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Summary:

For all the glitz of tech brands like Google, Facebook and Twitter, they account for relatively few jobs and only a tiny fraction of GDP. Our economy needs more VC investment in big industries like healthcare and construction.

fix economy
photo: William Berry/Shutterstock

What do General Motors, Intel, 3M, Johnson & Johnson, Apple, Google, Facebook and Twitter have in common? Beside being textbook American success stories, they are all torchbearers of true, groundbreaking innovation – whether it’s technology,  supply chain, business model or any combination of those. But more than that, they are all legitimate creators of new industries.

Yet when you look at the relative contribution of these companies to U.S. GDP, to U.S. employment numbers – and, especially, to perceived innovation – stark differences arise. The last three are surely the perceived leaders of innovation today and garner much more coverage from the popular media . But they are laggards when it comes to meaningful employment generation and fueling large-scale economic growth. And it’s those two factors that are critical for stimulating our economy and getting us on a path toward a more economically stable future.

I believe Silicon Valley needs to jump in and extend its innovative spirit in sectors that impact large portions of our economy and are critical to getting us out of the recession. More specifically, it needs to foster a breeding ground for white space innovation. That means ones involved in large markets; that there is differentiation based on fundamental innovation; and there is potential to reinvent established industries – or also creating new ones.

All innovation ≠ employment growth

Digital media marketing, the primary source of monetization for social media companies, generously adds up to $500 billion in annual revenue, and employs about five million Americans. That’s significant for sure, yet it’s a small fraction of the $15 trillion U.S. GDP. Once we subtract these high-profile companies from the equation, that leaves $14.5 trillion of the GDP, some 150 million Americans in the work force, and a vast majority of the commercial sector unaddressed.

So what about innovation in all of those other industries? Who is financing their reinvention? For the U.S. to be competitive in the rapidly morphing global economy, we need to innovate across many sectors of the economy, and not just media, social and mobile.

Economic growth comes from cross-sector

The periods of sustained economic growth in the U.S. during the 20th century – the 1920s, 1950 to 1970, and the 1990s – were all spurred or supported by broad-based innovation across many industry sectors:

  • The Roaring Twenties saw innovation and rapid growth of the automobile industry, which stimulated innovation in industries such as oil and gas, and roads and infrastructure. This also helped spur “adjacent” industries such as tourism, and helped create the first major boom in construction and energy industries.
  • Similarly, with a few exceptions, the period from around 1950 to 1970 saw a steady migration from an agriculture-based economy to industrialization, enabled for the most part by innovations in energy, transportation, pharmaceuticals, the food industry and entertainment.
  •  Finally, the ’80s and early ’90s witnessed innovations in high-tech and especially the launch of the internet, which positively impacted almost every sector of the economy.

By contrast, innovations in social media – undoubtedly the hallmark of Silicon Valley-based innovation over the past decade – impact a very small sliver of the economy. And despite high growth rates within this sliver, they simply cannot help fuel U.S. economic growth on a broader scale.

Today’s white space opportunities

According to the Bureau of Labor Statistics, two of the top three job creators through 2020 will be in healthcare and construction. In fact, juxtaposing these industries with social media and advertising, the ratio is stark: 10 jobs to one.

Construction

The last recognized innovative period in construction, using patent grants issued by the USPTO as a proxy, was back in 1968. Since then, while construction certainly has innovated on the use of new materials and automation of “heavy lifting,” there is much room for improvement. For instance, in the U.S. it still takes 10 years to build highly complex structures, like hospitals and apartment housing, with cost overruns that end up two times higher and operating costs that are monotonically increasing.

This costliness and mismanagement translates into increased healthcare costs (in the case of hospitals), inflated real-estate values and, oftentimes, structures that are not prepared to handle innovative medical equipment. An infusion of venture capital into the application of technology in construction will lead to better designed projects that increase workplace efficiencies, as well as construction processes that reduce time to build and overall costs.

Healthcare

Pharma is another sector that has been struggling of late. The stellar performance of Merck and Pfizer from the ’60s to the ’80s is now distant history. Instead, Pharma has more recently become known for a suffocating lack of clinical success. The biotech revolution in the ’80s was led by a once little-known biotech in Silicon Valley, Genentech. We project the next major innovation will come from similar, unforeseen roots. (Disclosure: My firm, Artiman Ventures, holds investments in several health science-related companies.)

On average, it takes over a decade and more than a billion dollars to bring a single new drug to market. Or does it? The clue lies in the average part. Because of the trial-and-error approach to experiments deeply ingrained in the industry, the total cost of each successful drug must amortize the cost of all the unsuccessful ones. Disruptive innovation in an industry like this would do more than provide an opportunity for a far better ROI. Innovation in healthcare also changes the way we care for ourselves and our loved ones, which is an ROI based on quality of life.

The Valley’s opportunity

Disruptive innovation in large, established industries is critical for stimulating our economy. Construction and healthcare may not be glamorous, but their GDP impact relative to social media and advertising is stark: 30 to 1.

Silicon Valley can fuel this shift by focusing on white space investments to drive innovation in large industries and markets that impact the remaining $14.5 trillion of GDP, which represents over 96 percent of American economy (and coincidentally, 96.7  percent of America’s workforce). In my opinion, that needs to be the “new normal” in Silicon Valley.

Yatin Mundkur is a partner with Artiman Ventures, focusing on technology and medtech. He is currently on the boards of Cellworks, Crossbar, InfiniteZ, Looxcie, Pricelock, Prysm, Virident Systems, Xambala and Yantra.

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Photo courtesy William Berry/Shutterstock.com.

  1. Alexandr Shevtsov Sunday, July 7, 2013

    What do General Motors, Intel, 3M, Johnson & Johnson, Apple, Google, Facebook and Twitter have in common? … But more than that, they are all legitimate creators of new industries.
    —————-
    That was long ago, and now do not expect them to innovation, now they only can that take money from consumers and do nothing for innovation.

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    1. Construction, Healthcare, and insurance industries, etc. are highly regulated, capital intensive, thus extremely difficult for outside innovators. I really do not think brilliant technologists should waste their talent in these areas. On the other hand, brilliant social activists, politicians, and academic people should involve more in these fields. Someone needs to blaze the path first, and sadly, technologists may not be the suitable people in many situations.

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      1. Well put. ‘Waste their talent’ is the key point. You want to see innovation in these spaces, incentivize it. Expecting that the smartest or richest people are obligated to do something about it by throwing money at inefficient systems or industries seems silly.

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      2. Mac McDougal Monday, July 8, 2013

        I agree with you that we need brilliant activists to help, and they are all working like beavers to try to stop the wagon before it goes over the cliff. But are you really saying that “capital intensiveness” and innovation are negatively correlated? Have you seen the cost numbers for a chip fab plant recently? VCs are not “brilliant technologists”; they are brilliant financial opportunists, and the financial incentives for innovation in construction are becoming clearer with each passing ton of CO2 leaking from our built environment. Regulatory regimes across California are actively *encouraging innovation in new structural materials, heating/cooling, insulation, active shading, and a host of other arenas. The issue is not that VCs would like to innovate here but they can’t navigate the regulatory/financial swamps. It’s that their in-house incentives seem to encourage funding businesses that don’t produce anything.

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  2. whitehawk66 Sunday, July 7, 2013

    I think the author provides a good reminder to keep perspective above and beyond the hype of these constantly evolving and every changing technologies.

    Older professions and disciplines could stand to evolve and the over-hyped nature of newer technologies should be taken with a grain of salt…or three.

    Social media….advertising…don’t buy the hype like a sucka muthafuc…

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  3. Comparing Johnson and Johnson and General Motors to Facebook and Twitter makes little sense. Knowledge jobs do not add up in numbers to brick and motors jobs, nor will they ever. The former two have actually cut jobs in last ten years as automation advancement have taken place. While the latter two have come into existence in the last ten years adding jobs.

    It’s not up to high tech companies to create jobs. They will when they need employment. They will when it is more cost effective to hire people rather than further automate. Jobs will be created, but they won’t be the jobs that were created ten years ago. It’s up to workers to adapt and keep learning. There are many jobs out there, especially in technical fields that are going unfilled. This is why the annual allocation of H-1B Visas are “snatched” up in days.

    Students coming out of high school need to be much more aware of what is the best time of training for their future. Parents of these students need to quit pushing their kids into four year universities for their (the parents) emotional benefit.

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  4. It’s short-sighted to only look at the direct employment figures for today’s innovative tech companies. Creation of software platforms and mobile devices have had enormous gains in productivity (and job growth in all productive sectors of the economy). The “social” and “advertising” sector have created the foundation for huge growth in jobs and innovation throughout the economy.

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  5. My impression is that the author’s primary purpose in writing this article is to drum up interest in an area he is heavily invested in—health sciences.

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  6. Lots of good comments here. Thank you. I will take the liberty of replying to them collectively

    - There is no question, some of these sector have regulatory pressures. However, that has not been an unsurmountable obstacle to entrepreneurs. Silicon Valley continues to be a very strong leader in both therapeutics and diagnostics – both ares see some of the heaviest regulatory burden. In fact, with the upcoming mandatory health care exchanges for ACA, a few enterprising startups have pivoted their business to leverage this regulatory burden.
    - Telecom is another sector which sees heavy regulatory burden. No one accuses startups from shying away from the telecom sector. Nor do commentators credit telecom incumbents with innovations. Virtually all the developments have come from startups.
    - Lastly, another regulatory heavy sector – financial services – have also seen its share of startups in areas ranging from exchanges to broker/dealers to payment processing innovation.
    In summary, while regulatory burdens pause entrepreneurs they do not stall the committed ones. The lack of awareness of some of these problem areas amongst entrepreneurs; which in turn, are opportunities for them is what prevents work on them. The media can help by broadening their focus and highlighting a wider spectrum of issues,
    Its not the lack of incentives or rewards. Examine the success stories in any of the areas mentioned above.

    Further, multiple sectors of the broad economy need fresh thinking from innovators from who are willing to cross disciplines. Witness the work at Tesla and SpaceX by Elon Musk. When you take people out of their comfort zones into unfamiliar industries they innovate differently than if they had remained in their past field of expertise—experts in a given segment often see problems, where novices see solutions and ask ‘why not’. This is how you innovation has been repeatedly produced.

    Incidentally, about 4/5th of Artiman’s investments are in Tech vs a 1/5 in health sciences. But, we do see benefits in tilting the ratio a bit towards healthcare.

    - Yatin Mundkur

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    1. Andrew West Tuesday, July 9, 2013

      If we are truly concerned about saving the US economy, we need to create jobs. We have 25-30 million people that are unemployed or under-employed (part time). When the government proclaims progress because we have 200,000 new jobs in a month, that’s only 2.4 million a year – about the same as our annual batch of college grads. It is insignificant. We have a big problem and it requires big thinking – incremental innovation won’t save us.

      The construction industry is very inefficient and most in the industry know that. They are too busy to innovate or even consider RE-inventing their industry. The hardly invest in any R+D. But the industry is currently suffering because most projects they can complete now cost more than they’re worth. Studies have shown 30-50% waste on projects and it’s finally caught up with them. China, Germany and Japan are pursuing different ways to produce buildings, we’re still “building” them. We used to build cars. There is a huge opportunity to re-invent this industry and create jobs.

      The healthcare industry suffers from similar problems. The most important distinction about our very inefficient (yet most expensive) healthcare industry is it was never designed. It evolved and catered to special interests without ever being designed to operate efficiently and effectively. Major studies confirm that our $3 trillion healthcare industry only delivers $1.5 trillion in healthcare and we’re 38th in the world for quality. Even the latest government “reforms” will not reduce any of the waste, in fact it will cost more and deliver less. The Affordable Care Act isn’t and the stated goal was simply to “bend the cost curve.” It won’t even achieve that uninspiring goal.

      We need to re-invent several industries in addition to construction and healthcare, including agriculture, education and energy. My work demonstrates that if we finally address these challenged industries with new methods and processes we can create 12-15 million jobs. If we save $1 trillion in healthcare that alone could translate into 5-10 million jobs.

      We need economically viable solutions that don’t require government money or mandates. We need to make invention the goal, not just innovation. And, we’re running out of time.

      You can see an Intro of my work here:

      http://m.youtube.com/#/watch?v=xj3Zc-SF0YE&desktop_uri=%2Fwatch%3Fv%3Dxj3Zc-SF0YE

      And here: http://www.solutioneur.com

      I’ve recently added Healthcare and Social Security.

      Solutioneur@hmail.com

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