Economic development is just plain hard work. It doesn’t come from adopting the flavor of the day or the latest idea. It comes when a region focuses its efforts on creating business and structural advantages to (i) produce high value- added products that are unique and (ii) are not replicable elsewhere. Economic development requires establishing a long term infrastructure that creates a community and livelihoods for its citizens. It takes time to do properly.
I am reminded of this most of all when I look at our region’s approach to economic diversification and technology startups. When I was an international hedge fund trader years ago, my colleagues and I took comfort in the phrase “the trend is your friend.” Nothing was easier for us than jumping on a market trend and riding the momentum. As long as we jumped on early, and jumped off while others were jumping in, we made money. It wasn’t our job to think long term – it was our job to find short term momentum in markets and benefit from it. These days, momentum trading dominates not only the financial markets but also the expectations of investors generally. Momentum trading has fed into the venture capital industry too; venture capital floods into startups[V1] in industries that promise momentum towards a quick exit. This has resulted in a skewing of which types of startups get funded, and in what industries entrepreneurs looking for quick riches start companies.
Looking at digital media startups or cybersecurity startups as the path to regional growth is seductive but it’s a view that confuses current momentum driven by the venture capital market with long term economic development opportunities. It’s easy to go with the prevailing trend, and as is the case with every momentum-based trend, some people will make lots of money. But the real question people should be asking is this: “Why can you start a software company with $25,000 and a case of Red Bull”? You can do it because software is becoming a commodity. As a member of the faculty at one of our region’s leading business schools, I can tell you that it’s a settled principle that when an industry is based on a commodity product, the way to succeed is through scale and controlling costs. This explains why so many software startups now develop technology in emerging economies and why the Internet (mobile and fixed) is becoming so concentrated in Google, MSFT, Comcast and a few others. It also should be a warning that when an industry commoditizes it becomes much harder for startups to become large independent businesses – they cannot acquire sufficient profits to be sustainable.
As I read about the changes in DOD Budgets, announcement of DC-government funded digital tech investment, and calls for economic diversification, I see a worrisome congruence in thinking: people are mistaking transitory momentum in startup activity for an enduring long term opportunity.
Our region has the highest concentration of scientific funding and researchers in the United States. Our nation’s federally funded R&D has fostered and funded the development of every important technological trend in our nation since the creation of the transcontinental railroads. Countless innovations that you know about (Siri, GPS, semiconductors, and biotechnology) and some you don’t (driverless cars[V2] , artificial limbs, bendable metals, and proteomics) are being developed every year under the guidance of our national security agencies. When new technologies come to market they are unique and command high value added pricing. They are not commodities. They become the backbones of new industries, and very, very rewarding for the entrepreneurs and regions that foster them.
Working to create new industries is much harder than following momentum, but ultimately it is more profitable. By focusing our region’s efforts on mining the technology and innovations currently being funded by our national security agencies, we create the possibility for our region to be the leader in the establishment of new industries, with high value added jobs and startups. Much of the technology that will shape the next 30 years of our nation’s economy is being developed in our midst. Shouldn’t we focus on commercializing it?