Notes On The Role of Financial Capital In New Technologies

This post was influenced by the renowned and commercially under-celebrated writings of Carlota Perez & Joseph Schumpeter. 

Whenever society experiences a new technological revolution, there is always a shift into a new paradigm. The timeframe of that paradigm varies, but it always begins with a technological "big bang" that kicks off the technological revolution. For example, the creation of the Intel Microprocessor in 1971 acted as a "big bang" for the technological revolution that we are still in today (*see note at the bottom) - The Information Age. The microprocessor would go on to enable all the technological conveniences consumers rely on today, such as computers, software, telecommunications, satellites, mobile phones, and the list goes on. That one spark enabled a fire of technological progress by collapsing the cost of innovation.

In most cases, the first "big bang" and all the innovations that follow are usually done with scientific motivations first and then commercialization second. When entrepreneurs and innovators are building, someone will have to eventually see these projects as a possible source of profits. They will have to be willing to fund these entrepreneurs to see if their projects are 'for real' and eventually be willing to place a bet through an investment (powered by their evidence-based conviction) that the project can be profitable through commercialization. Once the product is commercialized, they will fund further for expansion. 

Process for funding a new technology

  1. Testing

  2. Launch

  3. Expansion
    3a. Further expansion

Financial capital is crucial towards innovation and progress throughout technical revolutions. An investor's money can help make radical changes. Eventually, there comes a time where the technology becomes legitimized. As a result, there is usually a surplus of investors willing to put their financial capital towards projects inside this new technology and the other new projects it will enable. This is a period where it would appear that these investments seem to be “not a high risk” due to the transition in consumer behavior towards similar products, especially for the possible rewards compared next to identical projects. This period of investment is usually in the beginning to middle stages of a new technological paradigm. 

However, at some point, the low-risk investments inside this established paradigm begin to diminish. This happens through 'hitting the ceiling' for innovation or the lack of ability for expansion with the technology available. In most cases, this is a signal that the technological paradigm is coming to an end. At this point, financial capital will begin looking elsewhere for profits and venturing in new directions. 

The ability to find these 'new directions' to place their financial capital is where true alpha is found for investors. There is no map to help investors find the next hyper-profitable investment. The one thing that is important to understand as an investor is that entrepreneurship varies. It can be found through the 'true outsider' - someone who lives outside the current social norms and sees the world through an entirely different lens. Or it could be someone inside a current establishment firm whose following product not only changes the face of the company but sparks a new technological shift inside the paradigm. 

Historically, most technological shifts have happened inside an established company, either through invention or by acquisition (ex: the precursor of the integrated circuit in Bell Labs). As of late, it's mostly been tried through acquisition (ex: Facebook acquiring Oculus). This can be profitable for the entrepreneurs and investors; however, it's worth noting that this behavior tends to prolong the current technological paradigm instead of shifting towards a new one by avoiding an outside technological revolution that could hurt the established company's future profits. 

Established companies view it's in their best interest to avoid or hold off on radical technological change because it always results in a shift in consumer behavior which could make their products and services obsolete. This is when companies bring out the PR machine and find direct and indirect ways to try and discredit any emerging technologies, and/or the entrepreneurs.

The irony in this is their products and services are likely already becoming more obsolete every day. This is especially the case currently with the collapsing cost for innovation and the scale of self-education through the democratized access on the web, resulting in increased entrepreneurship. So, in reality, it's in the companies best interest to start focusing on acquiring talent to bring on more innovation than trying to diminish it in the market. Few companies usually recognize this and continue to thrive. Most companies do not (the velocity of innovation inside the information age has not been kind to the companies lifespan). 

Since a majority of the established companies do not recognize the significance of the shift, this results in a surplus of entrepreneurship powered by outside innovators who do understand the shift and continue to work on their projects, hoping to create the next technological revolution. 

Thus, making the position of financial capital come full circle to place their investments towards the testing, launch, and expansion towards these 'outsiders' new technologies in hopes of finding the next paradigm shift, and more importantly, their next big profits.

*People have argued that we have already started to enter a new technological revolution, specifically ‘the decentralization age’. However, in my opinion, I do not feel we can truly label a new technological revolution until we have the historical context as we do of others, such as the Industrial Revolution. I would also argue that decentralization has not proven to be a new technological revolution because it still fits the criteria for the current ‘Information Age’ we’re in - it is potentially improving it though.