In Chapter 20 of the book, Toffler made the cogent observation: “In a world of accelerated change… time horizons must be extended.” (p. 406 of the hardcover edition). As we celebrate the 50th anniversary of the publication of Future Shock, we find ourselves at an interesting crossroads with respect to the future of venture investing. In Chapter 20 of the book, Toffler made the cogent observation: “In a world of accelerated change… time horizons must be extended.” (p. 406 of the hardcover edition).
Toffler goes on to discuss why longer time horizons are required in such a world. What I find interesting as a long-time researcher and practitioner of investing, finance, and economics, is that time horizons among companies and investors appear to be doing just the opposite. Although difficult to quantify precisely, corporate and investor time horizons appear to be shrinking, not expanding.
We see corporate and investor myopia in many places today. Corporations who have publicly traded equity on the major stock exchanges, and the legions of research analysts working for the Wall Street investment banks who cover them, seem intensely focused on quarterly earnings reports. A quarterly earnings miss can send a stock reeling. Corporate executives seem to spend an inordinate amount of time managing analyst expectations in an attempt to minimize quarterly earnings surprises. I have spoken with some prominent CEOs of publicly traded companies over the years who have personally lamented the shift toward shorter time horizons on Wall Street. They believe shortsightedness is a detriment to the functioning of a healthy and prosperous enterprise.
Equally notable, and perhaps even more important from a longer-term economic perspective, is the obvious shift toward shorter investor time horizons among venture investors—those brave and risk-seeing souls who back startup and early-stage companies against unfavorable odds.
Long-time venture investor Douglas Jamison and I wrote a book on this subject, titled Venture Investing in Science, published by Columbia University Press in June 2017. In the book, Doug and I noted that venture investors—especially those in Silicon Valley—had time horizons that appear to be shrinking. The nearsightedness was reflected in a migration away from investing in companies seeking to commercialize transformative technologies grounded in what we called “deep science.” Such companies often take not quarters or several years to mature, but decades.
Deep science is revolutionary. Newtonian mechanics, Maxwell’s theory of electromagnetism, quantum mechanics, and information theory have fundamentally altered the way we view nature and the cosmos. These advances in deep science over the centuries have inspired research and spawned a cornucopia of new inventions and innovations. Some of these deep science-based inventions and innovations have been massively transformative, unleashing waves of Schumpeterian creative destruction that fundamentally alter the economic and business landscape over the course of decades. New types of computer memory devices or computing architectures steeped in deep science that have the potential to transform the business landscape can easily take over a decade to commercialize. Investing in such companies requires the kind of time horizons Toffler discussed. The rise and heyday of Silicon Valley was rooted in venture investors who had the type of time horizon required to nurture such companies.
While technological change has indeed accelerated in the 50 years since the publication of Future Shock, there has been a pronounced shift in venture investing, away from deep science and the longer-term investment horizons required to successfully fund such ventures. In 1985, deep science-related venture investments accounted for over 55 percent of total US venture capital funding and over 50 percent of total venture capital deals. By 2014, the share of deep science venture investments, both in terms of dollars and of deal volumes, had declined by a whopping 50 percent. We see in this data a pronounced migration of venture capital in the past two decades, away from deep science-based companies.
The primary implication of the shift in venture investing time horizons, as Doug and I discuss in Venture Investing in Science, is that it occurs within an economy that is less dynamic and prosperous. This is evidenced over time, in slower productivity growth and stagnation in improvement of living standards. The hard or deep science-based companies being starved of venture capital today historically have been the companies that produced the biggest economic payoff in the form of rising productivity and prosperity. It was these companies and their farsighted venture investors who backed some of the premier deep science companies that are household names today.
Venture capital has no peer in the history of funding transformative technology companies. There is no other form of capital that has come close to producing the type of economic payoff venture investing has produced over the decades. The statistics speak for themselves. Venture capital-backed companies account for a massive 85 percent of total research and development spending, almost 40 percent of total revenues and employment, and nearly two-thirds of total stock market capitalization. It is truly astonishing how such a relatively tiny pool of capital can have such large economic effects.
As US venture capital has migrated away from longer-term, transformative, deep science-based deals, we are seeing a kind of vacuum in the investment landscape. I see this regularly today in the advisory work I do with emerging technology companies. I am frequently asked by the founders and CEOs of deep science enterprises where they should seek funding. Silicon Valley, once an oasis for capital for deep science ventures, has become more of a desert.
Increasingly, deep science companies are forced to look overseas for funding. There is nothing wrong with seeking funding overseas, but it can get expensive in terms of travel, time, and effort.
There are other sources of venture investment capital, such as angel funding and crowd funding. Angel and crowd funding can be crucial early on, but funding deep science companies often requires a great deal more capital than these sources typically provide. In recent years, we have seen the rise of new forms of financing, such as Initial Coin Offerings (ICOs). There is still a great deal of regulatory uncertainty surrounding such offerings in the US, and it remains to be seen if ICOs can become a viable funding source for deep science companies.
Some might wonder about the future of the US banking system and its role in supporting deep science companies. At last glance, there were over $1.5 trillion of reserve balances with Federal Reserve banks. One of the noteworthy economic developments that was discussed by Toffler in some of his other books was the migration away from tangible-asset intensive companies. Such companies were the mainstay of the Industrial Age. Commercial banks, having expertise in tangible asset-based funding, were a common source of funding for industrial companies of yesteryear.
The rise of information technology over the decades has wrought a major shift in the structure of corporate balance sheets. What we see with information tech companies is a predominance of intangible assets on company balance sheets. Commercial banks lack the type of expertise to fund such intangible asset-intensive enterprises. Given this lack of expertise and given the increasing penetration of information technology in the economy, we can expect to see a diminishing role for the US commercial banking system.
While it would be marvelous to put the $1.5 trillion of bank reserves to work funding transformative, deep science-based companies and the “moonshot” enterprises of tomorrow, the likelihood of this happening any time soon is not high. What’s more likely is that US commercial banks will become more marginalized in supporting the kind of deep science-based innovation that drives a dynamic, highly productive, and prosperous economic landscape.
If Toffler is correct that a world of accelerated change requires extensive time horizons, it is not at all clear how the venture investing in deep science issue gets resolved. At the time of this writing there is little evidence of diminishing corporate or investor shortsightedness. Wall Street investment banks have an important role to play, but at present they are afflicted with the same nearsightedness we see in publicly traded corporations and venture capital today. To compound matters, as George Gilder has observed, US government policy now favors the rapid-trading and short-term arbitrage of the big investment banks over the longer-term commitments that foster economic prosperity.
In the current deep science landscape, there is emerging interest in technologies rooted deeply in quantum mechanics. We are in the early stages of a (r)evolution in computing away from bits and toward qubits. Qubits are the mainstay of quantum processors that lie at the heart of quantum computing. The US federal government, as well as governments overseas in Europe and Asia, are investing billions in quantum-based technologies. China alone is investing over $15 billion in next-generation quantum innovations. What is not clear is whether other investors, outside of federal governments, will step in to help fund startup and early-stage quantum computing companies.
It should be noted there are large established companies investing in commercializing quantum computers and other quantum technologies. IBM has demonstrated a 50-qubit quantum computer. Google has produced a 72-qubit quantum computer. While large established corporations will play a role in this arena, rest assured it will take entrepreneurs backed by investors with investment horizons well beyond the quarter to propel transformative, quantum-based innovations in the years to come.
At the same time quantum computers are emerging, we are seeing the proliferation of a new class of advanced 2D and 3D nanomaterials that possess unique properties beyond the silicon that powers today’s digital technologies. I have spent a great deal of time working with emerging advanced nanomaterials companies. The main issue confronting almost all of these US-based companies is a lack of venture funding. Some have been driven out of business while others are teetering on the edge of insolvency. This is disheartening, given the long-term need for new materials for computing and other applications. One suspects that the future of technology is carbon-based, as opposed to silicon-based, but the path toward carbon-based technologies is not at all clear, at least in the United States.
Being an optimist by nature, I am hopeful that a new class of venture investors will emerge in the coming years. I do recognize there are numerous impediments and obstacles in the US venture investing landscape that are likely to act as headwinds in the foreseeable future. While I have yet to devise a new model for venture investing in deep science enterprises, I believe strongly that any such model will embrace the type of longer-term time horizon Toffler stated was required in a world of accelerated change.
There has been some discussion in Silicon Valley over the past several years about creating a stock exchange focused on the long term. This discussion itself is a testament to the myopia plaguing the major US stock exchanges. It is envisioned that a long-term stock exchange (LTSE) would help address the myopic focus on quarterly earnings and seek to encourage investors and companies to make decisions based on a longer-term time horizon.
Such an exchange would be a natural home for the deep science-based ventures that are critical to fostering economic dynamism. An application to the US Securities and Exchange Commission (SEC) for registration of a LTSE as a national securities exchange was approved on May 10, 2019. The recent approval of the LTSE by the SEC is a ray of sunshine in an otherwise darkened and cloudy myopic US venture investor skyline. It will be interesting to see how the LTSE evolves in the future.
Peter Drucker once observed that every organization needs one core competency: innovation. Innovation is vital to every single organization on the planet. It is not a quarterly activity. It requires vision and execution that extend far beyond the quarter. Deep science-based innovation is a long-term endeavor. In terms of driving productivity and prosperity, it has no peer. Venture investing is crucial to deep science-based enterprises.
Make no mistake. A Silicon Valley of the future—a Carbon Valley, perhaps—will be populated with venture investors who are farsighted. Again, as Alvin Toffler noted in Future Shock, in a world of accelerated change, time horizons must be extended. Nowhere is this truer today than in the world of venture investing in deep science-based enterprises.
Stephen Waite is a corporate advisor, strategist, researcher, and author. For the past two decades, he has worked closely with entrepreneurs and CEOs around the world in the nano/quantum, advanced materials, cybersecurity, and next-generation media segments. He is the author of Quantum Investing and co-author of Venture Investing in Science, Boomernomics, and Graphene Technology. When not advising clients and writing books, Steve can be found in the studio playing, recording, and mixing music.