Our Innovation Backlog
The flow of innovations is as strong as ever, but the U.S. is slipping in its ability to commercialize them.
Innovation and entrepreneurship have been a major part of my life. As a student at MIT, and later as a faculty member, I was constantly immersed in both. In 1982, I started a small software-systems development company with a $1,000 investment, entering an innovation and entrepreneurship vortex that carried me through the dot-com explosion. In 1999, Kenan Systems was purchased by Lucent Technologies, and I became an executive there, charged with advancing “Bell Labs innovation.” After leaving Lucent two years later, I formed Tiax, which acquired the assets, contracts, and staff of Arthur D. Little’s Technology and Innovation business, with its own legacy of helping commercialize innovations, from synthetic penicillin to advanced battery technologies.
Being part of such premier idea engines as MIT, Bell Labs, and Tiax has given me a rich perspective on the innovation landscape. What I see concerns me, because we are on the verge of losing a major source of growth. While many feel that innovation has slowed along with our economy, I perceive that the flow of new innovations has remained strong and unabated over the past few years. It’s the mechanisms for implementing them that have eroded. I call the problem the innovation backlog. Unquestionably, the solutions to many current problems, the treatments for many illnesses, and the pathways to new businesses have already been invented, but they are waiting on the sidelines.
The last few decades placed a huge premium on creativity while also providing the vast financial resources needed to fund it. Despite the dot-com bust, that creative momentum continues. Through my interactions with colleagues at research universities, hospitals, and industrial labs, I have concluded that innovations are being generated at unprecedented rates.
However, it’s not only innovation that matters-it’s the rate at which innovations are improved and brought to market. And this has declined precipitously since the bust. The result is a surplus of innovations, with vast numbers of potentially important advances being warehoused or shelved. This situation is alarming enough in itself, but even more worrisome is the fact that innovations don’t have an unlimited shelf life: they are perishable and risk becoming unusable when the people associated with them move on to other endeavors. Another reason for concern is that warehoused innovations remain untested and deprived of the iterative improvements so critical to their journey from inception to implementation.
We might have brought this problem on ourselves. In the 1980s and ’90s, well over a trillion dollars went into the creation of diverse new technologies in the United States. Toward the end of that period, demand for innovations far exceeded supply-a situation that stimulated more idea generation but also escalated expectations and prices to the point that valuations of small technology companies reached untenable levels. Many acquisitions or mergers that would have created promising synergies didn’t take place because of these valuation obstacles-or when they did, the price of acquisition was so high that the returns needed to justify the price were never obtained. We now seem to face just the opposite situation, with the supply of innovations greatly outpacing demand.
This scenario has national-even global-implications. If the innovation-to-implementation flow is out of sync, the consequences for our work force, our wages, and our standard of living are serious. Unless we act decisively, it could be very difficult and costly to restart and resynchronize the flow. Before we act, however, let’s consider the factors that led us to this point.
The Army of Ants
Right after World War II, the government and many leading companies invested heavily in research and development. The results were spectacular. Bell Labs, for example, developed the transistor, Unix, the laser, and information theory. University research, heavily funded by the government, likewise generated breakthroughs, from computers to revolutionary drugs.
But as early as 1970, the innovation flow encountered turbulence. The nation was grappling with stagflation, high unemployment, and stalled productivity, while facing stiff overseas competition, especially from Japan. These bleak circumstances led to the downsizing of most major corporations. But because of credible evidence that an R&D dollar was more productive in a small company than in a large one, interest grew in the entrepreneurial model: startups formed around core innovations and sharply focused on bringing those innovations to market. By the 1990s, after several spectacular successes, this model was attracting increasing supplies of venture capital and other funding.
The rapid spread of entrepreneurial R&D (actually, RD&D, for research, development, and delivery), coupled with downsizing, led to the disappearance of many corporate R&D labs. The ones that remained lost much of their scope. Meanwhile, the startups put their sweat equity and uninhibited creativity into developing and implementing innovation. Entrepreneurs like Bill Gates and Steve Jobs became our heroes and role models.
The analogy that comes to mind is of ants carrying one egg (one innovation) at a time-an insignificant individual feat perhaps, but one that collectively achieves a lot. Regrettably, the entrepreneurial approach to carrying innovations to market is now stalled, with many of the ants (small companies) dead; their partially implemented innovations usually died with them.
Even the startups that remain face formidable challenges. The financing supply chain is badly broken, which means that the surviving ants are slowly starving, along with their innovations. In addition, corporations that once paid premiums for startups, or their products and services, have gone conservative, hesitating to buy from struggling entrepreneurial companies.
A host of other factors makes investing in innovative products too risky. One is that in tougher times, people aren’t as willing to wait the five or 10 years, or even longer, for a return on their investment that bringing an innovation to market often entails. The recent accounting scandals haven’t helped, either, making executives even more averse to the risks of implementing innovation, since the bookkeeping regulations for such ventures are fuzzy at best and almost invite scrutiny.
This situation leaves us with a greatly underappreciated challenge: how to unlock the benefits stored in the increasing backlog of innovations, prevent further disruptions in the innovation-to-implementation flow, and avert the looming crisis. Efforts to meet that challenge should be undertaken at the same time that we begin documenting the extent of the innovation backlog, so that the burst of creativity that produced it isn’t lost forever. I have some suggestions for how to proceed.
Adopt alternative industry models: Think of universities, research hospitals, and large corporate labs as innovation sources. They can be characterized as R&d (big research and small development) organizations. Most companies, with their marketing and production arms, would be d&D (small development, big delivery) enterprises. The lack of a strong connection between these groups is partly responsible for today’s innovation backlog. Therefore, we need more “linkage” companies to bridge the gap. These are rD&d organizations. They have some research capability in order to link to the sources of innovation, and a delivery component that helps get products to market, but their main activity is in developing innovations for market.
These companies are nothing new. Sarnoff is one example, having morphed from RCA’s main lab into a for-profit enterprise whose services run from contract research to collaborative R&D. I was pleased to discover that Arthur D. Little’s Technology and Innovation group (not to be confused with its management consulting operations) was founded more than a century ago as just such a linkage organization as well. While synthetic penicillin was invented at MIT, the Technology and Innovation group enabled its commercialization and can boast similar successes in auto air conditioners, lithium-ion batteries, and other areas. To avert the looming innovation crisis, we need more of these companies. There is plenty of business to go around.
Loosen university intellectual-property rules: University-based research thrived in the 1980s and ’90s because of extensive company sponsorships that spawned new innovations, as well as startups. That coupling is much weaker now, partly for reasons already mentioned, but also because the intellectual-property policies of universities have become so complex and money-oriented that companies find it increasingly difficult to structure deals. These restrictive policies may also cause academics to lose their entrepreneurial spirit. I suggest that universities allow faculty members to keep a much bigger share of the intellectual property they create, and also change their rules to encourage the transfer of intellectual property, focusing more on their fundamental mission than on revenue generation.
Create federal incentives: The U.S. government could create a series of incentives to encourage innovation implementation. For instance, Small Business Implementation grants could provide tax credits or other incentives to companies that license or purchase innovations and bring them to market. This would encourage implementation in much the same way that R&D credits encourage idea generation.
These are a few specific ideas for reducing the innovation backlog. But we also need a culture change. In the technology-happy 1980s and ’90s, entrepreneurship centered on innovation. The founder/technologist was an entrepreneurial hero. But it has become abundantly clear that while innovation is important, it is perhaps only 5 to 10 percent of success. The other 90 to 95 percent is implementation. We need to find “implementation entrepreneurs” and make them our new heroes.