Navigating the Innovation Economy
Part of the pleasure of reading a good book is being able to share it with friends and colleagues. And because Infosys provides me with this space to blog about topics like innovation and creating smarter organizations, I can supply you with a digest of some of my reading that's relevant to these areas.
In that spirit, I highly recommend Doing Capitalism in the Innovation Economy by William H. Janeway. The author is a venture capital veteran who provides a fascinating glimpse into a rarified niche of the financial world, especially as to how VC firms funded the first modern technology start-ups of the 1970s and '80s.
For more than 250 years, innovation and technology have depended on a combination of three important elements, according to Janeway: the state, the market economy, and financial capitalism. "Through the centuries, the state and the market economy have variously collaborated and competed in the allocation of resources and the distribution of income and wealth," writes Janeway. "And financial capitalism has emerged to exploit discontinuities in the evolution market and political processes, while it depends on those same processes for its prosperity and even at times for its survival." He gives the reader interesting examples of the great booms and busts that the quest for innovation has prompted, beginning with the tulip bubble in 1630s Amsterdam. But it's in the mid-20th century where the worlds of finance and technological innovation became most interesting. "In no sector of the world economy did advances in computing have a more revolutionary effect than in finance," writes Janeway. "Here was a world peopled by smart, rich, and intensely competitive players who were swimming in oceans of data."
Trading desks have long been equipped with computers to record trades and keep records. But Janeway notes that the IT revolution created a whole new world of finance: Computers could analyze data in ways that gave investors new opportunities and new trading instruments. The world of finance we know today was created by the IT revolution of the 1970s. The IT revolution is so complete that I wonder if the world could ever have another dot-com or telecom bubble. That's because high-speed trading enabled by computers and the terrific software that power them have made it fairly easy for just about anyone to seek out and squeeze out market inefficiencies. Long gone are those huge arbitrage opportunities.
But in some ways, that's why we're at the dawn of another technology era. The market is so saturated with high-speed computers aimed at investors, there's a demand for even faster tools that can highlight the talents of even savvier investors. If there's one thing the last couple centuries of boom, bust, and speculation have proven, smart enterprises are already working on solving this problem and meeting this potential demand. For instance, think about the promise of the Cloud over the course of the coming decade. In the old days, venture capital was a lot more predictable in that "the next big thing" was likely a start-up company that could innovate like the established firms - but could be more nimble and do things more cheaply. With the Cloud, identifying potential winners becomes even more of a challenge because more start-ups have access to more computing power.
The fact that the Cloud has evened the playing field is a far cry from even a decade or two ago. Janeway recalls investing in a systems technology firm that they thought could one day be a rival of a giant like IBM. Why? Because, writes Janeway, by the 1990s, IBM's product lines were so profitable that it could not afford to undercut them by pursuing growth opportunities that "carried the much lower margins of computers leveraging open interfaces and open standards."
One of the most interesting chapters on financial history in Janeway's book details the tremendous amount of capital it took to fund the building of the railroads in America. After the Civil War, so much track had been laid on speculation that nobody was sure if they would ever see a return on their investments. One of the side businesses that boomed, however, is something the author describes as the "killer app" of its day: the mail order catalogue of Sears Roebuck. Sears offered small town citizens the opportunity to buy big city goods at rock-bottom prices because of the overbuilding of the railroads. Think about how the Amazons and eBays and Googles turned the dot-com bubble and bust to their advantage in much the same way, says Janeway. The infrastructure existed; someone might as well make a smart business out of it.
That captures the essence of innovation: the ability to see a vibrant, new opportunity in a scenario in which most other people see tapped out. To the innovators, it's the beginning of something big.