RALEIGH – World War II sparked the creation of the US National Laboratories. FDR and Congress made significant investment in research and innovation to support the war effort. In the years after the war, the federal government put strong emphasis on investing in science and technology research, including President Truman’s forming of the National Science Foundation in 1950.
The government recognized that advancement of technology is the single most important factor for both economic prosperity and national security. This theory has since been proven scientifically through mathematical economic analysis, winning Robert Solow the Nobel Prize in Economic Sciences in 1987.
In the middle of the 20th century, big business followed the government’s lead, investing significantly into building private research labs. In the 1960’s, Bell Labs had more than 1,200 PhDs on staff and produced 13 Nobel Prize winners. Xerox PARC launched in the 1970’s, leading to the invention of ethernet, graphical user interfaces, the computer mouse and laser printing. General Electric developed jet engine materials, x-ray and MRI imaging technology and new plastic polymers. IBM invented the floppy and hard disk drives, relational databases and the UPC code. For 28 consecutive years, IBM produced more patent inventions than any other company.
Similar to the federal government, through the middle of the 20th century industry took a long view, willing to invest substantial time and money into research that may take decades to recoup. But the renaissance of industry funded innovation was relatively short lived. And government-funded innovation is on the decline. Most recently, we are seeing a growing shift towards innovation being funded by the privately wealthy.
Roots of R&D
Let’s look at what is happening and where we may find ourselves if these trends continue.
The NSF reports that the share of federally funded R&D has been on a path of decline since 2010 (from 31% in 2010 to 20% in 2019), and the share of federally funded basic research has also consistently declined (from 52% in 2010 to 41% in 2019). Roughly 75% of global innovation funding comes from just 5 nations – the US (28%), China (22%), Japan, South Korea, France, Germany, the UK and India. While the US remains the top spender, China has been increasing its budget roughly double the US every year since 2017.
The days of major corporate investment in research began to change in the 1980’s. Jack Welch became CEO of General Electric in 1981 and systematically dismantled the major research efforts that created the original foundation that made GE one of the top companies in the world. Welch’s worldview was that stock market performance was the only measure that mattered. Quarterly returns pressure led to the financialization of GE. Labor was moved to the cost side of the balance sheet (prior to Welch, companies reported their employees as assets, not costs). Layoffs, cost-cutting and stock buybacks, all orchestrated to demonstrate Wall Street returns propped up GE during Welch’s tenure. But it left a hollow shell that finally collapsed due to a failure to innovate and create new products.
Today, nearly every publicly traded company in the world follows some version of Welch’s playbook, and few spend a significant percentage of their budget on long-term scientific and technology research.
So where is innovation being funded today? Largely this role has been taken over by venture capital. In the last decade alone, venture capital has more than quadrupled, to more than half a trillion dollars in 2022, with the majority deployed in the US. The big question is whether the shift from primarily government funded innovation to enterprise funded, now to venture funded innovation is healthy for the US.
Without question, venture capitalists have shorter timeframe expectations to measure financial return than the government. Goals vary fund-to-fund, but a typical VC hopes for a 5-10x return in 7-10 years. VC’s also tend to only invest in technology that is already mature, with little appetite for basic scientific research. While the total innovation spend in the US is shifting from the government towards VC, that does not imply that VC’s are spending on earlier stage technology development. In other words, there is decreasing funding on “research” and more on “development”.
With historical perspective, we know that it sometimes takes decades for truly foundational technology advancement to reach market practicality. Will VC’s have the patience to fund transformational technology advancement? The answer is almost certainly, “no”. VC’s tend to deploy capital milestone-by-milestone in the growth of a company, with the most common use of later stage funds applied to growing sales or funding market consolidation through mergers & acquisitions. Technology research for basic product development tends to be a lower, and at times least important priority.
The “customers” of venture capitalists are the Limited Partners (LPs) that contribute their personal money into the funds the VC’s run. The goal of the LP’s is simple. Take money to make more money. While I am sure that some LPs do care about the technical superiority of the US, and the broad, population-wide economic benefits that technology advancement brings to society, the reality is that venture funds are fundamentally driven to use money to make money.
Reasons to worry
We can only hope we don’t need a major world crisis like World War II to remind us how important technology advancement is to a healthy society. Perhaps I’m wrong and the shift from government-funded innovation to venture funded innovation will prove positive. But as I see competing nations like China and South Korea out-investing the US in basic research, it has me worried. The total numbers indicate that the US and major industries are losing the long-view, instead focused on short-term gains. VCs will have even less patience.
There are funding exceptions. The pandemic crisis created new federal budgets for the semiconductor industry, for example, that likely would not have been created if we had not lived through major supply chain disruption. This is particularly good news in North Carolina, where companies like Wolfspeed are developing wide-bandgap technology. Toyota, Forge Batteries and DNP have all recently made announcements for battery production. NC State was just awarded $39.8M to establish a new semiconductor research center. But the federal funding trends have a majority focus on re-establishing US production of advanced semiconductors, with a secondary budget focus on researching new discoveries.
Those with the responsibility of taking a long-term view of the health of the US economy should be watching closely. If the trends continue and each year venture capital grows, while government investment erodes, will we see a behavior shift from the VC’s? If short-term gains remain the priority, and investment is only made into the highest “commercial probability” technologies, it begs the bigger question. What good will that consolidated wealth be, if our country falls behind others in transformational technology development?