Startups: It’s NOT About R&D

European Straits #41

Dear all,

Last Friday, I had a meeting with Bruno Le Maire, the French minister in charge of finance and the economy. He got to know me through my op-ed columns in the French magazine L’Obs and wanted to provide insights on his policy agenda and hear my opinion on certain topics.

We agreed on many things: the nature of the current techno-economic transition; the problems that European firms encounter when trying to compete on the global stage; the need to reinvent many governmental positions, starting with industrial policy and antitrust policy; the difficulty of making the government work in the horizontal world of ubiquitous computing and networks.

However, we disagreed on one point: the importance of orchestrating R&D as a cornerstone for economic policy. Le Maire is rightfully worried by Europe being late with cutting-edge technology such as driverless cars and artificial intelligence. However, I think his conclusion is mistaken. What we should do to make up for this lateness is NOT to throw more public money at R&D.

Rather it’s critical to make it possible for ambitious European entrepreneurs to scale up their businesses. At the early stage, those entrepreneurs will use cheap, commoditized technology and robust, existing platforms such as Facebook (for marketing), Stripe (for payments), and Amazon Web Services (for hosting and processing). But then, at a later stage, they’ll encounter the critical problems that come with scaling up in the digital economy—and they’ll have to implement R&D (or buy R&D results from smaller companies) to break those bottlenecks, all without any need for government money.

Indeed when it comes to R&D, we’ve all gotten used to simple ideas, such as “paying dividends is bad, investing in R&D is good”, or “it takes research grants and an R&D tax credit to foster an entrepreneurial ecosystem”. As I wrote in 2016, the French context makes it all the more difficult because the French elite has an unrivaled passion for science and high technology.

But the truth is that the opportunity to pursue R&D and the best way to pursue it (whether in the private sector or through massive intervention from the government) are highly dependent on the techno-economic context. In the last two centuries we’ve gone through four different stages:

  • For much of the 19th century, science and business were worlds apart. Academic scholars were producing scientific knowledge in university laboratories. Entrepreneurial tinkerers invested in labor-saving machinery to produce larger quantities of increasingly complex products. Overall there was not much use for science in the nascent industrial world.

  • Then in the age of steel and electricity, the rise of entrepreneurial inventors led to designing a market for technology, where technological assets could be bought and sold at arm’s length. Key institutions such as patent law and licensing contributed to making that market efficient. The new market for technology made it possible for scientists to work with industrialists.

  • At some point, the bigger corporations brought about by the Fordist economy decided that they wanted to employ their own researchers rather than buying from inventors on the market. The rise of the corporate lab, backed by government money, paved the way for our current vision of R&D: one that is made of moonshots and that takes place in large organizations.

  • Finally, since the rise of business strategy and global finance in the 1970s, large corporations have mostly divested their corporate labs and focused on their core business. As pointed out by the likes of William Lazonick and Rana Foroohar, their priority has become to maximize shareholder value over the short term rather than competing at the frontier with moonshots.

I’ve reflected a bit over the last few days, and reached the following conclusions:

  • Like in many fields, the current techno-economic transition brings us back to the late 19th century, only with the superior power of computing and networks. It means that most of the R&D will now happen in smaller companies, and that large corporations will implement R&D by way of acquisitions on the new, more efficient (and global) market for technology.

  • The reason why traditional European corporations don’t acquire smaller companies implementing cutting-edge technology is that they’re simply a lost cause. Their way of doing business prioritizes the short-term. As a result, they’re not competitive in a digital economy that rewards continuous innovation (the “Red Queen Hypothesis”).

  • If we want our European R&D ecosystem to thrive, it’s necessary to prime the pump by growing large local tech companies that in time will acquire local R&D. Again, this doesn’t mean throwing government money at university labs or corporate R&D departments. It means that our primary goal should be to grow our own champions in the global digital economy.

You know that it’s our mission at The Family! 😚 And I’d be glad to read your views on this. In the meantime, here are a few articles:

Also, I’ve just published an article inspired by Tim O’Reilly’s WTF? What’s the Future and Why It’s Up to Us! Here it is: Haven’t You Read Tim O’Reilly?.

Warm regards (from London, UK),