Technology innovation on the second half of the chessboard

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Paul Asel

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Paul Asel is managing partner of NGP Capital and a global technology investor for more than 25 years.

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EarthNow recently announced a $1 billion investment, perhaps the largest-ever Series A financing round, to build a global constellation of satellites. Ant Financial announced plans to raise $9 billion at an expected $150 billion valuation, making it the most highly valued privately held company. Last year, SoftBank embarked on a $100 billion investment fund, 30 times larger than any prior venture fund.

The venture industry is scrambling to respond. Several established funds, including Sequoia, Khosla, Norwest and Battery, have recently announced by far their largest funds raised to date. Valuations and round sizes have doubled on average in the past five years.

The speed and magnitude with which technology innovation is moving is mind-boggling, even for those of us who have worked at the center of it for decades. Staid industries for which technology seemed irrelevant are transforming themselves or being disrupted by the Connected World, innovation made possible by the confluence of cloud, mobile, sensor and artificial intelligent technologies. McKinsey has noted that the internet-impacted industries represent 15 percent of our economy. The Internet of Things will impact the rest with a potential economic impact of $11 trillion by 2025.

Technology innovation is now a global village. China has moved from a technology laggard to fast follower to leader within the span of two decades. This year, venture investment in China is likely to surpass U.S. venture investment for the first time. Europe is producing cutting edge technology and companies; the Spotify IPO ago is just the latest example. Venture investors in Silicon Valley used to apply the bridge rule: If an investment involved crossing a bridge, then it was out of scope. Now many of us apply the two-flight rule: Any investment is fair game if it can be reached within two flights.

And yet we are left to ponder: Has the market run amok? Otherwise, what fundamentals are driving the longest bull run in venture history? Brynjolfsson and McAfee from MIT offer some perspective in “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies.”

First, they note that innovation is accelerating as we approach the “second half of the chessboard.” This analogy applies a parable to Moore’s Law. The game of chess originated during the sixth century in present day India during the Gupta Empire. As the story goes, the emperor was so impressed by the difficult, beautiful game that he invited the inventor to name his reward. The inventor said, “All I desire is some rice to feed my family,” and proposed to start with one grain of rice on the first square and double the grains of rice in each succeeding square.

Impressed with the inventor’s apparent modesty, the emperor replied, “make it so.” If the request were fully honored, the inventor would receive 1.8 x 10^19 grains of rice by the 64th square, more rice than has been produced in the history of the world. The midpoint of the board would receive 4 billion grains of rice, about one large field’s worth of rice. It was only as they headed into the second half of the chessboard that at least one of them got into trouble.

Geoffrey Moore first proposed what has become Moore’s Law — the doubling of compute power every two years — in 1965. Moore initially indicated that he could foresee this pattern persisting at least 10 years.  Moore’s “Law” is merely a guideline, yet it has proven to be reliable over the past 50 years, and experts indicate it is likely to persist for another 10-15 years. If applied from the invention of semiconductors in 1958, then we are currently on the 30th square — rapidly approach the second half of the chessboard.

Until recently, the implications of Moore’s Law have been predictable. I first extrapolated Moore’s Law out 10-15 years starting in the 1990s. One could readily envision the miniaturization of computers, the rise of smart phones and Dick Tracy watches, the proliferation of sensors, higher processing speeds, storage capacity, compute power that would permit robotics, augmented intelligence and edge network computing. As we project forward, implanted devices, self-healing operations and autonomous vehicles seem imminent.

But as compute power far exceeds human capacity, it is increasingly difficult to apprehend the future implications of Moore’s Law. Much as with the emperor and inventor, the acceleration of innovations and magnitude of change puts us in promising but murkier territory as we enter the second half of the chessboard.

The second concept that Brynjolfsson and McAfee highlight is the delayed impact of fundamental innovation adoption. Pervasive utilization of the steam engine, internal combustion engine, electricity and indoor plumbing took decades, often 30-60 years. These innovations were often not adopted until new manufacturing facilities were built decades later.

We observe a similar trend in adoption of computer and internet technology. The publishing industry for books and newspapers was the most obvious application of the internet, yet it took well over a decade for our reading habits and the industry to adjust. Many would say this is still a work in progress. The financial industry is fundamentally a digital business, yet many practices remain entrenched: cash and credit card-based payments are but one example. The auto sector is just beginning to grapple with myriad new technologies. Surely the manufacturing and industrial sector will take longer still.

So two innovation trends are coinciding. Increases in compute power empower artificial intelligence, smart sensors and edge computing for the first time. Meanwhile, many industries are grappling to adopt technology available in the market for decades. The range of possible innovations for aspiring entrepreneurs are broader than they have ever been. The potential to transform industries has never been greater. More capital than ever before is available for good ideas. It is a great time to be an entrepreneur.

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