I recently read an interesting article in the Wall Street Journal discussing the potential slowdown in innovation, particularly in the technology industry. The point of the article was that although many of the highly valued companies in the world are in tech – Apple, Alphabet (Google’s parent), Microsoft, Amazon and Facebook – according to this article, “their core technologies are decades old”. Technologies like the transistor (the basis of semiconductors) and the Internet itself are 40+ years old. Given the current business environment, many companies are taking less risk on R&D since it is not being valued as highly as it used to in the past.
Traditionally innovation has come from investments in areas that have led to major break through inventions like cellular communication and semiconductors. Even though corporate R&D today is about 2% of GDP, it’s mostly focused on technologies that can be commercialized and brought to market quickly. Although many companies place a high value on R&D, investors’ time horizons have become shorter and shorter, to the point that public companies are worried about their performance 1 quarter at a time.
“We used to say we need public investment in R&D because companies only worry about the next quarter” Arati Prabhakar, director of the Defense Advanced Research Projects Agency (DARPA)
Even private companies and the venture investors who fund them are somewhat guilty. In the early days of venture investing, there were bold bets being made on individual disruptive technologies, some worked, others went bankrupt. Today’s VC’s unfortunately have more of a herd mentality meaning if one of them invests in a particular technology, they all do the same, knowing that only a handful of the companies being funded will survive. There are numerous examples of this – solar, WiFi, GPS, and many more. This is the opposite of funding innovation in a sense, given all the private investors are investing in the same thing.
Since R&D inherently is risky, many companies both public and private have become more risk averse. Some of the larger companies like Cisco, GE and others simply buy the next start up rather than investing in the technology themselves. One reason for this is time to market – it’s sometimes faster to buy your way into the market than to develop the technology yourself. The other issue is of course managing the P&L on a quarterly basis. There are exceptions to this of course. Certain companies with high valuations (e.g. Google, Facebook) are somewhat immune to the pressures most other tech companies face, and, as such, are free to innovate and experiment at will. However, these are exceptions to the rule.
One area that continues to heavily fund innovation is the US Government. In particular, DARPA (Defense Advanced Research Projects Agency) currently has over 200 research projects. In many instances, they partner with private companies to co-develop various technology covering AI, VR, voice recognition, and other areas that have commercial use.
This is an important topic to keep an eye on. The new administration will hopefully reduce regulations and enable tech companies to broadly spend on R&D projects. After all, that is what will drive the future of tech.
The WSJ article can be found here.
BitNavi is a blog conceived by Karl Motey in the heart of Silicon Valley, dedicated to emerging technologies and strategic business issues challenging the industry.
Follow them on Twitter: @bitnaviblog