The billionaire entrepreneurs of Silicon Valley have not all been recycling their earnings into Napa Valley vineyards. With publicity commensurate with their wealth and ambitions, such notable visionaries as Elon Musk (cofounder of PayPal, the online payments giant owned by EBay) have staked out claims at and beyond the frontier of available technology, from Tesla’s all-electric cars to the prototype spaceships of SpaceX.
This is a moment when the Silicon Valley style and brand — Go Big or Go Home — has appeal. The recovery from the great recession remains frustratingly slow. In response, governments across the developed world have perversely embraced austerity. Authoritative voices — economist Robert Gordon of Northwestern University and Musk’s cofounder of PayPal, Peter Thiel, among them — are publishing obituaries for the most recent “new economy,” jointly created by the microchip, the computer and the internet.
Can individual initiatives backed by personal fortunes reinvigorate the digital revolution and launch new transformational technologies? The short answer is no. To understand why, we need to read the relevant history of the innovation economy, from the early days of the first industrial revolution through to the gestation and commercial birth of our continuing digital revolution.
It is important to recognize that the impact of the digital revolution itself is far from played out. Only 50 years on from the technical realization of the programmable microprocessor, momentum is accelerating across a broad front.
At the level of infrastructure, migration to the “mobile cloud” — the fourth generation of architectures — is irreversibly under way, rendering access to ever growing computing power ubiquitous. At the level of platform technologies that enable previously unimaginable applications, the ability to extract meaningful information from aggregations of human-generated “big” data is being realized, and not only by the world’s security agencies.
Potentially most revolutionary is the pervasive deployment of computerized speech recognition and its incipient extension into natural language understanding: Hal of 2001: A Space Odyssey will be riding with you in your pocket, on your wrist or on the bridge of your nose.
In this context, it is useful to recognize that the “killer app” of the railway age — mail order retail — did not emerge until a full 50 years after the first “railway mania” on the London stock exchange. Reconstruction of manufacturing to take advantage of electrification plus the mass distribution of home appliances each reached its respective tipping point some 50 years after Edison turned on the first generating plant.
If we need not concern ourselves excessively that the digital economy has (as it were) run out of steam, where should we look for leadership from the philanthropic angels of Silicon Valley? The most intensely needed innovations are among the host of technologies collectively referred to as greentech/cleantech. They promise radically to increase the productivity of carbon, enabling the switch to a low carbon economy.
Some of these technologies are digital: smart meters, for example, that manage electricity consumption relative to actual usage. Delay in their deployment is political and economic — who pays for them? — not technological. Most of these technologies, from solar cells to batteries, involve breakthroughs in entirely novel materials such as graphene.
Moreover, movement to a new energy infrastructure for the global economy is as massive a proposition as the development of the railways and the deployment of electricity grids and the wired and wireless internet. Herein lies the double rub.
First, commercialization of new materials takes decades, during which production is reduced to cheap and reliable practice. In parallel, commercialization also requires an extended search for applications in which the new material’s characteristics allow it to replace what is already used, or induce the invention of entirely new applications.
This is why, with one exception, new materials have invariably been commercialized by large, established enterprises (as plastics were by ICI, DuPont and General Electric), not by start-ups, however visionary their entrepreneurial leadership may be. Silicon, that singular exception, is the one that proves the rule.
Network building is the second challenge. Since the 1770s we have experienced five successive waves of technological innovation at sufficient depth and scale to generate “new economies.” Each has depended on processes of trial-and-error and error-and-error: upstream inventions and downstream explorations of what the inventions are good for. At the core of each has been the deployment of networks of transportation and communication whose value in use cannot be known at the outset of construction.
So at each stage the innovation economy depends upon sources of funding unconcerned with near-term, quantifiable economic value. Angel investors have always played a role, from James Watt’s partner Matthew Boulton onward. The complementary sources of institutional support for innovative investments at scale have been masses of financial speculators, participating in capital market bubbles, and the state, in pursuit of politically legitimate missions, from national development to national security.
The canals and railways of the first two waves of innovation were supported by compulsory purchase orders in the UK and, in the US, by direct subsidies. In each case, financial manias followed. The electricity grids of the third wave attracted finance during the 1920s due to the provision by the state of regional monopolies. The highways of the fourth, automobile revolution were directly constructed by the state as the multitude of car manufacturers sorted themselves out competitively.
Silicon is the source material of the fifth, digital revolution. Its commercialization was in substantial part led by entrepreneurial start-ups, notably Texas Instruments and Intel. Their distinctive success was directly due to the encompassing role of the US defense department. For the US government not only funded fundamental research across all the digital domains, it served as a creative, collaborative customer, pulling all its suppliers down the learning curve to low-cost, reliable production. The dotcom/telecom bubble at the end of the last century was its baby.
We cannot expect the present generation of technology philanthropists to replace the agencies of the state. Scale matters. For 25 years, from 1953 to 1978, federal funding accounted for more than half of all research and development in the US or about 1 percent of GDP. An equivalent amount would be more than US$1.5 trillion today. Even the annual budget of the US National Institutes of Health is “only” US$35 billion.
There remains a time-honored role for angels, beyond financing entrepreneurs seeking to exploit the new economic space created by transformational networks. Charles Darwin’s father, heir to his father-in-law Josiah Wedgwood I’s fortune, funded his son’s investigations of natural history. The first physics laboratory of the English-speaking world, the Cavendish at Cambridge, is named for its donor, the 7th Duke of Devonshire, William Cavendish.
This tradition of philanthropic funding of scientific research continues to the present day. It has been most effective when management of the resources has been institutionally outsourced to responsible peer review, as embodied in Britain’s Wellcome Trust and Cancer UK, and the US’ Howard Hughes Medical Institute and the William and Melinda Gates Foundation. Entrepreneurial vision needs to be matched by disciplined rigor in execution, whether the project is upstream science or downstream venturing.
William Janeway is a partner and senior adviser at Warburg Pincus and a visiting scholar in economics at Cambridge University.
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