Three Wheels of Technology Wealth Creation
The January 2015 Fortune article by Erin Griffith and Dan Primack, “The Age of the Unicorns” created quite a stir in the technology venture community. Uber, the current poster child is valued at US $50 billion. It’s no wonder that the lure of the entrepreneurship is so strong and so much emphasis is placed on innovation and entrepreneurship as engines of growth.
At the end of the World War II, the US had the world’s largest industrial capacity supported by significant government investment in research and development. Outside of this national effort, private equity funds, in particular VC funds were turning their attention to technology companies. By the late 1980’s ICT companies, spurred on by the success of Silicon Graphics Inc., founded in 1982 (IPO 1986), were actively seeking funding from the VCs. There was a significant growth in Private Equity (PE) funds starting in 1990 which was finding a good return through IPO exits and funds were being actively recycled.
The US, arguably the wealthiest and most powerful nation in the world today, has a population of 319 million, a GDP (per-capita) of US$37,800 and a literacy rate of 97% based on World Bank data for 2014.
In contrast, Malaysia has a population of 29.9 million and a per-capita GDP of US $10,933. Does this huge difference in market size impact the business potential? Definitely! Ask any entrepreneur. The larger the market the more opportunity to find a customer that will value (and pay for) the service or product you have. Naturally therefore, the larger the market opportunity, the larger the profit potential which translates to a much higher valuation!
Small countries are at a disadvantage and hence the importance of open regional groupings like the European Union. Malaysian companies are looking to the ASEAN market - 625 million, across 10 countries, covering 4.4 million square kilometres but this will be a difficult market to crack as it is not a homogenous.
The availability (and harnessing) of technology, of talented individuals, market interest for new solutions and access to funding drove the growth of US technology companies. Clearly these were strong drivers that favoured US companies, but there were others. A strong R&D base was critical. There is a huge commitment to R&D from corporations as a means of creating new products. These are other factors that came into play with we call, the Technology Wealth Creation model.
Let’s look at a major driver of R&D and innovation – funding. Malaysia’s expenditure as a percentage of GDP (1.14% and 1.63% in 2012) is comparable to that of the United Kingdom, but in real terms, their expenditure on R&D (2013) at £28.9 billion is equivalent to RM183,000 million - 17 times that of Malaysia! Besides expenditure on R&D, the critical ingredient is the quality of the researchers, and it is in this area that the US (2.73%) has a big advantage – the best brains from around the world compete to work at the world’s best universities.
International students in the US account for 70% of the full-time graduate students (Master’s and PhDs) in electrical engineering, 63% in computer science, 60% in industrial engineering.
The Three Wheels of Wealth Creation (3WWC) are; Technology Development, Business Creation and Wealth Creation.
Working in harmony, the 3WWC, promote the development of appropriate technologies, encourage and support the development of early stage companies and finally reward the participants with wealth from IPO’s and acquisitions – which in turn frees up funding and support to keep the three wheels in motion.
The willingness to take risk is a critically important factor across all the wheels. At the creation stage, founders take risks, mostly with money from others but they are comforted by the fact that should they fail - there is no stigma attached to failure – they can go back to the job market, or start a new venture! This is a unique feature of the US landscape, particularly in Silicon Valley. What is equally interesting is the willingness of early customers, who take on unproven products and solutions. Why are they willing to take this risk? Well the answer is pretty simple; the companies are constantly looking for a competitive advantage and generally companies are privately owned and managed by a professionals, who are measured by their company performance.
Much is spoken about the need for passion in business creation, or really in most endeavours. It is therefore pertinent to recognize that competence is far more important than passion. Ben Horowitz of Netscape fame, earlier this year gave the commencement speech at Columbia University which he titled, “Don’t Follow Your Passion”. He said, in reference to the quality of the contestants in the show American Idol, “just because you love singing does not mean you should be a professional singer!” One needs to have a sense of realty and self-awareness.
Finally, with Wealth Creation, the market (institutions and individuals) are willing to buy shares in new companies, often at huge valuations. Some companies show earnings performance, many don’t. A few companies survive, others get acquired, fortunes are made and money is recycled. Not just in new companies, but in research grants and endowments to the leading universities.
Many countries around the world have launched digital and technology support schemes expecting that wealth creation will happen. Without the effective working of the Three Wheels of Wealth Creation (3WWC) are; Technology Development, Business Creation and Wealth Creation, prospects of success are dim and so shouldn't be holding our breath.
[The full article is published on Digital News Asia, December 16, 2015]