Silicon has been a trustworthy source of wealth. The market economy accumulated this wealth in the hands of a few. This wealth is now flowing to nurturing ideas for building the next phase of Silicon-powered society to have a multiplier effect. Moreover, wealth accumulated through the trading of resources like petroleum is also flowing to next-generation Silicon ventures, often known as AI startups. However, innovation for leveraging the next success of Silicon poses by far greater risk. Hence, avoiding silicon wealth annihilation has started to surface. A series of wrong investment decisions could wreck the ecology of innovation. Let’s hope not.
Innovation spurs economic growth, but, more importantly, it raises living standards by delivering increasing wealth from depleting resources. Its ability to make Silicon bearing sand a source of wealth is our hope to make every corner of the world prosperous. For meeting the challenge of sustainable development for all, innovation is especially important. Indeed, innovators are perhaps the only people who stand between a world in prosperity and despair. We must avoid a chain reaction burning down venture capital funds, angel investments, and startups spirits, subsequently drying up the flow of ingredients to nurturing ideas.
Silicon’s power in fueling a creative wave of destruction in retrospect
In the pursuit of having a solid-state electrical switch, scientists at the Bell laboratories invented Transistor in 1947. The return of the Transistor inventing team lead, Nobel laureate Dr. Shockley, to his hometown in California for exploiting the commercial prospects of the invention planted the seed of the chain reaction. He recruited eight bright science and engineering graduates for his startup—Shockley Semiconductor lab. These “traitorous eight”, named so by initial Dr. Shockley, started a chain reaction of exploiting Silicon’s power.
The initial push for the primitive innovation from the Silicon came from US military and Space programs. However, that push was not sufficient to take Silicon in the orbit to create increasing economic outputs. Instead, it kept emerging from the hidden material property of Silicon. The continued R&D led to increasingly better, and less costly transistors. As opposed to discrete Transistors costing $150 apiece, tens, hundreds, thousands, and millions started coming out on a single tiny chip costing a fraction of a penny.
The exponential growth of Transistor density, giving birth to Moore’s law, kept lowering each Transistor’s cost. On the other hand, the improvement of the design and processing technique of Silicon chips kept improving the quality. Silicon’s mighty power of making Transistor exponentially better and cheaper led to the rapid expansion of the demand of Transistor. Hence, the growth of existing firms and their spin-offs kept growing simultaneously. Such growth behavior kept opening the opportunity of accumulating wealth by a few by making early-stage investments in those startups. Subsequently, both the number of firms, size of each firm in revenue, profit, and jobs, the number of venture capital funds, and the total risk capital fund kept exponentially increasing.
The power of Silicon created a new culture of turning Ideas into wealth accumulation
Along with the sustained progression of transforming farmland into a highly prosperous Silicon Valley, a culture of investing behind unproven ideas started growing. Along with Angel investors, venture capital investment firms started to grow. Since 1961, the venture capital industry has been growing in the valley, giving birth to the famous Sand Hill Road.
However, the focus started shifting from semiconductor processing to devices, systems, and service innovation. The underlying reason for such a shift was due to the maturity of Silicon processing technology. Unfortunately, unlike Silicon, many of the service innovation ideas are not equally scalable. Of course, search engines and social networking-based applications created far greater prosperity for the investors than Silicon processing in a short period. However, it does not open the path of replicating thousands of such success stories. Hence, investments made in similar ideas have been failing to produce a profitable return.
The elusive nature of ideas demands the urgency of avoiding Silicon wealth annihilation
Some of the ideas in the next phase of building a Silicon-based society show quite different commercial characteristics. Often their growth patterns are also illusive in nature. For example, along the whole journey of a single Transistor costing $150 right after the invention to millions of transistors on a single chip, there was an increasing profit-making opportunity. However, many of the current great ideas do not make money until their performance crosses the threshold level.
Often these thresholds are high and are also moving targets. After spending millions or billions over the years, startups find their products not worthy of generating revenue. Moreover, unlike Silicon, computational algorithm-based technologies sometimes saturate before crossing the threshold. Such tricky nature, which is quite different from Silicon, is catching once highly successful VC investors in the Silicon industry off-guard. Contrary to the growth of revenue and profitability, many of the Silicon Valley firms are now growing with the valuation and burning of investors’ money.
Even upon remaining in the loss for over more than a decade, many of the firms are experiencing growth in valuation and skyrocketing share price. In fact, many of the unicorns are still generating loss-making revenue, and there is no clear indication of reaching profit. If they keep remaining at a loss and burning investors’ money, how will the investment return replenish the treasury? As a result, wealth will start to annihilate from the coffer of VC funds.
Examples highlight the necessity of avoiding silicon wealth annihilation
Among Silicon Valley’s recent upstarts are Tesla, Uber, WeWork, several are in Autonomous vehicles, and many more are in the broad category of artificial intelligence (AI). After 17 years of formation, Tesla barely reported a full-year profit recently. However, once subsidies are taken away, its balance sheet looks deep red. Moreover, this star faces two major challenges in reaching sustainable profit. The first one is battery technology. It has a long way to go to make electric vehicles a creative wave of destruction to gasoline ones. On the other hand, unlike in the past, Tesla does not have a strong technology portfolio. This is essential to create barriers to incumbents’ switching moves. Hence, upon burning billions of dollars, Tesla may not succeed in making a strong firm, while giving dividends to shareholders.
Upon burning $80 billion of investors’ funds, R&D outputs are failing to figure out the autonomous vehicles’ release date. In the absence of the autonomous vehicle’s emergence, Uber and many other ride-hailing companies cannot find a way to replace costly drivers to reach profit.
AI applications are highly elusive in nature—underscores the necessity of avoiding silicon wealth annihilation
In 2019 alone, more than one thousand AI startups raised close to 19 billion in the USA alone. Many of these startups are trying to make machine intelligence exceed human capability. In the beginning, many of these AI applications, whether detecting cancerous cells in medical images or detecting the human face of suspects in crowded places, show very high growth in performance. However, in the latter part, particularly in pushing the accuracy from 95% to above 99.99%, they start showing oscillating behavior.
In many cases, these AI algorithms saturate before reaching the target. On top of it, the performance targets keep changing as we keep knowing more about human intelligence’s role in getting jobs done. Furthermore, human beings are sharpening their innate abilities, often known as soft skills, to create increasing AI application barriers in taking over their jobs. In chasing moving targets with technologies showing oscillating behavior, startups will keep burning investors’ funds. Hence, wealth annihilation will continue due to this illusive nature.
Moreover, unlike Silicon, hardly there are customers for half-backed AI innovations. Until and unless those applications overtake human performance, there is no market value. For example, an autonomous driving module with performance very close, say 99%, to a human driver has no market value at all.
The necessity of avoiding silicon wealth annihilation is getting stronger
In creating Silicon centric smart society, software and service innovation ideas are now showing the possibility of growth. However, until and unless these ideas cross the threshold level, there is no market for them. On the one hand, computational technologies are saturating before making ideas to reach the threshold level. On the other hand, thresholds are moving targets, as we keep knowing more about the role of human intelligence. Further, unlike Silicon, or even the word processor, there is no market for half-backed AI products. Hence the expertise of accumulating wealth out of the investment made in Silicon startups, over the last 60 years, has itself become the cause of making mistakes in funding software and service indications. Therefore, there is a need to take measures to avoid silicon wealth annihilation. Otherwise, the innovation ecosystem runs the risk of drying up due to the lack of risk capital.
