#6 - Is innovation dead?

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Synthetic Biology and Existential Risk: A COVID-19 Thought Experiment. An interesting topic to mull over while we’re all in quarantine, anyways.

📰 1 topic: Innovation stagnation

Peter Thiel is famous (among other things) for quipping, nearly a decade ago, that “We wanted flying cars. Instead we got 140 characters.” More specifically, innovation in the world of bits (i.e., information technology) has proceeded at a rapid clip while innovation in the world of atoms (i.e., more physical things like biotechnology, autonomy, nuclear energy, etc.,) has not.

Many of Thiel’s arguments revolve around the idea that society and our institutions have failed us:

  • Massive risk-aversion. Young, smart people often flock to the world of software or otherwise engage in professions with substantially less risk (see e.g., law, banking, medicine, consulting).

  • Excessive regulations. For the most part, making mis-steps in pure information technology companies doesn’t really cost society a whole lot. In the early days of Facebook, “move fast and break things” was a great mantra because breaking things had relatively little downside — just don’t see what your college roommates are posting on each others’ Walls. As innovation begins to influence the physical world, as Facebook has done with politics, for instance, the downsides become enormous, and regulators often step in to police conduct. This can go too far, however, and thickets of red tape can strangle innovation (see e.g., GDPR, America’s patent system, FDA). As a counter-example, when President Bush de-regulated the space industry (in 2004 and 2006), he created a friendlier environment for SpaceX and Blue Origin to thrive.

  • Public markets are broken. This is a version of the innovator’s dilemma. In public markets, shareholder demands for short-term profits limit a company’s incentives to invest in R&D unless the company is confident that the R&D will readily translate into profit-generating products. The problem, though, is that the payoff from R&D is inherently uncertain, both in its magnitude and in its time horizon.

  • Government funding is broken. In the mid-1900s, the U.S. government rapidly accelerated technological development by giving researchers a lot of money, but this came at this price of suddenly politicizing the system. Peter Thiel says that “the problem is that a good scientist is very much the opposite of a good politician . . . A scientist is someone who’s interested in the truth, a politician is someone who has a very troubled relationship with the truth.” In other words, the people who are great at writing government grant applications have replaced the eccentric scientists who have pushed the research.

  • Private markets may not be broken, but they aren’t great. When venture capital began its rapid ascension in the late 90s, the best VCs bet big on moonshot ideas, turning those ideas and transformative technologies into everyday realities. Semiconductors, recombinant insulin and internet search engines have all come to market largely thanks to VC backing. Today, however, VCs have become more addicted to capital-light, metric-heavy software businesses because these businesses are more predictable and have more immediately attractive economics. The attractiveness of software businesses + the recent explosion in the number of new VC firms that need to establish themselves and their track record = over-investment into software companies, at the expense of investing in breakthrough technologies that tackle our biggest challenges.

Those who push back against this opinion usually say that our many of our institutions are still producing massive innovation and that if we do have a problem with innovation, it’s out of our control (last 2 bullet points), anyways:

  • Emerging technologies and deep tech VC. What about self-driving cars, blockchain, quantum computing, CRISPR, space travel, etc.,? Quite a few venture capital firms / funds today (including Peter Thiel’s own Founder Fund) are focusing directly on these “deep tech” investments. The aggregate annual global private investment in deep tech categories has grown by more than 20% a year from 2015 through 2018 to reach almost $18 billion. Total U.S. funding into R&D (including both corporate and government funding) has been up 50% since 2008, to > $600bn.

  • X (formerly Google X) and corporate R&D. Google can do a lot with over $100bn in cash on hand. I’m willing to bet that every top-level executive at Google has read the Innovator’s Dilemma and knows the value of tinkering with and investing in ideas that seem tangential or even orthogonal to their core businesses. Google founded X in 2010 with the mission of building “10x impact on the world’s most intractable problems, not just 10% improvement. We approach projects that have the aspiration and riskiness of research with the speed and ambition of a startup.” That sounds a whole lot like the innovation Peter Thiel is hoping for. Essentially (from what I understand), the way this works is: X thinks of an idea and uses Google’s money to build that idea. If that idea gets big enough, it gets spun out into its own company under the Alphabet umbrella (see e.g., X companies like Waymo (self-driving cars), Loon (Internet-transmitting balloons), and Makani (electricity-generating kites)). X companies are independent from the will of investors and instead respond to directly to Alphabet’s management.

  • We’ve picked all the low-hanging fruit. Step-level innovations at this point are increasingly difficult. That is, good ideas are getting harder to find. Researchers at Stanford and MIT found that while we’ve been throwing more researchers to tackle problems, average research productivity has declined over the last couple of decades across all academic areas of research (including semiconductors in the world of bits and medicine in the world of atoms). Just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort every 13 years to offset the increased difficulty of finding new ideas.

  • Inherently high costs. Building in bits requires relatively little capital. If you want to build new software, any number of tools is readily available on the cloud, and you don’t really need that extensive of an education to learn how to use those tools. In contrast, innovation in the world of atoms usually requires labs, heavy R&D spending, deep expertise in an area. It’s only natural that innovation in software is much faster than innovation in other areas.

In the 1960s, the U.S. witnessed perhaps the most impressive flurry of innovation in its history. Within ten years, the American people, rallying around a common cause to prove American capitalistic superiority over communist Russia, put the first man on the moon. Wernher von Braun, NASA’s chief of rocketry at the time, had thought the U.S. would build a lunar colony and perhaps even send humans to Mars. Since the 1970s, however, no human has returned to the moon, and NASA has since shut down.

I agree that the level of new deep tech innovation in the last 30 years has not lived up to the expectations of the 20th Century and that some of our institutions are to blame. Although I’m fascinated by emerging technologies, my question is what more we can or could have accomplished. That said, I do think there is some balance we need to strike between the speed of innovation and the safety of innovation.

Note that my analysis contains more of the abstract, systematic forces that may perhaps lead to lack of innovation. It admittedly contains less of the empirical markers (see e.g., lack of wage growth) of whether innovation has actually slowed. If you want to look more deeply into this, check out Robert Gordon’s paper on six headwinds the U.S. faces in terms of decreasing innovation.

📚 5 articles

X’s Tidal moonshot. Underwater cameras and computer vision to track and monitor aquatic ecosystems. Very cool.

Waymo raises $2.25bn from outside investors at a $30bn valuation. Yeah, I know I said that X largely gets money from Google. This seems to be the first time any X-related company has money from outside investors, and interestingly enough, it comes after Sergey Brin and Larry Page stepped down as Alphabet’s CEOs and put Sundar Pichai in charge. My guess is that Pichai is doubling down on Waymo’s financial discipline and inviting external investors to hold them accountable to generating returns. I wonder how this will affect X companies and their freedom / level of innovation moving forward.

10k Italian med school students no longer need to take final exams. A move to shepherd more doctors into the work force to treat COVID-19. I largely agree with this. Here, speed trumps safety: The speed with which we need to get more healthcare workers exceeds the marginal safety we get from medical students taking their final exams. My broader takeaway is that national emergencies (similar to combating the Russians in the 1960s, perhaps?) leads us to take more risks (and perhaps results in more innovation). I mentioned this in a previous newsletter with respect to China’s rolling out new technologies in response to COVID-19. A deeply pessimistic take here would be that institutions are in a state of complacency and need negative shocks to the system to re-energize them.

Bird lay-offs. Lime is also purportedly raising money at a $400m valuation (down 80% from its previous $2.4bn valuation). Sad to see. E-scooters are really cool. Running a startup is already difficult enough, let alone responding to an international pandemic.

Lyft teams up with Amazon. Obviously a very kind gesture from Lyft. I’m wondering what the strategy implications are. I’m probably reading too much into this, but maybe some sort of Lyft + Amazon integration could better take on the likes of Instacart, Postmates, and Uber Eats.