instance, actors are valued solely for their profitability. If emerging technologies, like AI-driven CGI characters, become more cost-effective than human actors, the prevailing business models may naturally evolve to exclude them. This logic extends to writers, directors, cinematographers, and editors. As Silicon Valley's efficiency-driven ethos seeks to eliminate perceived inefficiencies, we must be wary of a future where, in our quest for optimization, we inadvertently render human creativity and participation obsolete.

Is this happening yet?

Is Silicon Valley poised to step into the territory of Hollywood? At a glance, the answer might appear to be 'not yet,' but subtle indicators suggest that an overlap might be on the horizon. Let's consider Hollywood's other close neighbor: the video game industry. For years, Silicon Valley largely categorized video games as mere "content" or a "hits-based business," rendering them a less appealing investment venture. However, the narrative is shifting. Catalysts like the Unreal Engine, Unity, and groundbreaking distribution platforms like Steam have redefined how the tech giants view the gaming realm. Suddenly, video games are being perceived as valuable investable assets. Affirming this trend, venture capital powerhouse Andreessen Horowitz (a16z) launched a colossal $600 million Gaming Fund in May of 2022. Not to be left behind, Lightspeed Gaming has made its ambitions clear, proclaiming its readiness to invest up to $100M for every innovative gaming idea and has $2.6 billion under management.

This shift prompts us to question: what really differentiates a movie from a game in this era of blurred boundaries? If venture capitalists are making inroads into the gaming industry, it might not be long before they turn their attention to the world of film and television.

While Hollywood's current ecosystem may face challenges, teetering on the edge of transformation, any restructuring led by its innovative neighbor, Silicon Valley, must be approached thoughtfully. Silicon Valley's efficiency-driven, capitalistic model has its merits, but it cannot become the sole driving force behind entertainment. The bedrock of the industry is art — a powerful medium that transcends mere profitability and speaks to the human experience. As we contemplate the confluence of Hollywood's storytelling prowess and Silicon Valley's technological genius, the emphasis should be on melding the best of both worlds. It's essential to ensure that the heart of this new era remains rooted in art, rather than merely capitalistic pursuits.

Allow me to leave you with this reflection: In my humble opinion, the true purpose of technology should be to assist us in realizing our full potential, not to replace us. Capitalism and AI, with no one at the helm directing them wisely, ignores the larger goals of humanity.

A Poem

Do not go gentle into that artificial night, Old tales should glow, told in the human way; Cherish, cherish the beauty of our imperfect light.

Actors, whose flaws give stories depth and might, Their raw truths more than algorithms can convey, Do not go gentle into that artificial night.

Writers, whose hands craft tales of love and fright, Finding beauty in errors, in the human fray, Cherish, cherish the beauty of our imperfect light.

Directors, who see the world in black and white, Yet paint in shades of gray, where emotions lay, Do not go gentle into that artificial night.

Craftsmen, in their touch lies the soul's delight, Their hands tell stories that machines can't say, Cherish, cherish the beauty of our imperfect light.

And you, Tinseltown, in your eternal fight, Embrace the mess, the beautiful disarray. Do not go gentle into that artificial night. Cherish, cherish our human story, so raw and right.

Go Down the Rabbit Hole

• Fable Simulation has built an ShowRunner AI that can now make horrible episodes of South Park without human intervention

• Check out VentureBeat’s coverage of Fable Simulation.

• Read the Fable Simulation white paper regarding AI driven cartoons

• Joseph Tainter’s Book - “The Collapse of Complex Societies”

• Mark Love’s Book - “The Startup J Curve”

• Andreessen Horowitz (a16z) announces it’s Gaming Fund

• Lightspeed Venture Partners and their Gaming Fund

• Read more about SAFES and how they work

• Meet the 10 most active venture funds in the gaming sector

• Learn more about Carta, the company that changed startups and ownership models forever.

• Unreal Engine is advancing it’s technology on a nearly weekly basis - check out the latest in Unreal Engine 5.3.