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Category: Technology

  • The Impact of Technological Change on the Firm Boundary

    In a landmark paper titled The Nature of the Firm published in 1937, then-26 year old economist Ronald Coase addressed the question of why firms exist. “Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, these markets transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-coordinator, who directs production. It is clear that these are alternative methods of coordinating production. Yet, having regard to the fact that if production is regulated by price movements, production could be carried on without any organization at all, well might we ask, why is there any organization?”

    Coase, who went on to win the Nobel Prize for economics in 1991 for his work as the pioneer of the theory of the firm, posited that the transaction costs of doing business in a market economy necessitated that individuals should organize themselves under the rubric of a firm. The world has changed unrecognizably since Coase developed the theory for why a centrally-planned institution like a firm exists in any market economy. The principal forces affecting the size and structure of the firm are government policy and technology. The Coasian lens of transaction costs helps explain why conglomerate firm structures are commonly found in emerging and frontier markets – wherever government policy-making is a powerful exogenous force and the rule of law is weak, it makes sense for firms to integrate vertically or expand corporate scope by entering new industries.

    Over the last 25 years, technology too has had dramatic effects on the nature of the firm. Technological changes strike at the heart of possibly the most important strategic decision made by the capital allocator, christened the “entrepreneur-coordinator” by Coase. This is the decision of what to buy and what to build. Stated differently, technology has always been a critical determinant of setting and resetting the boundary of the firm, and momentous changes over the last three decades have hastened the speed at which this boundary shifts.

    Shifts in the firm boundary inevitably lead to shifts in the value captured by the different actors in an industry. The rise of e-commerce undercuts both offline retailers and legacy brands. “Direct-to-consumer” means that even small, niche brands are able to gain global distribution without having an offline footprint. Retailers, product marketers and manufacturers who were operating in an equilibrium deemed to be settled by the dominance of organized retail are being disrupted by the emergence of new marketing and distribution channels enabled by the mobile internet that have made certain segments far less profitable or even irrelevant.

    The media business has felt the impact of shifting firm boundaries even more dramatically than retail. In the old television entertainment business model, studios created content that broadcasters would licence, offsetting content acquisition costs with advertising. Now, technology has shifted the firm boundary to fuse content production and distribution, where consumers are willing to pay for an advertising-free viewing experience. In print media, content production and distribution that were both controlled by media houses have been disaggregated, as consumers read individual articles rather than bundles curated by professional editors that are distributed and discovered through channels the content producers have almost no control over.

    Applying Coase’s insight, the transaction cost that caused the emergence of a firm in the industry value chain can be reduced or eliminated by technology. When this happens, the “entrepreneur-coordinator” or capital allocator of the firm must act to re-position the firm in the new context. Viewing technology as a force that reduces transaction costs and shifts the firm boundary is a powerful way to anticipate how an industry might change in response to innovation. Armed with this understanding, an investor can make better judgments about which businesses will accrue market power and which segments stand to lose.

    Originally Published: MOI Global

  • Technological Deflation and Structural Reform

    I wrote a piece for Mint on how structural policy reforms have a similar effect to technology-driven deflation. The thesis for this article came from a tweetstorm:

    This is the political challenge of structural reform. The disruptive transition caused by reform means not all incumbents make it into the “new world”, just like technological changes invalidate some of the incumbents with new entrants taking their place. Those affected adversely – whether they are business and asset owners who become uncompetitive, or workers who lose their jobs – will not take kindly to being sidelined.

     

  • India’s Economic Future

    Harsh recently wrote an excellent piece on how India’s economy will grow from the current $2.5 trillion GDP to $12 trillion by 2030. His prediction rests on on two planks: increasing participation of women in the workforce, and technological change.

    The Solow growth model – one of the few economics topics I actually remember something about from business school – takes three inputs, namely capital, labour and productivity growth, to project what the future output of an economy might be. Harsh has made a persuasive case from first principles, on how an increase in women’s participation in the workforce combined with the mobile internet revolution will propel India’s GDP to $12 trillion by 2030.

    These media reports add a lot of colour to what can sound like a routine development – it is anything but that:

    Rural Indian Girls Chase Big-City Dreams

    Latest HRD survey shows girls going to college out number boys in seven states

    Their Postcards For 2018: From 18 places, girls who turned 18 this year speak out

    Harsh’s point on technology too is visible and obvious – Reliance Jio’s entry into telecom is making 4G mobile connectivity ubiquitous. Over the next 3-4 years, we should see 5G (with speeds on the order of hundreds of MB per second) rolled out across India. Consider what this will do for education, health care, media and entertainment. The possibilities are enormous.

    Last year, I had co-authored two op-eds with investor Navroz Udwadia on how India can achieve sustained double-digit growth, by fixing the banking sector and building infrastructure for agriculture. The former addresses the capital piece of the Solow model, the latter helps increase productivity for agriculture through “technological” interventions. The introduction of GST too is a technological step change, the longer-term benefits of which monthly or quarterly economic data cannot capture.

    There are real changes underway in how India allocates capital, in the composition of our labour force, and in technology. These will all mutually reinforce each other and the gains will compound. It can be difficult to see the bigger picture when we ourselves are inside the frame. I feel very positive about India’s economic future. It’s a great time to invest in India and to be an entrepreneur here.

  • India Can Emerge As An Innovation Leader

    Has the Indian startup opportunity been wildly over-estimated? Mahesh Murthy’s article on this question has triggered a debate. Mahesh feels the “copy-paste” approach will not work in India — provided that most of India’s highly-valued startups are simply clones of successful US companies, “much of the growth assumed for our current unicorns is probably vastly overestimated”, he writes.

    History is on Mahesh’s side. Desi Martini tried to be India’s Facebook — it was acquired by HT Media in 2007, but failed to scale and HT wrote off its investment. Guruji.com was a “search engine for India” backed by Sequoia Capital in 2006 — it was unable to compete with Google’s superior technology, failed to scale and eventually shut down. Seventymm, backed by substantial venture funding, tried to be India’s Netflix and also failed.

    But it’s worth asking what’s different between the older crop of companies and the ones we see today. The obvious change is the rapid uptake of the mobile Internet and smartphones since 2008. Most Indians simply couldn’t afford to buy desktop or laptop computers, and pay for a monthly internet connection. Today, smartphones are available for a few thousand rupees and mobile data too is cheap enough, with telecom companies offering data packs and pay-as-you-go plans that allow even the lowest income groups to access the internet.

    The broader story is about the rise of the Indian consumer — as I’ve written before, the US is the natural pioneer for consumer internet innovation because it is home to the world’s largest and most affluent consumer base, combined with an industrial commons in technology and engineering that is second to none. Russia and China don’t compete with the US because they are “walled gardens”, as Mahesh observed, and have very different cultural and language characteristics. In contrast, urban India is predominantly English-speaking and is also aligned with the US culturally. Whether its TV shows, Hollywood movies, English music, fashion or food, as India urbanizes, Indian consumer tastes are becoming more similar to the US, or loosely speaking, increasingly “westernized”.

    The rise of the connected, aspirational Indian consumer who has a growing capacity to make discretionary spends is a robust and secular trend given India’s highly favourable demographics. In this sense, comparisons to the past are no longer relevant. This emerging consumer base will enable business opportunities in India over the next decade — including on the internet — that we cannot even imagine today.

    One of the largest consumer markets in the economic history of the world is up for grabs, and the internet is a new distribution path to service that growing market. Venture funding is empowering first-generation entrepreneurs to create products and services for this new consumer. The global majors recognize the opportunity, and India-based internet companies are betting on it too. Just as Indian companies can’t cut-and-paste a model from abroad and succeed, even global internet companies cannot do a cut-paste job — the Indian market has its own quirks, and achieving success in India requires creativity and experimentation from all players, because everyone is in uncharted territory.

    It can be debated whether valuations in certain cases are too rich, if private equity-funded startups can compete with well-established companies investing off their balance sheets, or whether some of India’s unicorns will be able to continue financing unprofitable growth — but debating such questions is very different from asserting that Indian internet ventures have no chance going up against global internet giants.

    I think the opposite is true — the only country able to compete with the US on internet and technology innovation will be India, because only India has a large, growing consumer base and a comparable pool of technical talent. The challenge for India is to retain this talent at home, and attract talent from abroad. India’s open internet, compared to the “walled gardens” of Russia and China, will prove to be its strength in the longer run. The future won’t be like the past, as the expansion of the consumer base gives Indian startups the scale to build the next wave of the world’s great technology businesses.

  • Why Technology Matters For Sustainable Development

    In his book Zero to One, Silicon Valley entrepreneur Peter Thiel addresses the distinction between globalization and technology. Globalization constitutes “horizontal progress”, he writes, or “taking things that work somewhere and making them work everywhere”; and China is the “paradigmatic example” of growth through globalization.

    Technology, on the other hand, enables “vertical progress”, which Thiel argues is harder to imagine because it means “doing something nobody has ever done”. Moreover, while technology has for many come to mean information technology, there’s no reason to restrict its definition in this way, since “any new and better way of doing things” can be called technology.

    Since the 2008 financial crisis, there has been an explosion of entrepreneurship around the world. Asian countries, particularly India and China, have demonstrated their ability to create high-growth start-ups. Around the world, there are 70 or so private enterprises valued at above $1 billion, and Asia is home to 15 of them.

    But most of these ventures are products of horizontal progress (going “from one to n”, to use Thiel’s expression) and not vertical progress (“from zero to one”). Strictly speaking, even internet giants such as China’s Alibaba Group and India’s Flipkart are not technology pioneers: their well-earned success has been in deploying and scaling a proven business model in their home market.

    So far, China, India and other emerging markets have grown by adopting and adapting technologies and business models from advanced economies. But can economic growth be sustained and delivered through the globalization model alone? Large populations in Asia and Africa aspire to join the ranks of the middle class; bringing sustainability to so many people will take innovation across a wide range of industries, which have so far remained relatively untouched by the rapid pace of change affecting information and communications technologies.

    There is an enormous amount of latent consumer demand across the developing world that will be difficult to meet without innovation. Consider the challenges in energy, healthcare and financial services, for example. Energy and power requirements are so enormous that meeting them with fossil fuel-based technologies would result in serious environmental degradation, as China’s experience is proving.

    In healthcare, large sections of the poor are being priced out of the market for life-saving drugs, and the industry requires a more cost-effective drug development model, as well as new government welfare mechanisms to deliver medicines to the bottom of the pyramid without violating the intellectual property rights of drug innovators.

    In finance, tens of millions of people remain without bank accounts and are cut off from the formal financial system. Rapidly evolving crypto-currency technologies such as the Bitcoin (combined with internet-enabled smartphones) can help widen financial access.

    The scale of need across these and other industries is such that the globalization approach alone is not sufficient: new technology is urgently required. Entrepreneurs have to deliver innovations in multiple sectors, not just ICT-related industries, to be able to make a large-scale impact.

    Finally, it is more difficult for entrepreneurs and investors in advanced economies to deliver such innovations because they are not close to the customer. Increasingly, entrepreneurs in emerging markets will need to take the initiative and attempt to do what nobody has done, because the problems in these markets will be problems that nobody has really solved before. Additionally, these will be problems that advanced economies don’t really have a stake in solving.

    In other words, emerging-market entrepreneurs will need to think of how to go “from zero to one” in myriad industries if they are to deliver sustainable and equitable growth for their large domestic populations. It poses a serious risk for global economic growth, but also presents the entrepreneurial opportunity of the century. Innovators who square the circle will not only create substantial wealth; they will also have done a tremendous service to human society by helping millions transition out of poverty.

    Originally Published: World Economic Forum

  • Bitcoin and Emerging Markets

    In my op-ed for Mint, I write about the potential applications bitcoin could have specifically for emerging markets like India:

    India’s banking and financial services industry has incumbents that are inert, sloth-like and highly risk-averse. The banking industry in particular is heavily dominated by public sector undertakings (PSUs). PSU banks still control approximately 80% of all deposits. The industry is rife with corruption and mismanagement, for government banks know that their owner will always bail them out. But this was not always the case—before Indira Gandhi nationalized banks with the stroke of a pen, over 85% of deposits in India were held by private banks. Since the nationalization of banking, all innovation in the industry has come to a standstill.

    For 2013-14, 63% of the total number and 35% of the total value of retail transactions was electronic. Average electronic transaction value has nearly tripled in four years, according to data from the Reserve Bank of India (RBI), India’s banking regulator. But Indian banks cartelize and lobby their regulator to punish consumers with outdated usage practices totally out of tune with the needs of mobile transactions and electronic commerce. Instead of prodding the banks to improve their fraud detection and redressal systems, RBI simply makes it harder for consumers to transact and introduces artificial friction by way of two-factor authentication requirements so that banks get away without having to improve themselves.

    …

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community.

    An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement.

    Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily.

    Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

  • Horizontal Progress vs Vertical Progress

    In his new book Zero To One, entrepreneur and venture capitalist Peter Thiel writes:

    At the macro level, the single word for horizontal progress is globalization – taking things that work somewhere and making them work everywhere. China is the paradigmatic example of globalization; its 20-year plan is to become like the United States is today.

    The single word for vertical, 0 to 1 progress is technology . The rapid progress of information technology in recent decades has made Silicon Valley the capital of “technology” in general. But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.

    Elaborating on the theme of Globalization as “horizontal progress” versus Technology as “vertical progress”, Thiel writes:

    This age of globalization has made it easy to imagine that the decades ahead will bring more convergence and more sameness. Even our everyday language suggests we believe in a kind of technological end of history: the division of the world into the so-called developed and developing nations implies that the “developed” world has already achieved the achievable, and that poorer nations just need to catch up.

    But I don’t think that’s true…most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. If every one of India’s hundreds of millions of households were to live the way Americans already do— using only today’s tools— the result would be environmentally catastrophic. Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.

    As I’ve written earlier, this is a fundamental dichotomy: while advanced economies have the knowledge base and networks to deliver such innovation, the market for such innovation lies in emerging markets.

    Achieving higher resource efficiency and developing lower-pollution energy sources presents a considerable innovation challenge – and commensurately, an entrepreneurship opportunity. So far, major startup successes that have emerged from India and China have been adept at “globalization” – they’ve taken proven business models from abroad, and executed those models well in their own markets.

    The “technology” successes, especially in non-software or Internet areas, have been few and far between – and there are some very good reasons for why this is so. The question is whether emerging markets can become economically developed by globalization alone. As Thiel writes, this won’t be possible – “globalization without new technology is unsustainable”.

    Something’s got to give – either we have technological breakthroughs that enable sustained economic growth, or growth itself will become constrained. China is already facing enormous pollution and environmental issues – sample these news reports:

    Air Pollution, Birth Defects and the Risk in China (and Beyond)

    The pollution constraint on China’s future growth

    Environmentalism with Chinese characteristics

    China Needs Industry to Enlist in “War on Pollution”

    India is a fair distance away from China – and it’s already “choking on air pollution”. So the question is, where will the innovation come from, and which startups will deliver “vertical progress” to help sustain growth in emerging markets?

  • Energy Innovation For Emerging Markets

    Energy and clean technology investing has proven to be disastrous for venture capitalists. Capital allocated to clean tech fell to less than half in 2013 from the $3.7 billion invested in 2012, and new clean tech-focused funds were able to raise less than $1 billion last year, compared to $4.5 billion raised in 2012.

    High-profile flameouts like Solyndra, A123 Systems, Konarka, Miasole, Better Place and Fisker Automotive have, appropriately enough, made investors very wary. Billions of dollars of equity has evaporated. Successes, such as Tesla Motors and Nest Labs, have been extremely rare.

    Clean tech and energy, once touted as a fecund sectors for entrepreneurship alongside software, life sciences and the Internet, are no longer mentioned in the same league. Risk capital has dwindled dramatically, with prominent venture investors either winding down energy investing teams or retrenching significantly, content only with managing existing investments and not making new ones.

    But why has clean technology blown a hole in investor’s pockets?

    From questions about the suitability of cleantech for the venture capital investing model, to heated debates about the validity of climate change itself, which became a moral basis for the promotion of clean technology, many a rationale has been offered for why clean tech didn’t succeed in delivering investment returns. There is still no clear answer to why companies led by top-notch entrepreneurial operators and commercializing promising technologies met with spectacular failure.

    It could be something more prosaic: clean technology companies and energy innovators have been in the wrong geographical market. Investors have unwittingly violated one of the maxims enunciated by venture capital pioneer Eugene Kleiner, who said; “Make sure the dog wants to eat the dog food.”

    Take any metric – energy demand, fuel consumption, pollution, power generation growth, electrical grid development or water demand. Over the last decade, North American and European countries don’t figure on the list of the fastest growing markets for any of these.

    Yet, clean technology companies have focused almost exclusively only on these developed world markets. The economies that have witnessed the highest growth in energy- and resource-related consumption are in emerging Asia, South America and Africa. Countries and cities in these regions also top global rankings for being the most polluted.

    Does it make any sense to build windmills in Scandinavia or solar plants in Germany and California, when those regions already have relatively low levels of pollution and are fully electrified? As Europe is discovering, moralistic grandstanding cannot become the basis for innovation. This discrepancy represents a fundamental misallocation on a global scale of both human capital and financial risk capital.

    The difficulty of commercializing innovation is compounded thanks to the cultural challenge innovators in developed economies face when working in emerging economies, which also inevitably have very different business climates.

    Frequently, the geographical markets that are amenable to innovation in clean technology have regulatory risks and present far more challenging conditions for building businesses, as evidenced by their low rankings in the World Bank’s ease of doing business study.

    This is an advantage “virtual world” businesses that are in consumer-focused Internet and mobile sectors have over others in that they have to contend with a lot less friction in developing markets.

    Consider China’s situation. Tens of thousands of environmental protests are reported annually, millions of consumers live in extreme pollution and smog is destroying visibility – so it is easier to make the case for higher rates for electricity.

    India’s growth has so far been predominantly services-driven. Manufacturing output has collapsed and saw negative growth because of unprecedented economic mismanagement by the current national government. This isn’t socially sustainable – as India promotes manufacturing and heavy industry to employ tens of millions of its youth, it’s inevitable that problems with pollution and environmental degradation will be exacerbated.

    These are markets where one needn’t be moralistic about why clean technology is required. As the prospect of unlivable communities and unbreathable air looms large even in the most important urban centers, the economic logic for clean technology is self-evident.

    Innovators outside these economies should take them a lot more seriously and find ways to overcome the cultural and business pitfalls of operating in emerging markets. There is also an unprecedented opportunity for inventors and entrepreneurs in emerging markets to build companies in clean technology.

    A reallocation of financial risk capital and human capital towards where the clean technology and energy innovation markets are would go a long way towards solving the world’s sustainability challenge – and in the process, would also deliver far better returns for investors.

    Originally Published: http://navam.in/1hmJSlU

  • Challenging Silicon Valley’s Innovation Hegemony

    For several decades, Silicon Valley has had a near-monopoly on innovation. The Valley emerged out of America’s deep commitment to higher education and scientific research, combined with the American will to maintain leadership in defence technology. Through the second half of the 20th century, China was disastrously experimenting with Maoism, India was embracing Socialism, a fragmented Europe was rebuilding after the Second World War and the other superpower, Soviet Russia, was persisting with its Communist economic model. The Americans invested public and private capital in fundamental research and development, allowing private enterprise to drive economic growth and entrepreneurial small businesses to commercialize publicly-funded scientific research. America invented the venture capital model to commercialize such research.

    It stood out as an oasis in a world where central planning and a state control of the economy was the norm. Owing to a liberal immigration policy, it became a magnet for talent from around the world. Scores of scientists migrated from Europe to America in the throes of the Second World War, including titans like Enrico Fermi and Albert Einstein. Nobel laureates Hargobind Khorana and Subramanyan Chandrasekhar, both of whom completed their college education in India, also made America their home.

    The migration of talent from other parts of the world to America continued through the 1960s and 1970s, with the best talent from China and India making the move, thanks to the economic havoc caused by the destructive ideas of Chairman Mao and Prime Minister Indira Gandhi.

    In this way, America managed to consolidate the world’s best scientific talent. It then gave them a platform and funding to invent and create. The scientists and engineers who went to America might not all have founded technology companies, but through their work at private research labs, government research institutions, universities and startups, laid the foundations for America’s technological prowess that underpins its military and economic might to this day.

    It is important to recognize that this was a historical aberration and cannot be sustained by design — America positioned itself to benefit from the poor choices that the rest of the world made. A reversion to the mean is underway, and the tide has started turning over the last two decades. Besides increased economic and financial integration worldwide permitting capital flows on a global scale, economic reforms catalyzing sustained growth in Asia and the creation of a common market in Europe have fostered economic blocks that can compete with America.

    Sector after sector has become more globalized. Venture capital investing, long the exclusive preserve of a clutch of firms on Silicon Valley’s famed Sand Hill Road and till recently heavily concentrated in the United States, is now unmistakably global. Risk capital flows to places that have talented people pursuing breakthrough business ideas — and sustained global growth over the last two decades has set the stage for a need for technological innovation across economies and geographies. The rise of the Asian consumer is creating opportunities for innovation in all kinds of consumer products. Transplanting ideas from elsewhere doesn’t always cut it with the taste and sensibility of consumers in Asian countries. With increasing consumption, there is a glaring need for efficiency in resource utilization and energy use.

    Challenging economic conditions combined with more stringent immigration policies in developed nations have made it appealing for accomplished scientists and engineers from developing nations to return home, where in many cases there is stronger economic growth alongside a new focus on nurturing and financing science and technology. This has set the stage for venture capital investing in emerging markets.

    America has a long lead, but the rest of the world is catching up. It will continue to maintain primacy in Internet innovation in particular because of the spending capacity of the American consumer. The Internet is a platform for consumption, be it consuming information which allows for digital advertising to flourish or purchasing products through Internet-based retailers. America’s consumption power allows it be the breeding ground for global Internet giants such as Google, Amazon and Facebook, and it will dominate in web innovation as long as the American consumer has clout.

    New York-based venture capitalist Fred Wilson recently wrote about how the Valley’s dominance could be upended if there was a new wave of technological disruption, far separated from the computing and Internet industry on which the Valley has been built. Wilson said that should Silicon Valley miss such a new wave, it could look like Detroit in a few decades.

    Just as a consumer-centric economy allows it to dominate Internet innovation, it also creates an insulation from innovation in non-consumer industries. The world has become a dramatically different place in the last few decades, and such innovations that define the next wave of technological disruption can come from any nation that has a sufficiently large pool of talented people working to solve the big challenges in energy, health care, clean technology and other sectors. That would weaken Silicon Valley’s grip on driving innovation — and further undermine America’s standing as a global power.

    Originally Published: http://navam.in/1omJBAj