The real source of all growth is human ingenuity and entrepreneurship, which often thrive in the worst of times—and are always surprising.
Knowledge is about the past; entrepreneurship is about the future. In a crisis the world of expertise pulls the global economy ever deeper into the past, where accountant-economists ruminate on the labyrinthine statistics of leviathan trade gaps, tides of debt and deficits, political bailouts and rebates, regulatory clamps and controls, all propping up the past in the name of progress.
The crucial conflict in every economy, however, goes on. It is not between rich and poor, Main Street and Wall Street, or even government and the private sector. It is between the established system and the new forms of wealth rising up to displace it—all the entrenched knowledge of the past and the insurrections of futuristic enterprise and invention.
The real source of all growth is human creativity and entrepreneurship, which always comes as a surprise to us, especially in the worst of times, as Rich Karlgaard notes. No amount of knowledge about the present can predict the specific profile and provenance of innovation. From the pits of the crash of 2000, when the Internet and the dot.com siege were famously dismissed as a barren “bubble,” came Google and MySpace to rise up and take all the chips and establish a new Internet economy. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.
Because the U.S. remains the world’s largest economy and still leads the world in business and technological creativity, the current crisis is mostly confined to boondoggles of finance. It will pass rapidly and evolve into a new boom. Emerging is a parallel unregulated financial system based on entrepreneurial creativity and invention.
At the heart of this multitrillion-dollar engine of growth are 741 venture capital firms that traffic in creativity as a business. These firms command $257 billion under management and have launched companies generating $2 trillion-plus in revenues. Complementing the venturers are some 10,000 hedge funds and private equity players, with upwards of $2 trillion under management. Like everything else, the hedge funds are down this year. But collectively losing 12%, they have succeeded in preserving the bulk of their capital. More important, these funds represent a vast laboratory of capitalist ferment and experimentation beyond the heavy hand of politics. (Full disclosure: I run several hedge funds and have financial interests in two companies discussed below—Seldon Technologies and iCrete.)
At some 0.2% of U.S. GDP, the amount of venture capital is tiny compared with the oceans of debt and money commanded by other institutions. But venture funds are fertile and catalytic. Data gathered and tracked by Thomson Financial shows that the revenues of companies created by the venture industry generated 17.6% of U.S. GDP in 2006. For every venture dollar invested between 1970 and 2001, venture-backed companies produced $7.90 in U.S. revenue in 2006.
Let’s acknowledge the risk and the losses, too. The year of the crash saw a massive $100 billion in outlays to innovative companies. Following this unsustainable peak was a fast slide to around $45 billion in 2001 and to $20 billion in 2002 and slightly lower in 2003. Since 2003 outlays have been rising every year, and they reached close to $30 billion in 2007, decisively higher than any year until the 1999 boom. Although an industry of surprises makes many mistakes, scores of the firms supported during the boom are maturing, and a number are ready to go public. With 86 initial offerings, bringing in a total of over $10 billion, venture-backed companies in 2007 achieved record median valuations of $346 million and average valuations of $623 million.
The key to huge growth in technology is structural change. Emerging today are companies exploiting four large intersecting developments under way in the U.S.: “cloud computing,” graphics processing, nanotech engineering and energy-saving construction materials.
Long governing the computer industry has been Moore’s Law, the projection of the Intel founder that chip densities and thus computer efficiencies would double roughly every two years. Industry pioneer C. Gordon Bell has offered a corollary of that law: Every ten years, with computing power rising a hundredfold, a radically new computer architecture is born. That architecture is now coming into place.
The new structure is called “cloud computing,” and it represents the dispersal of computing resources across the Internet into new data centers. Google has reportedly built several dozen data centers for “the cloud” across the globe, and Microsoft recently announced that it would be building 27 new data centers with an average size of 500,000 square feet. Often regarded as a new centralization of computing, the new architecture in fact unleashes huge new efficiencies and opportunities on the edges of the network, impelling vast new tides of traffic across it. The rule for the new architecture is that hardware softens on the edge and software hardens at the core.
At the core of the network, the basic technology is hard: crystalline fiber optics in worldwide webs of glass and light. Most of the global fiber network was laid in the late 1990s before the telecom crash by scores of innovative but ultimately bankrupt companies such as Global Crossing and Flag Telecom. The huge challenge today is adapting Moore’s Law electronics to the gigaspeed hardware of the existing fiber optics global web.
This means a set of new computer architectures feeding an ever expanding set of technologies for software “virtualization.” New companies such as VMWare (now part of EMC) of Palo Alto, Calif. and Xsigo Systems of San Jose are spearheading this move. Amazon is the leader in exploiting it. Separating the function of the system from the hardware that embodies it, virtualization turns the Internet into a general purpose computing system, with huge gains in versatility, speed and efficiency.
This vast expansion of the scale of computing across the network, however, renders Moore’s Law doublings inadequate to meet the need for speed. A key answer is the movement of optical technologies to chips themselves by such companies as Luxtera, a venture startup in Carlsbad, Calif., technologies based on Caltech advances that link fiber directly to chips. Azul Systems of Mountain View is pioneering a combination of Java-based parallel processing with virtualization software to produce multitrillion-bit-per-second performance in data centers.
A further development, even more unexpected, is the advance of graphics-processor devices optimized for real-time PCs and game machines from Nintendo, Sony and Microsoft. Two companies have been playing leapfrog in graphics processors for more than a decade—ATI, now owned by Advanced Micro Devices, and Nvidia, last year’s FORBES Company of the Year. In press conferences and at trade shows from New York City to Shanghai, AMD is showing off integrated computer graphics, virtual world and 3-D special effects capabilities from a young entrepreneur named Jules Urbach. (I helped him raise funds for one of his companies.)
Even more fundamental is the emergence of nanotech, referring to technologies measured in the range of billionths of meters. Inspired by an inadvertently misleading speech by Richard Feynman in 1959, where he envisaged bypassing chemistry to manipulate atoms directly at nanoscale, nanotech for the last half-century has yielded an increasing pitch of hype bearing relatively little fruit. Notable have been improvements in wrinkle-proof clothes, more-resilient golf clubs and more-efficient ways of painting cars, but meeting disappointment has been the idea of transforming electronics and medical care.
This year nanotech is breaking out. The most spectacular invention in nanotech has been the carbon nanotube, famously researched by Richard Smalley and his group at Rice University in the early 1990s. With hundreds of times the strength of steel and conductivity of copper, nanotubes offered amazing properties but no obvious function. At first they struck the industry as a promising new way to make what it was already making: transistors for chips.
Now it turns out that the best application of nanotubes is as a radically superior way to make filters for fluids and gases. Seldon Technologies of Windsor, Vt. has invented ways to tune carbon nanotubes for fast removal of all impurities from water, including viruses and metal toxins, without use of power, chemicals or ultraviolet light. One product is a large nanomesh straw that allows a soldier or a hiker to suck superpure water out of a fetid puddle. Usable in Third World or emergency situations far from the power grid, Seldon’s water filters yield water clean enough that the company is testing it for use in plasma injectable into the body.
Regardless of views on global warming, the need for new energy and building materials is urgent and undeniable, and although most attention focuses on transportation, some 40% of greenhouse gas emissions in the U.S. comes from buildings. Gary Winnick, who led Global Crossing during its glory years before it crashed and burned, has launched a new company called iCrete that addresses one of the world’s most polluting industries, building construction. Relying on a radically new and cheaper way to make concrete, iCrete drastically reduces the amount of cement and associated emissions in new buildings. Ten times as cost effective as existing concrete, it is enabling a revival of architectural innovation in skyscrapers, such as noted architect Frank Gehry’s Beekman Tower in Manhattan. Even as it is used in some applications as a cheaper, stronger, lighter and safer replacement for steel, iCrete technology is being used in the foundation of the Freedom Tower on the site of the old World Trade Center.
Amid the surprising creations of entrepreneurs around the globe, all these technologies depend upon a vibrant and free U.S. economy without oppressive regulations or taxation. Creativity is the ultimate source of all forms of power and freedom.