Infrastructure, Please

Warren Buffett is fond of saying that he doesn’t listen to economists. That’s fair, I’m pretty certain there are more billionaires from technology startups and through equity investing than there are through economics. Disappointing news for me, frankly. In fact, there’s only one I can think of: Ray Dalio, who got rich through global macro investing.

But despite Warren’s view, as true as it is, economists will tell you that a key component that enables tech entrepreneurs and investors to do well is infrastructure. And they are right.

Once you see it, you can’t unsee it.

We’re all familiar with infrastructure such as roads, power stations, railways and airports. Private capital is now very excited about this sort of physical infrastructure. Blackrock is very excited about it. Their recent acquisition of Global Infrastructure Partners for $12.5 billion was a bit of a giveaway. Private equity companies are increasingly investing in infrastructure as infrastructure funding comes from the private sector as governments deal with massive deficits and high interest rates. 

But what is infrastructure? There is the infrastructure that powers what we would traditionally think of as the physical world, such as roads, railway lines and power stations. But there is more infrastructure that powers the world of bits: Inmarsat satellites, the submarine cable system, the data centres needed for the cloud; broadband cables and constellation infrastructure like Starlink and Project Kuiper by Amazon. Of course, the physical world has been subsumed by the digital world.

But infrastructure penetrates much more deeply. The internet wouldn’t work without infrastructure: the TCP/IP protocol, browser infrastructure like Firefox and Chrome, Cloudflare providing the CDNs and DDoS protection, Shopify providing the e-commerce infrastructure, and so on.

It also works at the company level: it could be your company's code base, or the warehouse and logistics network: the robots, trucks, planes and sorting and searching algorithms which power it. It’s the App Store and Google Play, which provide a platform for others to grow from. In banking, it’s the core banking software that manages ledgers, payment processing systems and point-of-sale hardware. It’s the Amazon locker I use to pick up parcels.

For all of us, it’s macOS, Windows or Linux operating systems. The idea extends to open source as well: the growth of artificial intelligence is in no small part due to infrastructure. We are able to build AI models using Nvidia GPUs and code in Python.

If you think I’m taking too broad a view of infrastructure, for the first, and perhaps the last time, I’ll quote a dictionary: infrastructure is the basic physical and organisational structures and facilities needed for the operation of a society or enterprise. Infra is the platform which we need for everything else to work.

If you can make it here, you can make it anywhere. Well, not really. It’s easier to start a software company in Silicon Valley than it is in, say, Tunis. If the existing infrastructure or technology is in place, you can build on top of it. If it isn’t, then you have to build the infrastructure, and not only is that harder, it is capital intensive and much harder for startups to get started. 

The availability of infrastructure, especially digital infrastructure, is part of the reason why the US leads the world, by a country mile, in VC funding, closely followed by China and the UK. It’s why, if you are a country or if you are a company, one of the best things you can do is to build new infrastructure. Without new and better infrastructure, we’re on a road to ruin. 

Perhaps the most obvious, but by no means the only area where this has been visible, is the world of logistics. Both Amazon and Alibaba knew the importance of logistics infrastructure. Amazon has been on a three decade path of improving its logistics network through growing the number of warehouses, deploying ever more advanced robotics, embracing endless automation, and investing in drones and a fleet of planes, as part of Amazon Air. 

Knowing how important a logistics network was going to be for future growth and the growth of the ecommerce industry in China, in 2013, Alibaba partnered with other companies to create Cainiao. It built the supply chain, technology and logistics operations and is now the world’s leading international ecommerce logistics company, handling over 4 million international packages a day.

Building infrastructure is nothing new: the first submarine cables were laid down in the 1850s, whilst the growth of the shipping container, powered by the entrepreneur Malcolm McLean, provided the infrastructural backbone to the entire global freight network. The military is as much a logistics operation, with all the infrastructure you’d need for logistics, as a fighting operation. Indeed, the Vietnam War and the volume of Vietnam bound trade helped increase the adoption of the shipping container until it became ubiquitous. 

In his recent appearance on Lex’s podcast, Jeff Bezos spoke about building the space infrastructure so that the next space tech startup can be built by a teenager in their bedroom. As crazy as it sounds, he’s exactly right. The growth of infrastructure provides the capability for the next generation of entrepreneurs and innovators to build. 

But there is a spicy sting in the tail to this. Infrastructure, as long as it is well maintained, compounds. To catch up with the US, you’re going to need to build a road network system, a financial system, a next-day logistics network, a high-speed broadband network, functioning cities, a high-speed rail network and freight terminals that connect you to the world and enable global trade. 

If there’s one nation that really got this, it’s China. It’s why you hear stories about China using more concrete in two years than the US did in the 20th century or China building such a huge high-speed network that their HSR network dwarfs the rest of the world. They got it. It’s why you have futuristic cities like Chongqing and Nanjing. To catch up and grow an economy, you need infrastructure. Let’s build it.