The Innovation Ecosystem
If I were a venture capitalist in the year 65.5 million B.C. and had to make an investment choice that would change the future of planet Earth, the conversation might go something like this:
Dinosaur: "We're the largest, most dominant species on the entire planet. If we die, 75 percent of the world species die. We need your investment to keep our species going."
Mammal: 'We're the little guys. We don't have much to show for ourselves yet, but we're super adaptable, future-oriented, and can survive a catastrophic event. We're the right team to be the next dominant species."
As a VC, I'd invest in the mammals. Not because of 20/20 hindsight, but because of Charles Darwin's wisdom: "It is not the strongest of the species that survives, nor the most intelligent, but rather the one most responsive to change."
With that in mind, Thorstein Veblen in 1898 first pondered whether the rules of natural evolution can be applied to economics. Current events prove this to be more relevant than ever.
Right now, the U.S. Congress and economic experts are trying to avert a mass extinction of U.S. auto companies. Their rationale: Such extinction would destroy more than the industry, it could collapse our economy completely. Determining the right path is not easy, and either way the results will be painful.
But at this point, I'm interested in a different question: How can we prevent it from happening again?
Although I am the director of a leading university institute for innovation and a serial entrepreneur myself, in some ways I've learned as much about business lifecycles by observing nature on my weekend mountain bike rides.
What I've seen is that a thriving ecosystem, whether in nature or economics, emerges from an evolutionary culture that nurtures diversity, doesn't artificially pick "winners," and embraces failure early and often.
Nature resists monocultures - a single form of life - because of its heightened vulnerability to change. Just take a ride through a "managed conifer forest" in Oregon, which features a single species perfectly cultivated for timber harvesting. According to an analysis by Oregon State University and the U.S. Geological Survey, this lack of biodiversity has caused a severe, sustained epidemic of Swiss Needle Cast in Douglas-fir populations. A diverse forest, on the other hand, would be able to bounce back, helping the threatened tree adapt to the new threat.
Like in nature, diversity keeps the business ecosystem healthy. Innovation starts with the "understory" of the economic food chain: the entrepreneurs. In this group, you'll find the diverse and future-oriented thinkers that will advance our economy despite times of struggle. This group gives us the mutations - the radical changes that enable groundbreaking ideas to enter the ecosystem if they are worthy.
Big companies play an important role, too, in this healthy, diverse business ecosystem. They help amplify - through acquisition, licensing, or even copying - the impacts of successful ideas. But simply depending on large monopolies creates a dangerous susceptibility to economic stress like we are experiencing today.
Just as dangerous as cultivating a monoculture is picking a "winner" prematurely.
In the recent green energy debate, for example, the U.S. chose to subsidize corn ethanol as the winning new clean fuel, giving $7.0 billion in subsidies in 2006 alone. But according to an April 2008 World Bank report, world food prices have increased by 75 percent due to increased production of biofuels. Ethanol burns dirtier than gasoline, and it's no cheaper.
Through premature decision making, have we thwarted cheaper and cleaner competitors?
What we should have done, and still can, is to encourage innovators developing a wide range of fuel-alternatives including wind, algae, solar, methanol, and so on. Government should make available research funding, infrastructure, education, incentives, and regulations for the outcome we want, and let the market decide.
As evolutionary biologist Leslie Orgel once remarked, "Evolution is cleverer than you are."
We've heard about the five mass extinctions in the history of the Earth. What we don't talk about is that 99.9 percent of species that have ever lived are now extinct due to constant natural selection. This "background extinction rate" of species since life began has averaged 10-100 per year.
Death is inevitable in an ecosystem, and furthermore it can be healthy. It's this brutal process of failure that prunes out the weak from the herd. And as my friend John Seely Brown likes to say, it's these failures that form the fertilizer for the next generation.
Global Crossing may be the most striking example. In the late 1990's they had built an extensive IP-based network connecting four continents, 27 countries and 200 major cities. Despite their spectacular bankruptcy, we have a global information infrastructure unimaginable a decade ago.
But new innovations often cannibalize old products, just as digital photography did to film and the personal computer to the minicomputer. Economist Joseph Schumpeter described this process as "creative destruction," where entrepreneurs often destroy existing markets but are the foundation for long-term economic growth.
This scares many established companies that have a great vested interest in the status quo. But those corporations that can successfully adapt and embrace the process of creative destruction will help avert mass extinctions and today's "too big to fail" scenario.
Henry Ford would have concurred. In 1934 he said, ""I made my fortune when I had nothing to start with, by myself and my own ideas... If I lose everything in the collapse of our financial structure, I will start in at the beginning and build it up again."
I've come to realize that we cannot and should not prevent the ongoing failure of individual corporations. But while it's easy to say "let them fail," we must actively support the entire innovation ecosystem for the sake of evolving our economic future.
It is ironic that the mass extinction of the dinosaurs eventually turned into petroleum, which has in turn fueled the internal combustion engine and today's failing auto industry. I look forward to seeing what's today's failures will fertilize.
Krisztina "Z" Holly is the Vice Provost for Innovation at the University of Southern California, and Executive Director for the USC Stevens Institute for Innovation. She has a dog named Darwin.
Follow Krisztina Holly on Twitter: www.twitter.com/krisztinaholly
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Nice article. Now, let's throw in some missing factors.
The Big Three fail. Three million jobs lost. What are the capabilities of "innovation ecosystems" to replace those jobs? Eventually, they could.
Next? Education. Despite the enormous effort, education in America is dismal at best. Public education, as currently mismanaged by bureaucrats, should not be near the bottom of industrialized nations.
Now, capitalism is all about creating mono-cultures in business. Winners take over and destroy their competitors. This eventually leads to an oligarchy. After that, individuals who control entire segments of the economy by whim alone. Like central planning committees of The Soviet Union.
You are measuring wealth in abstract. Innovation has to be coupled with a rebirth in manufacturing. After all, what is the use of designing a new gadget, only to have it manufactured overseas?
I can see it now. Inventor patents new gadget. Inventor is paid the princely sum of $20 million dollars by Thai company. Gadget manufactured in Thailand. Gadget exported to America. Where consumers buy $100 million dollars of gadgets. Company makes five-percent profit. The rest of the dollars go to worker's pay, pension, health care, transportation costs, etc. Most of those dollars go to...
Thailand. The inventor gets $20 million. America pays $100 million to Thai company in Thailand for gadget. Thailand becomes wealthier. The American taxpayer owes another $100 million to a foreign entities.
[followed from the previous one, sorry :) ]
How would it look like?
- Empower innovators to develop a standard system of interchangeable car parts, something that makes car assembly as easy as connecting plug&play devices or building with the LEGO blocks.
- Be ready to outsource all the mass production of the parts. Remember, the US can never be again competitive in mass production with this level of wages until robots do not take over all factories - but then again, where are the jobs?
- Import the parts and put together cars in boutique factories. Let thousands of DELLs of the auto industry thrive. Build personally tailored cars from the purchased parts and build the visuals around the with 3D printing. Impossible? Ask the technology innovators - even better announcing a serious competition - and they will deliver the solution. Not one, one thousand.
- Keep some facilities of the fallen Big Three as R&D grounds and retail centers - something like an Amazon for the car parts.
- Re-think the role of gas stations (if it is true, that there are some 100.000 of them, they employ roughly the same amount of people, as the auto industry itself), make them possible to become an universal service / maintenance / rent&ride point.
Agreeing with Krisztina, I am more than curious, what technology innovators would do with the auto industry, when they are empowered properly.
A little bit more in depth about all this:
http://kop
Outsource? The wealth of a nation is, ultimately, determined by it's ability to produce real wealth. The Information Society turned out to be nothing more than a bunch of administrators at various companies keeping records. While information is an integral part of any business, industry, or economy, it does not in and of itself produce real wealth.
The reverse side? Information represented by innovative new products can create wealth. Only wealth for your own country where you manufacture the product.
Manufacturing produces finished goods that can be sold to foreign markets. The foreign currency, thus acquired, is then used to pay down our debt caused by buying foreign goods. And, the foreign currency is used to buy back and remove Federal Reserve Notes from circulation.
The problem with finance, Western style, is that it creates imaginary wealth using paper, accounting tricks, inflation, and interest rates. Among other imaginary wealth creation techniques. You can make "money" trading stocks. Unless you cash out and buy something of value, that wealth is imaginary.
If we added up the interest owed on every dollar printed or electronically created by The Federal Reserve, would we have enough money in circulation to pay off The Federal Reserve? Probably not. Remember, the American taxpayer is the sole guarantor of every Federal Reserve Note in existance (printer or electronic). Not only to you have to pay back that dollar, you have to pay it back with interest. Only, the interest has not been printed (or created) yet.
I think we agree more, than it seems. I am for keeping/creating jobs in market segments, where profitability is high. And outsource everything, where profitability is so low, that even a small trembling of the market environment pushes it into the red. Or causes it to collapse entirely.
And it is the both ends of the process, that is highly profitable: design (if you develop a new standard, modular system, you can harvest on every and each pieces produced according to it) on the one end, and final product manufacturing, tailoring to individual needs on the other.
Take a look at the computer industry: how many chips and computer parts are actually built in the US? Close to nothing. Yet hardware business is one of the engines of the US economy, being at the two most important ends of the process - design and final product delivery.
I suggest to empower innovators and innovative entrepreneurs
1.) develop a new, modular system for cars
2.) build a flexible, highly competitive business environment around it
3.) focus on those parts of the process, where profitability is high AND outsource everything else
Sorry for linking again my post, but a comment field is quite limited: http://kop
And one more point: a well engineered scene can prohibit the birth of monopolies
Good point. Overstepping the simplified answers: "bailout to keep jobs" OR "let them fall and let natural selection a go", Krisztina suggests active support to the innovation ecosystem in order to build a new economic future. (The old future has just gone down in shredders.
I cannot agree more, that even with massive bailout nothing can be expected from the Big Three companies. Even if they wanted to change with all their intents, they are prisoners of their earlier success, and can not deliver a change deep enough in this situation.
My take on the issue is that we should re-engineer the whole scene. Make the system itself an ecosystem open to innovation, that can reach the obvious goals:
- keep / create jobs in sufficient numbers to complement the jobs lost,
- kill oil, put cars on renewable energy source in the shortest time,
- make them more safe,
- lessen the ecologic footprint of each mile of transfer.
I think, this is one of the rare moments, when governments should take a pro-active role in the business world, but only to the extent they help bring about a new ecosystem, and then let the business - thousands of competing/
We need to change the fitrness function to support innovation. I suggest we start with culling some of the large predators that have been dictating their own fitness function for far too long.
Large predators have a habit of falling into the Hobbesian trap; they are threatened by any innovation other than theirs and they have a habit of crushing threats in their inafncy.
Hi, I'm Mikesay making my first comment on Huffington Post. - Krisztina makes good sense in her article. I like her willingness to go way back in history to take a look at evolution. If we look back two or three million years we will realize that humans invented a concept very early on - they decided that "cooperation and sharing" was necessary for survival. That concept was developed when we had brain sizes 1/4 the size of our current brain. Cooperation and sharing was basic to human survival for 99.9% of our time as a seperate species. Then economics was invented by humans. It was needed to serve those who wanted to seek and preserve priviledge. Political economics is a diseased man made system - Since the very beginning, it has been ravished by two uncontrollable diseases - greed and corruption. The human survival system has gone from self sufficient small groups cooperating and sharing -- to -- subservience for survival for all but a priviledged few. A new society can be built on P+IE power.
If youwere a venture capitalist in the year 65.5 million B.C. and had to make an investment choice that would change the future of planet Earth, the conversation might go something like this:
Dinosaur: "We're the largest, most dominant species on the entire planet. We have figured out how to make huge amounts of money by packaging virtually useless investments into things we sell to dupes for billions of dollars. Invest in us"
Mammal: 'We're the little guys. We don't make much money, but we do make things that people need and/or want, and actually provide employment which in turn drives the rest of the Jurassic economy. Invest in us."
You would have picked the dinosaurs. After they had looted the Jurassic economy and left every other business on earth in dire straits, you would have said "We have to bail them out, because they are the innovators
One good fairy tale deserves another.
Though interesting as an abstract analysis, this fails to take into account a couple of the major arguments for the bailouts:
* When we're starting to go into a depression is not the ideal time for massive layoffs;
* A large and high quality heavy industrial base may be essential to maintaining US military power. The US needs to maintain a highly diverse economy with a good infrastructure and strength in key kilitary sectors, in the interests of its own survival.
Also, living in Silicon Valley, I can report that the VC;s are not rushing to invest in startups at this point. The depression affects startups as much as it affects the dinosaurs.
So a useful analysis of the problem has to go beyond the evolutionary metaphor.
Social Darwinism is a failed economic theory, one that went out of favor with economists after the great depression. Your arguments sound a lot like herbert hoover's..
I think n the most part, this is allowed to happen.. with the exception of the larger companies or those well connected to various politician
Kevin, How is SELECTIONISM (caps yours) different? Sorry, but I can't seem to find much about it except for some stuff related to selectionist theory of language selection. I thought it was a great metaphor. Unless you're taking issue with the fact that ENRON demise was self-inflicted. But then wouldn't that strengthen the case for the evolution metaphor, as they wouldn't have needed to hide their insolvency if they were a strong company capable of survival. Your thoughts?
It would be a lot more instructive to actually look at what the auto industry and related industries are, developments, domestic and foreign, over the last 40 years (tech, trade, oil prices, political decisions, executive pay, unions, etc.) that have led is where we are. Determine the proximate cause of the problem (Wall Street crash and global downturn). Look at what other countries are doing (helping their industries. And then develop a considered policy that fits U.S. national interests.
We have more to learn from Japanese, Koreans, and Europeans here than from mountain biking through the brush. And then there is China and India. Japanese transplants don't want Detroit to collapse. It would hurt them and their suppliers, too.
The problem with ethanol subsidies isn't picking winners and losers. It's doing it very badly.
Industrial policy works if done well. Our problem is ideology (people who say such planning doesn't work and then do their best to make sure of it) and special interests. Used to call that the "iron rice bowl" in Asia. They have sort of gotten over it.
How about failing nations? Do you apply your theory there, too? That's what the US is right now.
This is one of the best articles I've ever read on HuffPo, and I work in the automotive industry! I agree, they've become dinosaurs and the only thing they have left is sheer size. It's really heartbreaking to watch an institution go through this, but all the union's rigid guidelines, coupled with massive management corruption, have just made these companies unable to be "light on their feet". It's like tyring to turn an aircraft carrier around in a 1/8 mile radius. It just can't happen.
It's interesting that, if the banks had been allowed to fail as capitalist and 'evolutionary' theory prescribe, those that followed the 'old school' philosophy of sound management would be the ones left standing strong (and the automakers wouldn't have been forced to appeal to the government).
If there had been decent regulation, restrictions on leverage, and less "innovation" the crash could have been avoided in the first place.
Mortgages - 30 year (or whatever, why not 50 year?) fixed with boiler plate language, issuer holds all or a large part of the mortgage, good underwriting. Then few problems. My father's local banker knew how to do it. Wall Street MBAs were just too smart by half and we let them get away with it.
A lot of our problems could be solved by simplicity and common sense. Don't see it heading that way as much as it should. Complexity and lack of transparency are not necessarily virtues.
One way to bail out the US auto industry would be to tie interest payments to massive improvements in fuel efficiency of all the vehicles that the recipients produce. That won't happen it would involve these firms to accept some innovative thinking, more importantly it would take US law makers to do the same....
Finally, you are quite right, it does not do to pick winners. Using corn to make ethanol and burning it in inefficient automotive engines is like buying expensive furniture and using it to heat your home. That is bad enough, but if you're using an inefficient fire.... which is where the fuel efficiency point above comes in to play.
I've written a lot about the effect that corn to make ethanol has had on food prices over the course of 2008. Corn ethanol effectively reduces the size of the US crop by 16%, through losses as carbon dioxide in fermentation and the actual ethanol, off set by distillers grains.(as
The way ahead is to let a thousand biofuel flowers/al
You must be logged in to comment. Log in or connect with
