Silicon Valley is eating the world Thursday 19 Nov 2015

One of the things that really struck me last week was the feeling of optimism about the future of the tech industry right now.

Perhaps it was just because we were in California, on the beach, and the sun was shining. It’s hard not to be optimistic about life when it’s 25 degrees and you have a beer in your hand.

Not that I would know – I was working. Honest.

But perhaps it wasn’t just the weather. The tech industry is going through something of a golden period right now. Not only are the major tech firms some of the most cash rich in the world, but Silicon Valley has become a symbol for everything that’s good about capitalism. It’s a living example of the success that comes from big ambitions, innovative thinking, optimism about the future and risk taking.

It’s one of America’s greatest success stories. And given some of the stuff we saw onstage, it shows no signs of slowing down (more details to come later in the week). There’s a lot to be optimistic about.

And not just for the lucky folks out in California. The technology industry as a whole has a lot going for it right now.

Why?

Well, to me there are three things in particular that underpin pretty much everything good going on in the industry right now. I’ll call them the ‘Three Cs’: computation, capital and culture.

1. Computation speed

More than half a century after it was first defined, Moore’s Law is still going strong.

If you’re unfamiliar with it, here’s a quick primer. In 1965, Gordon Moore published a paper called “Cramming More Components onto Integrated Circuits”. Never has the term ‘cramming’ had such profound implications. In the paper, Moore observed that the number of components on a computer chip had roughly doubled every year since 1958. He suggested the trend would continue for at least another decade.

The number of transistors on an integrated circuit doubled roughly every 18 months for the next decade. And the decade after that. And the one after that.

It’s the most famous of all technological trends.

In the simplest possible terms, it means computers are becoming exponentially faster, smaller and cheaper. That’s been the rocket fuel behind pretty much every technological development of the last half century.

It’s worth stepping back and considering just how profound an impact this has had on our lives; very few other industries have progressed at this kind of rate. In the words of J Storrs Hall, the founding chief scientist of Nanorex Inc, in a recent essay:

“If the price and performance figures for transportation technology had followed the same curves as those for computers for the past 50 years, you’d be able to buy a top of the line luxury car for $10. What’s more, its mileage would be such as to allow you to drive around the world on one gallon of gas. That would only take about half an hour since top speed would be in the neighbourhood of 50,000mph (twice the earth’s escape velocity).

“Oh, yes, and it would seat 5,000 people.”

Sounds like a crazy level of progress, right?

Yet that’s exactly what’s happened to our computational abilities in the last half century. If you’re reading this on an iPhone, just consider that in your hand you have a machine more powerful than the world’s fastest supercomputers in the 1960s, something worth roughly $1trn in 1968 dollars.

The Apollo Guidance Computer used on the Moon missions in the 1960s is roughly as powerful as a Nintendo NES – a computer I played with when I was still at primary school.

Again, no other industry can match this kind of relentless, mind warping progress. Nothing else comes close. That’s all because of Moore’s Law.

It’s a trend that’s still going strong. Think about this: the Cray-2 supercomputer was one of the world’s most powerful processing machines in 1985. It was state of the art; the 2010 Apple iPhone 4 (which cost about £400 and could fit in your pocket) could match its power easily.

Yet fast forward to today and the recently launched Apple Watch is twice as powerful as that!

And it’s this that’s been instrumental in the rise of the internet, social media, smartphones, tablets – anything that relies on computers getting more powerful, cheaper and smaller.

It’s still the driving force behind the most cutting-edge technology of today. And it’s why we can expect huge advances in all manner of different industries in the coming years.

Take genomics, for instance. Sequencing a human genome is all about computing power; it’s a code you’re trying to crack. The more powerful your computer, the faster you can do it.

The first sequencing of the human genome – in the 1990s and early 2000s – took more than a decade and cost tens of billions of dollars. Today the process can be done for less than $1,000 and takes a matter of days.

That’s purely a function of Moore’s Law and our computational power.

Add in another two or three doublings over the next half a decade or so and we could easily be in a position where genome sequencing is essentially instant and virtually free. The impact that would have on society and human longevity is impossible to overstate.

And that’s just one industry being turned on its head by our increasing computational power. A constant refrain from inventors and innovators onstage last week was “faster, smaller, cheaper”.

Keep those words in your mind. They’re changing the world.

2. Culture

Back in 2011, the entrepreneur, venture capitalist and developer Marc Andreessen claimed that “software is eating the world”.

He was right.

And not just in the literal sense. Yes, more and more companies outside of the technology industry are now being defined as much by the software they use to operate as much as their business itself.

Think of a bank or broker striving to develop new ways of allowing you to manage your money online – that’s not a reinvention of the core business, it’s a software development issue.

The same goes for many retailers, utility companies (the smartgrid is a software development, for instance), and telecommunications – even local and national government are increasingly defined by the software they develop to enhance their operations.

Even my own industry – publishing – is becoming increasingly dependent on software. The written word itself hasn’t changed. Good writing is still good writing, and good thinking is still good thinking. But the software we use to communicate and interact with our readers is constantly evolving.

That’s one vital way in which the innovations, ideas and practices incubated in Silicon Valley have emanated out into the wider world. Like the star at the centre of a complex solar system, what happens in the Valley ultimately changes the way the rest of the world works.

But as I said, this isn’t just a literal case of software (or practices) developed on the west coast of America spreading. There’s also been a more metaphorical and symbolic shift. Silicon Valley is exporting its culture to the rest of the world.

The west coast culture of innovative, technology focused business models has spread rapidly in recent years, turning all sorts of different established business models on their heads. As The New York Times reported earlier in the year, “a new generation of tech companies has encroached on industries like hospitality (Airbnb), transportation (Uber and Lyft), office space (WeWork) and more, bringing a set of tech-inflected values with them.”

And it doesn’t stop there. The combination of social media and inexpensive smartphones with decent cameras has changed the way society operates (think of the role Twitter and Facebook played in the Arab Spring, or the way many people experience breaking news stories here in Britain).

This hasn’t happened by accident. It’s part of an ideology being rapidly spread by the technology industry. You might think it’s a little grandiose, but it’s real. Just consider the manifesto Facebook published when it went public back in 2013:

“By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible.

“Through this process, we believe that leaders will emerge across all countries who are pro-Internet and fight for the rights of their people, including the right to share what they want and the right to access all information that people want to share with them.”

The more you look, the more you see it: the culture is spreading. Software isn’t eating the world, Silicon Valley is.

(As an aside, think of the number of films and TV programmes featuring technology firms in a prominent role over the past few years. Off the top of my head, I’ve seen The Social Network, HBO’s Silicon Valley, and Start Ups: Silicon Valley. If you haven’t had your fill yet, there’s a Steve Jobs biopic out soon.)

New business models are emerging. New ways of thinking about the world are spreading. And people with real Silicon Valley experience moving into other influential positions.

One of the speakers that really caught my eye was Mina Hsiang. She’d worked at several interesting west coast firms before “getting the call” from the White House to become an adviser (she was also one of the “surge” of tech people brought in to fix the healthcare.gov site a couple of years ago).

It’s just one example, but I thought it was evocative of how the Silicon Valley culture of innovation is seeping out and influencing the world.

Another example – a little closer to home. Another speaker was a chap called Tony Young, who described himself as “disruptor in chief” of the NHS (I know). He was just in the process of launching something called the Clinical Entrepreneur Programme – essentially an attempt to give doctors on the NHS the chance to think more entrepreneurially and develop their own businesses without leaving the health service.

Who knows if it will work?

But again, it shows a shift away from the traditional way of thinking about business and towards the start-up culture of innovation and risk taking spread by Silicon Valley.

3. Capital

If you have the technology and the innovative ideas you need to exploit it, what’s the final piece of the puzzle? You need the capital to get started. And one thing that really struck me last week was what seemed like an absolute abundance of investment capital for small tech firms.

The number of times people onstage said “we’ve just raised X million dollars” or “our first round of fundraising was oversubscribed by X times” or “Google/Microsoft/Facebook have just bought this for X billion” really drove that point home.

And it’s certainly something that’s borne out by the numbers.

For instance, last year Facebook spent $2bn acquiring the virtual reality firm Oculus Rift. (Apparently the Oculus Rift management turned a $1.1bn offer down, despite the fact the company had only been in existence for a couple of years, after initially starting in a garage and funded by a Kickstarter campaign.)

According to technology analysts Venture Pulse, the amount of venture capitalist  (VC) funding available to companies is at multi-year highs (emphasis mine):

“Funding in 2014 hit a multi-year high of more than $88bn invested in VC-backed companies, an 80% increase from the year prior. 2015 so far is poised to surpass that mark with nearly $60bn already invested. Deals are on pace to reach similar levels as 2014, with 3,668 already this year.

“Q2 2015 was a banner quarter for Unicorns – VC backed companies with valuations in excess of $1bn. During Q2 2015, 24 VC backed companies achieved Unicorn status, including 12 in the US and nine in Asia. Among the newest Unicorns were Zenefits, Oscar Health Insurance and MarkLogic. The explosive growth of Unicorns is being spurred by the continued availability of late-stage deals – in particular, new capital sources including hedge funds, mutual funds and sovereign wealth funds. During Q2 2015, global late-stage deal size averaged $72.6m and included more than thirty $100m+ deals globally.”

It seems the capital is there for a company with an innovative idea.

And it became one of those things that I noticed early on, and then just couldn’t get out of my head. Depending on your point of view, you can read what you like into it.

Personally, I found it hard not to see this as a function of six years of near zero interest rates. We all know that’s created major distortions in the system. And it’s pushed increasing amounts of people to seek out ever more risky ways of making a return.

I’m ambivalent as to whether that’s a good thing. Whether any of this capital will see a healthy return is yet to be seen, but from the point of view of an innovator looking to finance a startup, it seems like it removes one big barrier stopping you getting started.

And perhaps that’s the point. It’s hard to know how much capital is being misallocated and how much is actually being used in such a way that it builds the framework and infrastructure for the next technology bull market. It’s our job to figure out where the real returns will be made. More on that in a future issue.

One thing that’s undeniable is that many large tech companies are sitting on huge amounts of cash. For instance, earlier in the year a report by Moody’s Investor’s Service revealed that just five US tech firms were sitting on a combined cash pile of $430bn at the end of last year. Here’s the breakdown:

Apple: $178bn

Microsoft: $90.2bn

Google: $64.4bn

Cisco: $53bn

Oracle: $44.7bn

In short, the technology industry is one of the most cash rich in the world. The capital that businesses need to innovate and develop the next breakthrough advance is available. That will prove vital.

By Nick O'Connor, posted on the Capital & Conflict website 17th November 2015

www.capitalandconflict.com/silicon-valley-is-eating-the-world