Features

Creating Wealth Through Technology

February 1st 2016 - Monday

What is the US Technology Wealth Creation model and can it be adopted by countries outside of the US?

The January 2015 Fortune article by Erin Griffith and D a n P r i m a ck, “The Age of the Unicorns” created quite a stir in the technology venture community. The unicorn is a startup company that has achieved a billion-dollar valuation. These companies have a robust business model, capable of achieving stellar growth, are led by a strong team and have been able to secure funding at these lofty valuations. Xiaomi, the Beijing based smart phone company is currently valued at US$ 45 billion and Uber, the current poster child is valued at US$ 50 billion. In total 80 companies are listed including; Airbnb, Snapchat, Pinterest, Grabtaxi – many of which are familiar to us all.

It’s worth remembering Travis Kalanick’s early attempt at fund raising, that is before Uber, was at quite a pedestrian valuation. His first technology startup, formed just before his graduation from UCLA, was called Scour, the first peer-2-peer software company, predating Napster by about 18 months. That was in 1998, when Kalanick raised US$ 4 million for his company, giving away 51% ownership of common stock! Kalanick has spoken of this experience several times including a video presentation at FailCon 2011, he said they were “kids out of UCLA” and not familiar with Silicon Valley terms.

Kalanick and other founders are now major angel investors and finding successes with a host

What you are passionate about at 21 is not necessarily what you’re going to be passionate about at 40.”  - Ben Horowitz of Netscape fame

of new technology companies. It’s no wonder that the lure of the entrepreneurship is so strong and so much emphasis is placed on innovation and entrepreneurship as engines of growth.

What have been the drivers for the phenomenal success of technology companies in the US backed by the Silicon Valley Venture Capital (VC) funds? There are reasons for their success, some are obvious, like outstanding entrepreneurs, access to leading technologies, ability to find early adopters and the very large homogenous US market. Others reasons are less obvious and relate to the operating environment that seems to favour companies operating in the US.

What is the US Technology Wealth Creation model and can it be adopted by countries outside of the US?

Before we address that issue we need to understand the US environment. By the end of the Second World War, the US had developed the world’s largest industrial capacity. Supporting this industrial might was a very significant investment in research and development. Outside of this national effort, private equity funds, in particular VC funds were turning their attention to technology companies. By the late 1980’s ICT companies, possibly spurred on by the success of Silicon Graphics Inc., which was founded in 1982 (IPO 1986), were actively seeking funding from the VCs. There was a significant growth in Private Equity (PE) funds starting in 1990. And not coincidentally, from 1990, there was also a rise in IPO’s that attracted VC funding. So the new money was finding a good return through IPO exits and was being actively recycled.

The US, arguably the wealthiest and most powerful nation in the world today, has a population of 319 million, a GDP (per capita) of US$ 37,800 and a population that has a literacy rate of over 97% based on World Bank data for 2014.

COUNTRY

USA

GERMANY

JAPAN

MALAYSIA

PHILPPINES

INDONESIA

GDP (US$)

$17.42 trillion

$3.853 trillion

$4.601 trillion

$326.9 billion

$284.6 billion

$888.5 billion

Pop.(m)

318.90

80.89

127.1

29.90

99.14

254.5

GDP/ capital (US$)

$54,625

$47,632

36,200

$10,933

$2,871

$3,491

In contrast, Malaysia has a population of 29.9 million and a per-capita GDP of US$ 10,933. Does this huge difference in market size impact on business potential? Definitely! Ask any of our entrepreneurs. The larger the market the more opportunity to find a customer that will value (and pay for) the service or product you have. Naturally therefore, the larger the market opportunity, the larger the profit potential which translates to a much higher valuation!

Small countries are at a disadvantage and hence the importance of open regional groupings like the European Union. It is important therefore that Malaysians are able to target and serve the regional market – efforts are being made by Government agencies – to change the market paradigm! Access to the large ASEAN market of 625 million, across 10 countries, covering 4.4 million square kilometres is important, even though it is not a homogenous market. In Malaysia, MDeC is actively supporting a regional push of its MSC (technology) status companies, as well promoting a broader adoption of technology in companies to improve efficiencies and productivity.

The availability (and harnessing) of technology, of talented individuals, the interest in the market for new solutions and access to funding did drive the growth of US technology companies. Clearly these were strong drivers that favoured US companies, but there were others. A strong R&D base was critical. There is a huge commitment to R&D from corporations as a means

of creating new products. These are other factors that came into play with what we call, the Technology Wealth Creation model.

Let’s look at a major driver of R&D and innovation – funding. Malaysian Gross Expenditure on R&D (GERD) is actually quite high, yet there seems to be a paucity of successful technology companies. According to Malaysian Science & Technology Information Centre, GERD in 2012 was RM 10,612 million which represented 1.13% of GDP. The GERD to GDP ratios taken from OECD data for other countries are; Japan (3.47%), USA (2.73%), United Kingdom (1.63%).

Malaysia’s expenditure as a percentage of GDP is close to that of the United Kingdom, but in real terms, their expenditure on R&D (2013) at £ 28.9 billion is equivalent to RM 183,000 million - 17 times that of Malaysia! Besides expenditure on R&D, the critical ingredient is the quality of the researchers, and it is in this area that the US has a big advantage – the best brains from around the world compete to work at the world’s best universities.

International students in the US account for 70% of the full-time graduate students (Master’s and PhDs) in electrical engineering, 63% in computer science, 60% in industrial engineering. We only have to look at two recent CEO appointments, where both candidates went to the US for their Master’s degrees and stayed on to work there; Satya Nadella of Microsoft, born in India, a graduate

“By the end of the Second World War, the US had developed the world’s largest industrial capacity.”

of the Manipal Institute of Technology, and Sundar Pichai of Google, a graduate of the Indian

Institute of Technology Kharagpur.

Total expenditure on R&D is driven by the pressure on companies to stay competitive through innovation and that drives technology generation, the first of the Three Wheels of Wealth (3WWC) as illustrated. The three interlocking wheels show the interplay between; Technology Generation, Business Creation and Wealth Creation.

Working in harmony, the 3WWC, promote the development of appropriate technologies, encourage and support the development of early stage companies and finally reward the participants with financial wealth from IPO’s and acquisitions – which in turn frees up funding and support to keep the 3 interlocking wheels in motion. Underlying all the wheels are a number of positive driving factors.

The willingness to take risk is a critically important factor across all the wheels. At the creation stage, founders take risks, mostly with money from others but they are comforted by the fact that should they fail - there is no stigma attached to failure – they can go back to the job market, or start a new venture! This is a unique feature of the US landscape, particularly in Silicon Valley. What is equally interesting is the willingness of early customers, who take on unproven products and solutions. Why are they willing to take this risk? Well the answer is pretty simple; the companies are constantly looking for a competitive advantage, and generally the companies are privately owned and managed by professionals, who are measured by their performance.

Much is spoken about the need for passion in business creation, or really in most endeavours. It is therefore portent to remember that competence is far more important than passion. Ben Horowitz of Netscape fame, earlier this year gave the commencement speech at Columbia University which he titled, “Don’t Follow Your Passion”. He said, in reference to the quality

of the contestants in the show American Idol, “just because you love singing does not mean you

should be a professional singer!” and “what you are passionate about at 21 is not necessarily what you’re going to be passionate about at 40”. One needs to have a sense of realty and self-awareness.

Finally, with Wealth Creation, the market (intuitions and individuals) are willing to buy shares

in new companies at huge forward valuations. Some companies show earnings performance, many don’t. A few companies survive, others get acquired, fortunes are made and money is recycled. Not just in new companies, but in huge research grants and endowments to the leading universities; Harvard, Stanford, Berkeley and others have become the centres of research because of the quality of their labs and access to huge funds from benefactors. Harvard University has the largest endowment fund in the US at US$36.4 billion and for the year 2013, paid out US$1.5 billion to support their programs, some of which are dictated by the donors. Yale, Stanford and Princeton all have endowment funds in excess of US$20 billion.

Outside of the US and China, which shares some commonalities with the US; population, technology generation, propensity to take risk, etc., following this strategy would not be a viable path. Honestly, any attempt to unearth a Malaysian “Unicorn” is not likely to end well. But we do have large corporations and industries that are faced with an increasingly volatile world and they need to find a formula for success. Added to their problems we live in a world that is getting increasinglycompetitive and leadership skills will be severely tested – no morefair weather Captains need apply!

“Small countries are at a disadvantage and hence the importance of open regional groupings like the European Union.”

To quote Prof Jay Rao, of Babson College speaking on leadership today;

“Several different kinds of leadership – heroic, transformational, charismatic – worked prior to the 21st century. However, as VUCAH (volatility, uncertainty, complexity, ambiguity and hyper-connected) increases around us, those types of leadership are quite inadequate. Entrepreneurial Leadership is what works better in today’s world.”

This new world requires all companies to put in place new management practice, which needs to take in the “attributes” of entrepreneurs who are experts at dealing with change and finding opportunities, otherwise the future for the large companies is bleak.

Read what authors Anwar Jumabhoy & Srikrishna Vadrevu say about entrepreneurs, the reasons for their success and the application of the “entrepreneurisms” in large corporations.

“Beyond Corporate Entrepreneurship: Entrepreneurship as a Management Practice” published by Black Card Books, is due out early 2016.

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