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Tom Snyder: Innovation requires investment

Tom Snyder: Innovation requires investment


Last week I did some mathematical analysis showing that the vast majority of entrepreneurship and startup activity is happening outside of the traditionally recognized technology hubs. Cities like San Francisco and Seattle get a lot of press in the media mainly because of the money being invested in them, not because of the technology happening there, which in fact represents only a small fraction of all startups.

But another reason these cities are so highly rated is because they're home to the headquarters of some of the world's biggest technology companies. After all, you'd think that companies like Google, Meta, Apple, Amazon, and Microsoft are leading the world in developing new technologies, right? Well, not quite.

You might be surprised to learn that the biggest of the big tech companies have very little real innovation in-house: Nearly every major tech product brought to market by an established tech brand had its origins in a startup that was acquired by the big tech company.

Consider Amazon's Alexa.

In October 2011, Apple launched the iPhone 4S with its revolutionary new voice assistant, Siri. Realizing the power of natural language interfaces in technology, Amazon had to develop a competitive response. Since Amazon did not have the capacity to build advanced NLP technology on its own, in 2012 it acquired UK startup Evi, which was developing a voice-activated search app. In 2013, Amazon acquired Polish speech-to-text startup Ivona Software and combined it with Evi to launch Alexa a year later.

But the story of Alexa is one of catching up with the competition: what was the story behind Siri, the OG?

After all, Siri wasn't even innovated by Apple. In fact, Siri was first released in February 2010 by Siri, Inc, a mobile phone software startup developing a voice assistant. The startup was an offshoot of a DARPA project that brought together more than 300 researchers from 25 universities around the world to innovate on core voice technology between 2003 and 2008.

Two months after releasing its voice assistant, Apple acquired Siri Inc for $200 million. During the same period, Apple acquired mobile chip company Intrinsity (April 2010, estimated at $15-35 million) and mobile advertising platform company Quattro Wireless (January 2010, $275 million). The two companies spent about 18 months integrating their complementary technologies into the iPhone 4S to create a unified platform experience.

From a technology perspective, there has been little real innovation at Amazon or Apple. Both companies are adept at identifying market opportunities, buying solutions from the startup world, and then integrating and expanding them. Apple paid roughly $500 million in total for the core components of its Siri ecosystem, and spent millions more on marketing. But they didn't develop a single piece of technology on their own.

Amazon didn't invent the name Alexa. The name came from Alexa Internet, a web analytics company that Amazon acquired in 1999. [Note – Alexa is used for the sound of the X when spoken, which is more easily identifiable by the voice recognition algorithms than some other consonant sounds in spoken language].

Let's look at another home technology brand with a big presence in RTP: Cisco Systems was a $70 million company when John Chambers joined the company. During his 20-year tenure as CEO, Chambers oversaw 180 acquisitions, growing the company to $47 billion in sales, the vast majority of which were technology acquisitions (the rest were buying direct competitors to gain market share).

I had the opportunity to join Chambers as a speaker at a recent AI event. Since retiring, Chambers has spent most of his time investing in AI startups. During his career at Cisco, Chambers has followed a simple strategy: innovation through acquisition is far more profitable than internal development. As an investor, Chambers is now dedicated to building the next generation of future acquisitions.

Let me share some personal experience: I worked for some 20 years in major technology companies, including Ericsson, HTC, and Sony (in a joint venture with Ericsson), primarily in new product development and technology exploration.

These are proud brands known around the world that have launched iconic products. And these companies have world-class engineers and developers. But every year, we struggled to get even a modest budget for new technology development. When times were really good, we might have had the budget to get two or three people in a 1,000-employee facility to work on advanced technology. And every time another project went off the rails, we were taken off the tech job to address the short-term needs of the business.

New tech budgets cover the salaries of a few people, but not the actual tech development projects. I remember one year our total budget for new tech development projects was less than six figures. Compare that to the $24 million Siri, Inc raised from investors to bring voice technology to market. Which team is more likely to succeed: a well-funded startup or a cost-avoiding multinational tech company?

Large companies must report earnings quarterly and are pressured by shareholders to minimize costs and maximize velocity of benefits. Transformative innovation takes time and money. In the 1950s, employees were listed on the asset side of a company's balance sheet. A good team was considered an asset to be rewarded when calculating the company's value on the stock market.

Similarly, great corporate labs promised innovative future products. Bell Labs, Xerox, and GE were giants in developing in-house innovation. But the world has changed since those days. CEOs such as GE's Jack Welch moved employees from the asset side of the book to the cost side. This created an easy path to demonstrate short-term profitability and bolster stock prices through rapid cost cutting (layoffs) during any slow sales quarter.

Much of corporate innovation in recent years has been about creative accounting, tax avoidance, and other measures of financial performance. Look at the extent to which non-GAAP methods (Generally Accepted Accounting Principles) are used in today's earnings reports. This is a good indicator that companies are not focusing outward on solving customer needs, but inward on manipulating numbers to protect shareholder value. Pressure for short-term performance has shifted all focus to the bottom line, leaving little room for long-term technology investments.

In-house innovation teams have limited project budgets and are limited to finding out what’s going on in the startup and university research spaces. A sub-six-figure budget can cover limited travel and testing of startup tech, but not develop the technology themselves.

Instead of deep technology development, companies are investing in highly skilled technology integration teams with strong brands like Lab126 (Amazon) and Google X. This reinforces the public perception that the big tech brands are innovators, when in fact they are integrating the work of others. The cost of technology integration teams is much lower than the cost of long-term technology development.

Large technology companies typically acquire startups after they have demonstrated market traction and technical maturity, to avoid the risk of spending research money on technologies that may never pay off. This significantly shortens the time between investment cost (acquiring the startup) and revenue recovery by selling and scaling the startup's innovation in the market. This approach prioritizes financial return over engineering problem solving.

Around 12 years ago, I ran the Advanced Concepts team at American Underground at HTC. I led a team that traveled the world to find cool technologies and integrated those new technologies into advanced concept prototypes. Every month, we demonstrated a new technology integration concept to the HTC board of directors and had to make a go/no-go decision immediately. The very few new technology integrations that were adopted had to be brought to market within a year. [Fun fact – HTC, out of AU, purchased Beats for ~$300M and integrated their audio algorithms and brand into HTC phones before Apple – a much bigger player – came along and bought Beats for $3B].

Although we worked on products with truly innovative concepts, we didn't really innovate much. Real advances in science and technology came from start-ups and small businesses, an approach that remains the same today. Sadly, even HTC's integration team could not withstand shareholder pressure and was closed down just a few years after its launch. Short-term accounting thinking took precedence over long-term engineering development. With no new customer value brought to the market, HTC failed as a mobile phone provider and the mobile phone industry consolidated.

So what does this mean in a broader context? After all, technological advancements continue to come to market across many industry sectors. Does it really matter whether that innovation comes from startups and small businesses, or from large tech companies? In my opinion, the question to ask is: what does our society need most?

If you are most interested in the financial health of the stock market as a proxy for the economy, maintaining the status quo will suffice. It will mean continued market consolidation into fewer and fewer really large tech consolidators. Wealthy investors will continue to support the smaller tech startup community, while larger companies will cherry-pick the companies with the least financial risk to launch new products.

But if our society wants to achieve real social outcomes like curing cancer or solving climate change, we need to prioritize funding the growth of more tech startups. Solving important world problems tends to be what motivates innovators and entrepreneurs; it's not the focus of bankers and financiers.

Governments need to end the massive tax breaks and incentives given to multinational technology integrators (Big Tech companies) and instead use tax revenues to support new small ventures. Venture capitalists cannot afford to focus on just a small minority of the ultra-rich; this narrow demographic is not broad enough to foster a true tech middle class.

The positive reality is that small businesses can only survive by creating real value. They are too big to fire employees, move revenue overseas, or pull complex financial tricks to create false value. But they can and do create great innovations.

And tech companies pay high wages. These high-paying jobs keep money flowing through our local economies and support jobs in restaurants, retail, and arts and entertainment. High-paying jobs make for healthy economies and great places to live. To truly grow our economy for everyone, we need more small tech companies.

It's time to recognize where real commercial technological advances are occurring and focus our economic policies accordingly.




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