Deepam Mishra, Aug 2022

American Dream Under Threat

The American dream has someways been synonymous with entrepreneurship. Historically the number of Startups per person in the US, has been the highest. Public policy and tax laws in the US have supported entrepreneurs like nowhere before.

When I first migrated to the USA, I was amazed to find out that I could actually get a tax deduction for investing in my own startup ideas and technologies. Compare that to India where I had to pay extra taxes for any venture capital , as deemed profit! That was 20 years ago — and US certainly felt like the Mecca for innovation. Is it still so?

During the late 1990s, the raw power of the American dream was the country’s ‘flat-world, Darwinian’ approach towards innovation. Even a FOB immigrant student, with zero resources, could have the audacity to change the world with Internet search. He could walk up to Sand-Hill Road with a paper napkin idea and become a billionaire in the next 10 years. Nowhere else in the world could one imagine a story like this. These stories became legend and the legends of US innovation defined its soft super-power that the world wanted to respect and emulate.

Now fast forward to today. The state of Innovation in the USA has become very inefficient. Take per-capital job creation from innovation, which has been going down for decades.

Even though the number of new business applications seems to be growing, the number of companies that create sustainable employment, have been consistently falling.

After all these years of world-leading innovation, and having the best of resources and markets, have we improved the art of innovation itself? Judging from the rate of startup-failures, the answer is no — perhaps the process is still as random as it has always been. Have we developed anything like an innovation culture?

Venture Capital or Venture Oligopoly?

The Venture-funded, startup model was a genuine US (Silicon Valley?) creation. In the 1990s I remember that famous Venture Capitalists used to be ex-entrepreneurs and innovators. They used a winning combination of confidence, experience and business model (high-risk/reward portfolio), to create a Darwinian battlefield of competitors. This unique eco-system led to the widest diversity of talent, life-altering innovations and mass brain-drains to the USA. Even those who failed in the Valley, were valued for their effort — for it was an honor to even have the chance to compete.

However, around 2000s, that enviable, ‘flat-earth’ Darwinian model of venture investing, started producing big T-Rex VCs. With virtually no authority to check their methods, and with a Colosseum-like theater of crazy Wall-st investors willing to feed them, these T-Rex’s got bigger and more fearful than ever.

The Venture Capital industry today resembles more like a closed-access club, where power is controlled by the top 5% and the only rule is to make a personal return-at-all-cost (not necessarily for the business). My argument is not against turning a profit (which is indeed a top goal of a business), it is the myopic approach, ignoring the long-term impact on the culture of innovation. As an example, in 2021, I felt really sad to hear even the most respected of VCs whitewashing bad ideas like SPAC, just to make quick returns – while knowing full well that many a common bloke will loose their shirts for trusting them. Perhaps it is the unavoidable curse of unchecked Capitalism, that always optimizes the short-term over the long-term, and always helps the richer keep taking away more from the poorer.

Sadly, despite such money power and lack of regulation, the VC industry’s performance scorecard is still as bad as always — only 10% investments survive (even fewer succeed). The number of companies destroying shareholder value, has been increasing, even though individual VC Partners have been getting richer and more revered. The biggest change they’ve delivered is to squeeze out the competitive space by raising larger and larger funds and to create un-business-like models to “loss lead” over smaller funds, with asinine business models like “last man bleeding, takes all”

Big-Techs Innovation: Incremental or Transformative?

Business funded research has significantly increased, but most of the investments seem to focus on incremental improvements or copying ideas from weaker pioneers . On the one hand, the proportion of fundamental research in corporate R&D, has reduced, the returns on this investment have been even worse. I led innovation for a division of SRI — one of the leading applied research commercial labs and had friends in peers like IBM Watson Labs, Xerox PARC etc. I have seen that most corporate R&D labs register a negative ROI, with <2.5% of their patents ever commercialized. In most corporations, filing patents has become a promotion-seeking KPI — and is often pursued to keep bosses and lawyers busy, than any real innovation (see the story of Intellectual Ventures, which I almost joined as an executive).

Corporate Venture Capital (CVC) programs were never really permitted to be too innovative. Corporates use venture investing for multiple objectives, often not clearly defined, and hence constantly changing. The unsaid truth in the Silicon Valley is that most VCs dont take CVC seriously. Most corporates use CVC as an investment ‘fly-trap’ to access information on new trends without having to hire in-house innovators. Others use investments to delay or acquire start ups that may grow to threaten them. Or worse still, many invest only to window-dress their efforts in giving back to society. Corporate venture arms rarely report clear performance outcomes and/or use funny accounting, making it difficult for corporates to even judge their value addition.

Finally, and perhaps inadvertently, the big-tech use their monopolistic powers to squeeze out startup innovation, even further. Given their size and scale, they know that they can copy and distribute a new product or innovation, faster than any original innovator can, even with a delayed start. This reduces their appetite to take first-risk. And worse, they routinely copy and kill pioneers who take the risk to discover new insights.

The big-techs who were themselves once startups, are fast squeezing out the space left for innovation.

The Great Innovation Outsourcing — to universities

It seems that almost all fundamental research has been outsourced to universities. While some of the universities had done a phenomenal job in producing world-changing innovations (and innovators), the speed and size of this mechanism is just too slow.

Today, there are some 250 university entrepreneurial programs, 5,000+ business management professors teaching entrepreneurship, 1,200+ venture incubators, and billions of dollars a year in government investments. I’ve consulted for some of the world’s best University Technology Transfer Offices and found that none of them make money. University-led and independent start-up incubators have high value as training grounds, but loose money on any innovation related metric.

Enemies at The Gate

Competition is increasing exponentially. China has been subsidizing higher education for a while (the sorry saga of US education corporatization, is another sorry tale to be told some other time). And over the last 20 years, it has started subsidizing research, new product creation and even marketing.

The number of technology graduates and scientists in China and India compared to United States are hard to compare (quality may be questionable though). The old economic order led by US and allies (Europe, Japan, other democracies) is weakening compared to rise of the neo-communist bloc. More than 50% of the world’s population today has started to question the US model of innovation.

In Conclusion

While my goal is not to offer a sad commentary or fear-monger, I do want to set the context for what I want to talk about in future articles.

Sad as the commentary it seems, wait for my upcoming thoughts on

1. Why US is still light years ahead of anyone in innovation, including (especially) China
2. Only the US Innovation eco-system can save what the world so fondly desires: freedom, peace and sustainable growth.
3. What I’ve learned from innovation pioneers: 5-P Innovation Process that can systematically create success, even in conventional organization