GigaOm - July 7, 2013 -- By Yatin Mundkur, Guest Contributor -- What do General Motors, Intel, 3M, Johnson & Johnson, Apple, Google, Facebook and Twitter have in common? Beside being textbook American success stories, they are all torchbearers of true, groundbreaking innovation – whether it’s technology, supply chain, business model or any combination of those. But more than that, they are all legitimate creators of new industries.
Yet when you look at the relative contribution of these companies to U.S. GDP, to U.S. employment numbers – and, especially, to perceived innovation – stark differences arise. The last three are surely the perceived leaders of innovation today and garner much more coverage from the popular media . But they are laggards when it comes to meaningful employment generation and fueling large-scale economic growth. And it’s those two factors that are critical for stimulating our economy and getting us on a path toward a more economically stable future.
I believe Silicon Valley needs to jump in and extend its innovative spirit in sectors that impact large portions of our economy and are critical to getting us out of the recession. More specifically, it needs to foster a breeding ground for white space innovation. That means ones involved in large markets; that there is differentiation based on fundamental innovation; and there is potential to reinvent established industries – or also creating new ones.
All innovation ≠ employment growth
Digital media marketing, the primary source of monetization for social media companies, generously adds up to $500 billion in annual revenue, and employs about five million Americans. That’s significant for sure, yet it’s a small fraction of the $15 trillion U.S. GDP. Once we subtract these high-profile companies from the equation, that leaves $14.5 trillion of the GDP, some 150 million Americans in the work force, and a vast majority of the commercial sector unaddressed.
So what about innovation in all of those other industries? Who is financing their reinvention? For the U.S. to be competitive in the rapidly morphing global economy, we need to innovate across many sectors of the economy, and not just media, social and mobile.
The periods of sustained economic growth in the U.S. during the 20th century – the 1920s, 1950 to 1970, and the 1990s – were all spurred or supported by broad-based innovation across many industry sectors:
By contrast, innovations in social media – undoubtedly the hallmark of Silicon Valley-based innovation over the past decade – impact a very small sliver of the economy. And despite high growth rates within this sliver, they simply cannot help fuel U.S. economic growth on a broader scale.
According to the Bureau of Labor Statistics, two of the top three job creators through 2020 will be in healthcare and construction. In fact, juxtaposing these industries with social media and advertising, the ratio is stark: 10 jobs to one.
The last recognized innovative period in construction, using patent grants issued by the USPTO as a proxy, was back in 1968. Since then, while construction certainly has innovated on the use of new materials and automation of “heavy lifting,” there is much room for improvement. For instance, in the U.S. it still takes 10 years to build highly complex structures, like hospitals and apartment housing, with cost overruns that end up two times higher and operating costs that are monotonically increasing.
This costliness and mismanagement translates into increased healthcare costs (in the case of hospitals), inflated real-estate values and, oftentimes, structures that are not prepared to handle innovative medical equipment. An infusion of venture capital into the application of technology in construction will lead to better designed projects that increase workplace efficiencies, as well as construction processes that reduce time to build and overall costs.
Pharma is another sector that has been struggling of late. The stellar performance of Merck and Pfizer from the ’60s to the ’80s is now distant history. Instead, Pharma has more recently become known for a suffocating lack of clinical success. The biotech revolution in the ’80s was led by a once little-known biotech in Silicon Valley, Genentech. We project the next major innovation will come from similar, unforeseen roots. (Disclosure: My firm, Artiman Ventures, holds investments in several health science-related companies).
On average, it takes over a decade and more than a billion dollars to bring a single new drug to market. Or does it? The clue lies in the average part. Because of the trial-and-error approach to experiments deeply ingrained in the industry, the total cost of each successful drug must amortize the cost of all the unsuccessful ones. Disruptive innovation in an industry like this would do more than provide an opportunity for a far better ROI. Innovation in healthcare also changes the way we care for ourselves and our loved ones, which is an ROI based on quality of life.
Disruptive innovation in large, established industries is critical for stimulating our economy. Construction and healthcare may not be glamorous, but their GDP impact relative to social media and advertising is stark: 30 to 1.
Silicon Valley can fuel this shift by focusing on white space investments to drive innovation in large industries and markets that impact the remaining $14.5 trillion of GDP, which represents over 96 percent of American economy (and coincidentally, 96.7 percent of America’s workforce). In my opinion, that needs to be the “new normal” in Silicon Valley.
Yatin Mundkur is a partner with Artiman Ventures, focusing on technology and medtech. He is currently on the boards of Cellworks, Crossbar, Looxcie, Pricelock, Prysm, Virident Systems, Xambala, Yantra and zSpace.