Updated: Sep 10, 2020
Technology (innovation, novelties, disruption, etc.) traditionally has been created in two main spaces: traditional established companies, or public and private research centers (universities, technological centers, etc.). In recent years, there has appeared a third actor – startups!
Involvement of startups and technology in economic development
The long-range economic potential and societal impact of new technology are one of the few certainties in the decades ahead. Technology companies continue to become a bigger percentage of the world economy. They have overtaken oil and gas companies to become the largest public companies in the world, the private market is bursting with billion dollar unicorn valuations unseen ever before in history, and many non-technological industries are either dying at technology’s hands or becoming one with it.
The first five information technology waves of Defense, Integrated Circuits, the Personal Computer, the Internet, and Social Media have dramatically transformed society. But the waves that are coming in the next 20 years will make what’s come to pass look like a child’s play.
Self-driving cars, Artificial Intelligence, robotics, and Virtual Reality are just a few of the fast approaching societally transformative technologies coming in the next wave. All of these technologies portend a future with great increases in productivity and prosperity.
Where will all this technology be created and commercialized? A majority of this future technology will likely be brought into the world by entrepreneurs creating startups.
Evolution of technology
Economic theories consider an evolutionary point of view of technological change and economic growth. Considering that vision of change and evolution of technology, let’s emphasize its main characteristics:
Technology means by definition uncertainty and insecurity
Technology is dynamic. It changes and constantly improves. New varieties and new options appear persistently. Technological change is systemic. Technology doesn’t appear without any change in the environment. New technologies appear at once with the infrastructure to produce and distribute them. The car required highways and petrol pumps. The Internet has evolved with the fiber infrastructure. That technological interdependence, however, means that big changes are slow and expensive.
Based on the idea of an evolutionary change of technology, evolution (technological) provides better products and they, in turn, are used to create the next generation of products. One can likely expect runaway technological growth in the future, resulting in unfathomable changes to human civilization.
Technology’s percentage of world GDP is growing
The global Information Technology (IT) industry market, encompassing hardware, software, services, and telecommunications, is expected to reach more than $3.8 trillion in 2019, up from a little over $3.7 trillion the previous year. Other calculations exclude sectors that are not deflationary such as services, and come up with $1.6 trillion/year, or 2 percent of global GDP. This figure was just 1 percent of global GDP in 2004 and only about 0.5 percent of global GDP in 1992. So technology’s percentage of the world economy is growing exponentially. At this rate, it will be 4 percent of world GDP by 2026 and 8 percent by 2038.
The global economy is expected to grow 3 percent per annum and double by 2038 to $150 trillion per year. If technology keeps on its exponential pace, hitting the 8 percent figure, then deflationary technology sectors will be doing $12 trillion in revenue in 2038, $10.4 trillion being net new revenue from today.
Increasing adoption of new technologies leading to rise in startups
Today, the adoption line of certain new technologies is practically vertical. Innovations and technologies are rapidly introduced into the market and accepted by society. The time it takes for a new technology to reach mainstream adoption is accelerating exponentially, to the point in the future where a new technology can have greater than 50 percent market penetration in just a few years, whereas earlier it would take decades.
This is a very large amount of future growth for technology that portends a very bright future for technology businesses, and in particular, technology startups and startup ecosystems. This can also be seen from another perspective – the valuation of the companies responsible for the disruption. Today we face a high rate of disruption and technology adoption. Apart from that, the emergence of new technologies is increasing over time. Today new disruptive proposals appear constantly. A significant portion of the technology products that will make up the $12 trillion in global annual GDP 20 years in the future likely doesn’t exist yet.
By definition, a startup means risk and velocity. By definition, a traditional company hates these two elements. Startups are thus the prime drivers of risk and the speed.
Role of startups in technological evolution
Startups provide disruption based on the constant search for opportunities and unmet needs. Some of this technological future will also come from large companies, but by and large, these large companies still haven’t figured out how to reliably create disruptive innovation.
A strong indication that we are in the middle of the passing of the baton between the industrial era and the information era is the recent milestone reached in July 2016, where the world’s five largest public companies by market capitalization were all technology companies – Apple, Google (Alphabet), Microsoft, Amazon, and Facebook.
The role of the large traditional companies in the innovation landscape is predominantly as acquirers, where they grow acquired products, applying their capacity for efficiency and scale. But traditional companies also see startups as a way of innovation. Corporate venturing today has been extended and systematized. Established companies define challenges for the young entrepreneurs and startups and then they try to buy them (when the risk is out).
Startups are much better at new disruptive innovation than large companies. Both factors (more disruptions and reduced time of diffusion) introduce enormous challenges in traditional companies. The introduction of a new technology means (in many cases) the vanishing of existing companies and sometimes of entire sectors.
Large tech companies have developed a more symbiotic relationship with startups. Companies such as Amazon, Apple, and Microsoft have displayed strong competency over the last 5–10 years in developing complementary relationships with startups by providing platforms and infrastructure for them to build on. Disruption cycles are speeding up.
New startups are created each year and they receive money from investors to grow. Many of the startups fail (and they are asked today to fail quickly, so as not to consume unnecessary resources). But in those cases, entrepreneurs and investors try again. In fact, repetition and diversification are key elements in startup ecosystems. In cases where there is a success, the effort is monetized through exits. An important part of the money from these exits goes back into the system. Successful entrepreneurs also create new businesses or turn themselves into investors. A startup ecosystem is an economic process for a city, country, or region.
It is also critical to see investing in the creation of startup ecosystems as not just as a generator of economic prosperity and job creation but also as a hedge towards the social security of the future.