Corporations and governments are starting to worry about a common set of related issues. During the last two months I was fortunate to participate in several conversations with top corporate executives and foreign government officials all of whom are visiting Silicon Valley with increasing frequency. The conversations covered topics ranging from innovation and the rapid technological changes we are experiencing and must adapt to, the mismatch of skills and jobs and the changes we must institute to meet our evolving labor needs, and the state of the world economy and the continued impact of globalization. I want to summarize the topics being discussed by these diverse constituencies and provide a place for relevant comments and opinions.
The ever-decreasing cost of developing new technologies is leading to an acceleration of innovation. Delegations are visiting our area because they are trying to figure out ways to address the impact of innovation on their organizations. They are interested in:
- Understanding technology changes and particularly the accelerating pace of IT innovation. Many corporations are starting to realize their inability to keep up with the simultaneous information technology waves and associated innovations created around mobile applications and devices, cloud computing, social media, and information creation and comprehension through the analysis of big data (that is now universally starting to be recognized as an important asset or resource).
- Participating in and copying (or at least attempting to) Silicon Valley’s innovation creation and nurturing model. They view our area as having mastered the unique ability to unleash multiple innovation waves in areas as diverse as information technology, biotechnology, cleantech, etc.
- Identifying startups that can provide them with an early competitive advantage around technology, data, or business model.
- Understanding substance from hype as it pertains to startups, and in de-risking the technology offered by early stage companies.
- Forming partnerships with venture firms and relevant venture-backed companies.
Corporations are not looking for innovation just in Silicon Valley, but around the world. They are quickly realizing that they need to innovate along a variety of dimensions (technology, sales model, customer interaction model, business model). They are also acknowledging that in the face of globalization, under which economies have become so inter-dependent, and hyper-connectivity, through which information is disseminated instantaneously, innovation is as likely to come from a team whose members are distributed between Sao Paolo, Brazil, Kiev, Ukraine and Athens, Greece, as it is to come from a Silicon Valley-based team. Corporations and governments are also quickly realizing that the models (economic, financial, agricultural, weather, customer interaction, etc.) in use today are no longer adequate or sufficiently accurate. As I’ve been saying for some time now, we need to innovate in that area also and work on developing new models that reflect today's realities.
While unemployment in this country remains stubbornly above 9%, we continue to receive more evidence that US-based IT, manufacturing and healthcare companies are not able to find enough engineers, scientists, doctors, and nurses to fill their open positions. Even within Trident's small portfolio of 50 companies we have several openings many of which have remained unfilled for several weeks. The US educational system is not producing enough software, electrical, and computer engineers, scientists and health care professionals. The demand for health care professionals stems from our rapidly aging populations (similar trends exist in other developed economies as well). The demand for IT workers is driven by the unprecedented innovation pace we have been experiencing, particularly in information technology. It is not only the educational background of the people companies are looking to hire that is important. Companies today seek people who can invent, re-invent, and constantly re-engineer. Who are creative and bring something special to work; have a unique value proposition. People who are proud of everything they are producing, no matter how small or insignificant. People who even on the insignificant find a way to impart their genius and creativity. Critical reasoning and thinking are becoming table-stakes. Routine work in many fields is disappearing to algorithms.
Corporations have been trying to address the labor/job market mismatch in four ways. First, within the US they have broadened the geographic scope of their recruiting efforts by looking for employees in states with high unemployment and being willing to reallocate them. Second, they are working with the federal government to adapt its immigration policies so that they can recruit personnel from countries that graduate more people with the skills in demand, e.g., India, China, Russia. Globalization and Internet connectivity make possible for well-educated foreign engineers, whose drive is often compared to that of the immigrants that arrived here in the late 19th and early 20th centuries and transformed this country, to effectively compete for the open positions. Third, often in collaboration with state and federal governments, they are establishing programs to retrain laid off workers and provide them with the skills that are in demand. Fourth, they are establishing operations in countries where the supply of employees with the right skills is strong. For example, over the past few years companies like IBM, Google and Cisco have greatly expanded their engineering operations in India, and China but also in Ireland.
Government delegations visit Silicon Valley companies to tout their countries' engineering, science or healthcare talent pools and describe the legislation and infrastructure they are putting in place in order to entice them to establish operations there. They are also starting to realize that by establishing the right environments for innovation they will be able to attract the right jobs. As Tom Friedman recently said in an address, the next war may very well be economic, not military. It will be waged in order to secure good jobs. The US must do a SWOT analysis. For example, we have a good university system which, however, is no longer the best in the world. We have good infrastructure but which, unfortunately is rapidly deteriorating and is in need of a $1T facelift for roads, bridges, airports, broadband connectivity, etc. Look at some of the characteristics that make Silicon Valley a magnet. We embrace diversity and over our relatively short history we have seen the spectacular results of the hard work that immigrants to this country have created.
We may be entering a prolonged period where the developed economies may not be able to exhibit annual growth rates that won't be higher than 1-3%, compared to the typical 5-7%, particularly following recessions. This anemic growth rate may become the new norm. While they continue to worry of the impact of the European debt crisis on the world economy, corporate leaders acknowledge that the US economy is in better shape now than it was in 2008 so they tend to discount the risk of another recession in the short term. In fact, with the IPO window having closed for the time being, corporations are becoming more aggressive about acquisitions using their healthy balance sheets. However, the economic slowdown that started during the summer cannot be ignored. If nothing else, it is demonstrating that the US cannot count on consumer consumption alone for the economy's growth rates to increase significantly. In fact, we are seeing consumers in developed economies, including the US, starting to change their purchasing patterns, particularly their discretionary spending patterns, and begin to go through what is expected to be a massive de-leveraging process that is expected to last for several years. Paying down debt will unboubtedly have big implications to banking (remember that banks and other financial servivces institutions are some of the biggest purchasers and users of IT). If nothing else, banks may find necessasry to change their business models. More importantly, it is not clear whether the consumer spending patterns of the past that had lifted the economy out of several recessions, will ever return. This emerging reality of economic growth rates and its long-term ramifications must be explained in simple and comprehensible terms to the citizens of every developed economy.
These have been fascinating conversations that I expect will continue at many levels and will even spread as more people in corporate and government positions realize the magnitude of the problems we are facing and their impact to our every-day existence. As venture investors funding innovation and the entrepreneurs who make it possible and who themselves represent some of the best economic drivers and job creators, we are ready and willing to continue contributing both to the shaping of the economy but also to the overall conversation.