01 August 2010

Promoting Innovation

So, in the previous post, I proposed that the only entrepreneurial enterprises worth pursuing are in innovation; more specifically my advice was to not pursue market-share (large, efficient business will beat you at that game every time) and actually do not pursue a market-enlarging strategy either...because you shouldn't have any noteworthy competitors. If you want to start a successful business, you've got to create a market from scratch (or at least revolutionize an existing one.)

Consider for a moment what Apple did in the last decade: although they were already a fairly large computer maker, they turned the nascent marketplace of MP3 players on its head when they created the iPod (and all the subsequent variations.) As early as the mid-1990s, companies like Rio had introduced similar devices that allow cutting-edge young people who already were storing their music collection on their computers to take at least a part of this collection with them without burning a CD. Granted, the Apple brand and marketing machine had a lot to do with its success, but the iPod really was a revolutionary device with its intuitive and even alluring interface, and an equally slick synchronization application, iTunes. This software, in turn, created the first viable, legitimate digital music sales channel. Today it seems that every young person has (or at least covets) an iPod-like device; 10 years ago, hardly anyone would have imagined they need something like this—Apple created a worldwide market out of thin air!

Nearly everyone agrees this type of business (and the type of jobs that go with it—high tech and knowledge-oriented) is what we want for our community, our state, and our country. So, the question is: how do we encourage this as governments and business communities? This is an important questions by virtue of the fact that nearly every state is trying to create at least one “innovation center” to do just that.

The traditional answer to facilitate job and economic growth has always been to lower taxes and reduce regulations. I recently received a campaign letter from Jim Harrison, who is running for a seat in the South Carolina state house; in this letter he follows the standard Republican line: “The only way our state can recover from the recession is to show the world that we are open for business. To do that, we must create a business-friendly tax environment with smaller, less intrusive state government that allows businesses new and old to flourish.” However, it seems that the most innovative industries have located in the least business-friendly, and in fact the most left-leaning communities in the country such as the San Francisco Bay Area, the Pacific Northwest, New York, Boston, etc. Why the incongruity? Simple: the most innovative organizations are small start-ups who—quite frankly—don’t care about these big business issues; they aren't yet making any real money for authorities to tax, and they generally aren't affected by many regulations. Innovators flock to these decidedly blue innovation centers because that's where the talent (both technical and creative) is, that's where capital sources (VC and angel investors) are, that’s where the infrastructure is, and—just as importantly—these locations are just cool places to live: abundant recreation opportunities, vibrant nightlife, etc.

But this all sounds tautological: innovators come to these innovation centers where all the cool people are to innovate. So the real question is: what is the underlying reason that these natural innovation centers exist? I think that what you will find at the heart of each is one or more world-class university. Not the kind with a undefeated football team, but the kind that draws the best and brightest young people from all over the country and even all over the world (note the numerous the foreign names in any list of high-tech startup founders.)

A tale of two states
Let me tell you a tale of two states; California and South Dakota. As you probably know, California is on the brink of bankruptcy due to overspending (in large part on education.) South Dakota, on the other hand, has written in their constitution that the state government simply is not allowed to go into deficit spending. In a traditional view, South Dakota is the good, responsible government, and California is completely irresponsible. However, I ask you: what has South Dakota done recently (and I am not picking on SD, you can ask this of most mid-western and southern states.) Can you name one scientific breakthrough or one high-tech startup that has become a household name from there?

In this regard, California has too numerous examples to list; nearly every major computer hardware, software, and accessories company is based in or started in “Silicon Valley.” Then think of the entertainment industry: despite the fact that many movies and TV shows are now filmed elsewhere, Hollywood is still the undisputed global nexus of the motion picture industry. For all the half-serious kidding from southerners and mid-westerners about how we'd be better off it an earthquake would just set California adrift in the Pacific Ocean, the United States of America would be a pale shadow of itself without California; just in strictly monetary terms, if it were an independent country, California would be the 8th largest economy in the world!

So, in an incongruous, “parable of the talents” manner, I say we should actually underwrite the supposedly irresponsible spending of these liberal states (who actually fuel these powerhouses of innovation) at the expense of the “good son” states that have their financial affairs in order, but due to their conservative policies, do not foster innovation! At the federal level, we actually do the opposite: southern and mid-western states generally receive more federal funding than the federal tax revenues collected from the state’s citizens and companies.

Again, I am not denigrating southerns or mid-westerners; I truly believe there are just as many creative and intelligent people (per capita) born in each state, but as they grow to be adults they feel unfulfilled/unchallenged and chafe under the traditional strictures of these states, and move (often for university studies) to a more inviting locales. So, much like the brain drain experienced by under-developed countries, many states and localities are actually shooting themselves in the foot by being financially responsible!

Now, I am not saying that, to become a center of innovation, state and local governments just have to loosen the purse-strings. In fact I don't have the answer to the question how does one foster the creation of innovative companies. Many communities have built business incubators, technology centers, etc. and may have even filled those offices with mediocre startups, but failed to see standout successes that actually leave those "incubators." Again, a large part of attracting creative and intelligent people is being "a cool place to live." As such, no matter what you do, you're never going to attract the best and brightest to Sioux Falls, SD or Cleveland, Ohio, or any number of ordinary cities across this land. Part of the appeal is geographic, and unless you can build mountains and seas, your community is out of luck. (I suppose things like parks, nature reserves, multi-use trails would help somewhat.) The other major contributor is a harder to define characteristic and again somewhat tautological: a community where the "cool kids" already live. This means things like a vibrant music scene and a range of international restaurants (staffed by actual immigrants, of course.) These are the type of things that can't be created in a top-down fashion, but certainly can be quashed by ill-conceived planning policies and various incentives & disincentives.

[UPDATE April 2017] At the moment, I live in Silicon Valley and—in reviewing this post 6+ years later—have to agree with my past self’s assessment. One very important ingredient, which I only mentioned briefly, is money—specifically the venture capitalists (VCs) who make generous bets (6-7 figures) on startups, hoping to hit it big on a very successful one. Along with this goes the valuable advice and encouragement this place is oozing with; everyone has FOMO (fear of missing out) and therefore don't easily dismiss ideas.

I just heard an excellent and relevant story on the public radio show Marketplace called “Will your city be the next tech hub?” that I recommend listening to.
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