Changing Tech Innovation Reduces The Upside For Inventors
Before 2000 tech entrepreneurship was mainly about inventing useful things and bringing them to market. Today it’s about winning a business game with fewer winners and enormous stakes. Inventors have a smaller chance of enjoying the rewards of building a substantial company.
Last week I attended a “camp” for senior technology entrepreneurs and innovators. We come together in mid-summer each year on island off the Maine coast that has no roads, electricity, or indoor plumbing and only a handful of year-round residents: tekkies gather where there is no tech. The campers are all men [there is a corresponding gathering of women] who made their marks in the 80s and 90s: tech entrepreneurs of the old school.
The gathering includes distinguished tech innovators: four started tech businesses, built them to over $1 billion of market cap, and exited successfully. Three are former CEOs of well-known tech companies. Several are/were professors at top universities. Three are the team that invented and commercialized a technology that is fundamental to computing today. Two worked at Xerox PARC in its heyday. One holds the National Medal for Technology. A few of the attendees are younger CEOs, venture capitalists, or journalists.
Listening to these people talk about their careers and accomplishments, I realize how much technology innovation has changed. Key differences:
• These entrepreneurs are motivated and fascinated by technology and by inventing and building things. A couple of guys in the group can de-bug and fix anything, to a remarkable extent, with a Fluke digital voltmeter (always in the bag, substitutes not accepted) and a leatherman. This year they built an elegant solar-powered charging station, including sophisticated technology that runs the solar arrays at their maximum power point and provides a DC-to-DC voltage step down from the 16–17 volts that the array produces to the 13–14 volt level which is optimal for charging the storage batteries, with hardly a Watt lost in the translation. All the campers received a classy “DC/DC” t-shirt as well as the ability to keep their phones and tablets going. We may be off the mainland, but these days we can never be off the net.
• As I listened to the stories about how they built their companies, I’m struck that the “win” they were after was making technology useful: basically the MIT philosophy of inventing and building practical things [e.g., the MIT motto: “mind and hand”]. One seminal story goes: we had a view of where computing was going, and we knew what people would need, so we built it and convinced the market that our solution met the market need best.
• The businesses these men built had specific focus: a solution to an important, well-defined problem.
• The money part was a necessary means, not a goal in itself. They had to raise money, of course, and there was the usual drama, but I heard no talk about how much money was raised, private valuations, or the size of the ultimate exit. The focus was building the right product and making it succeed in the market.
• And there is a great sense of fellowship in this group which comes partly from this shared philosophy.
The innovation I see in my work as a venture investor today has a different tone. I don’t hear the same degree of love for or fascination with technology, even among the engineers. The financial dimension has become much larger and more aggressive: e.g., the fascination with valuation (unicorns), private equity replacing IPOs, and the secondary venture market* becoming comparable in size to the primary market [some claim].
Today’s innovation market has more of a winner-take-all aspect. Enormous wealth and power has concentrated in a handful of platforms (Google, Facebook, Apple, Amazon, Microsoft). They buy new technology that inventors create, often at an early stage, and integrate it into their platform. The percentage of successful venture exits is declining, but some of the successful exits are enormous, which makes the numbers work out on average. This causes investors to focus dollars against the businesses with momentum and ultimately concentrates the winnings in fewer hands, as the New York Times observed in a recent article. Hence the risk of starting companies for individual entrepreneurs is increasing.
The rise of intelligent systems (aka artificial intelligence) may cause this pendulum to swing back. Currently, there are many different applications for intelligent systems and lots of companies forming to go after these applications. So the game of inventing something and making it useful in the marketplace is back on. If and how quickly this gets gathered into a big platform plays remains to be seen. Cleary several big tech companies are building these platforms and attempting this play: IBM with Watson, Apple with Siri, Google with machine learning embedded throughout its platform.
A few take-aways. The rewards for technical inventing have diminished overall, but may still be attractive in the intelligent systems space and a few others. Successful inventing today is more about behavioral hacks (e.g., a new social network) than technical hacks. Overall, the percentage of start-ups that achieve good exits has diminished significantly. Hence it is vital to manage your financial risk until you achieve clear momentum that establishes category leadership.
So if you’re an entrepreneur who loves to innovate, keep at it, with a realistic view of how the game will play out. For many the financial rewards will be less than in the past, and for a few they will be glorious. But there’s still the opportunity to invent something fantastic, bring it to market successfully, and make a difference in the world.
*Secondary venture investment refers to selling private venture holdings from one investor to another
Originally published at www.forbes.com on August 5, 2016.