Present Day

It’s a kind of law of governments that the older they are, the more corrupt they are. This corruption usually takes on the form of bureaucracy where many people have the ability to prevent things from happening.

The result is that if you run a small business in, for example, New York City (where there has been a functioning bureaucracy of city government for centuries) you will have many bribes to pay in the form of “permits” to make any changes to your business that are easily gatekept. They say “permit” but what they often mean is shakedown.

This is also the answer to why is real estate such a shady business. It’s because you have to pay so many bribes to so many different parties (a real estate agent, a mortgage broker, county, city, state, federal governments) and you need to pay people to do the things for you. You are dealing both with local cartels that control licensure (inspectors, agents, brokers, etc) and governments that control property transfer.

On it’s face, it’s truly remarkable how transferring a simple piece of property in the form of real estate incurs a 6% transaction fee and takes months, but I can purchase stock in a publicly traded company and become a partial owner of it with a vote and everything in the matter of seconds with no transaction fee. But if you think about the incentives and bureaucracy involved, it’s not quite so hard to understand.

Why tech is booming

If you really take a look at S&P 500 companies in general the only companies that are increasing their revenues and earnings at a clip faster than GDP and inflation (so I’m talking about real GDP, not nominal) are tech companies.

I suspect that if you do the math that these companies are almost entirely responsible for our (heh, well, previously at least) positive GDP growth in the united states. In Europe it’s pretty clear that real GDP has not increased measurably since the financial crisis (“real” by the way, means accounting for inflation).

What does America have that Europe does not? American has all the tech companies.

What is so special about the tech companies? One reason is that they have much less bureaucracy to deal with since they are so far on the cutting edge that the regulators have (mostly) not come up with ways yet to slow them down. Because most of their innovation is virtual it’s very hard to restrict it in meaningful ways.

As an aside, one of the funniest things to me about Europe is that instead of allowing their own tech companies to innovate, they pass restrictive laws that affect US based companies and then fine the US based companies billions of dollars. I guess it’s tax revenue either way but I’m not sure why the US government allows a foreign government shake down their corporations.

Automating bureaucracy

I have been thinking a lot lately about what it means to automate bureaucracy. It’s clear that the longer governments exist and the more aggressively they intervene in the business world (such as what we’ve seen starting in 2020) the more this becomes a problem and ultimately it posses a risk to human civilizational progress.

My personal theory is that the harder that governments make things for business owners on the compliance front, the more we can automate compliance. Eventually this becomes a simple cost of doing business that can be driven lower and lower due to automation.

Governments can use their power to create additional processes businesses need to comply with, but it truly shouldn’t matter because software has a magical property: we can use to automate processes. It’s not a perfect solution because there will always be overhead to comply, but it the costs can be driven down with automation.

Existing examples of automating bureaucracy

I have heard that the two most complex parts of US law are the tax code and immigration laws, so of course the tools most US citizens are familiar with are going to be income tax automation software.

Taxes

• TurboTax (personal income tax)
• Avalara (state & local sales tax compliance)
• TaxBit (crypto tax compliance)

Incorporation

• Stripe Atlas
• AngelList Stack

Data compliance

• Vanta
• AuditBoard

The advantages and disadvantages of these companies

The advantage of software company that automates bureaucracy navigation is that it’s almost like being a government employee. The work will exist as long as the government structure exists, and usually these exist a pretty long time.

The disadvantage of these types of companies is that you have to be careful of addressable market size. Can you automate small business permit compliance for sandwich shops in New York City? Yes, probably and will it be worth it? Well maybe… But how about sandwich shops in Cincinnati, OH? Almost certainly not. The market is just too small.

So you have to be careful to find a market that the scope is large enough in terms of the size of the government and number of customers that need the automation. Things related to the federal government in the US are great (or the EU) because it covers a very large population. Maybe it’s also great for certain large states (but less so). But smaller than that and you might have a niche consulting business, not a software company.

Other types of bureaucracy (internal vs external bureaucracy navigation)

I singled out government bureaucracy first because it’s the easiest to pick on: these are quite frequently the worst offenders because there is no underlying profit motive and thus easily co-opted by life long employees and politicians. Government agencies are so often barely accountable to anyone (maybe voters, assuming they even understand the problems involved) that they can get away with erecting terribly inefficient processes with unknown (likely simply unmeasured) benefits.

The other difference about bureaucracy with regards to government is that we probably are concerned with external automation: meaning automating how others must interact with government.

But, internal automation of bureaucracy is another animal all together. Here I will talk about the kind of bureaucracy that inhabits all large organizations that ossify over time. These are internal - to keep things running and operating at a large scale. Often these are created in response to previous issues that would never effect a smaller organization with good internal communication.

Here are a couple of examples of internal bureaucracy automation:

• internal employee compliance - such as training against the “employee handbook”
• sexual harassment training (arguably largely internal - it prevents civil suits & other business interruptions)
• KPI tracking & employee reviews (productivity and accountability)
• expense reporting verification and oversight
• tracking & enforcement of vacation policy on employees
• procurement process & policy

In addition to government all of these organizations can grow large enough to need this automation:

• schools & universities
• charities and non-profits
• all types of for-profit companies (of a certain size or age)

Each of these has their unique problems but they are almost better to address in terms of bureaucracy automation because the problems cut more horizontally across them all (sometimes in different ways, so you could e.g. make expense reporting software for non-profits specifically).

Internal bureaucracy navigation software

These are so numerous it’s hard to even begin to decide what to list here. But I will list a few large publicly traded software companies as an example

• Workday - HR, financial and more. Arguably both internal & external bureaucracy automation.
• Service Now - IT procurement automation.

Why are these uniquely good businesses?

To put it simply - stickiness. By nature the larger a bureaucracy is, the slower it moves and the slower it changes. So if they adopt a process it will probably be the same for a long time. Both internally & externally you can rely on this to build a business against. This makes it a lot easier to place bets on these kinds of businesses because they should in theory be easier to analyze compared to other tech companies.

My current company is a startup related to TikTok advertisement for Shopify stores. How long will TikTok be the hot new social media app? Not sure… How long will there be a race for consumer brands to get eyeballs on TikTok? Probably as long as it works until something better comes along. By nature, this opportunity is not something that will last forever. It’s a huge opportunity now and we are building as fast as possible to capture it. But it may not last forever.

Compare that to another problem: how long will large companies need to manage internal IT procurement? Well, probably forever (or at least as long as these companies exist and are run by humans). They just might not decide to use your software.