How to invest successfully in innovation and technology today
The Rafael del Pino Foundation organised, on 6 October 2021 at 18.30, the conference live on the Rafael del Pino Foundation website. www.frdelpino.es entitled "How to invest successfully in innovation and technology today" which was given by Luis Perez Breva.
Luis Perez Breva conceived and leads MIT Innovation Teams, the flagship programme of MIT's engineering and business schools that aims to enable technological breakthroughs to impact society and solve problems in the world, and which has already seen nearly two hundred technology start-ups from all fields. He has taught innovation as a skill that can be developed with students and professionals from all fields. The author holds degrees in Chemical Engineering, Management, Physical Sciences and a PhD in Artificial Intelligence from MIT. He is an entrepreneur and innovator, and an expert in technological innovation, venture labs, and the application and commercialisation of artificial intelligence to solve real problems.
On 6 October 2021, the Rafael del Pino Foundation organised the conference "How to invest successfully in innovation and technology today", given by Luis Pérez Breva, director of the MIT Innovation Team.
How can investors help technology move into the marketplace? It's not just investing, but also solving problems with technology. What does it mean to innovate? Is it a practice? Is it a skill? How do we do it? Do we rely on technologies? Do these technologies have to be new or old? As tools to solve problems? Or do we have to keep talking about predictable disruption, as if that can be predicted, about minimum viable product, about all these exponential ideas?
Beyond all this, the key question, whatever innovation means for all of us, is how do we invest in innovation, how do we do it successfully, how do we invest in new technologies?
The first thing we need to review is the argument for investing in technologies. It's not just about finding the new Uber, or the new Facebook, or the new Google. It's about something else, it's about discovering incredibly large new spaces of opportunity. That is, the potential that we are looking for with new technologies, or with existing technologies, is to create new spaces of opportunity so large that you can fit in with all the competition. We compete in a different way: we create new categories of products, of services, of possibilities.
The reason to invest in technology is to equip yourself with the tools to tackle real problems that matter. It is also to equip yourself with the ability to shape technologies, to change them and combine them with others until you come up with the real innovation, or the real new organisation, that solves the problem. Technologies or businesses do not solve problems; they are solved by the creation of new business ideas, or new organisations that use these technologies as a tool to solve real problems.
Finally, and most importantly, is to avoid wasting innovation. When you talk about the hours spent developing these technologies and you embrace the idea of failing fast, you are also embracing a very strange idea which is that we are going to waste all those hours invested in society, in talent and in the development of these technologies in a speculative game that generates wasted innovation. How do we avoid that? These are the key to the success of how to invest in technologies.
The difficulty lies in translating words whose meaning we take for granted into investment. Half the people will think that technology means electronic things, the other half that it means digital things. Or that Facebook is technology, confusing a company with technology. Another half will think it's only technology if it comes out of a biotech lab. Others will think that technology was invented by Ford a hundred years ago and has never happened again. Some will think that technology equals product and that the iPhone is a technology. Some will think that the iPhone is five hundred technologies. Investing in technology is more than just making a website. That's where we're going to pull from.
There are words that have become very important in the last two years. The first is "lab to market", i.e. how do we get the technologies that come out of universities to become technologies that make our lives easier, or that allow us to do things we couldn't do before.
The second is "problems". We come from a time when we have been talking about Covid, about measures, about the number of forms we have to fill in to move from one country to another, about web applications, about disruptive technologies, but also about the disruption we have suffered. And at some point we have to ask ourselves that, with all the inequalities that exist in today's world, and the technological capabilities that we have, why are we not using technology better to solve problems.
The fundamental difference between now and the pre-Covid world is that in the pre-Covid world we accepted disrupting markets as a way to solve problems. Now no one relishes the idea of disruption for its own sake.
What is the task of the investor, of the entrepreneur? Investing in technology is to discover, with the mental model before the discovery of America, that the world has more continents. We don't want to disrupt the world, but to make it bigger, to find new possibilities, new continents. That is what technology allows us to do.
Arthur C. Clarke said, writing in the 1950s on the laws of prediction, that when an eminent but elderly scientist claims that something is possible, he is almost certainly right. But when the same scientist claims that something is impossible, he is very likely to be wrong. The second law is that the only way to discover the limits of the possible is to venture a little further into the realm of the impossible. And the third is that any sufficiently advanced technology is indistinguishable from magic.
The investor starts with the third law. He has to believe that the technology will seem indistinguishable from magic when it is finished, he has to accept the risk involved in venturing into the realm of the impossible, and he has to know that he will be investing in a project that, at first glance, seems a little far-fetched. Hence the fear of technology. But this is what really happens and what really works.
What if there was a way to test and de-risk the investment? What if we could test ten new, radical concepts that use technology to solve really important problems, for the capital it takes to fail in a predictable way? What if, with these project methods, we could justify exploring much more ambitious projects? Let's look at an example.
Uber has required thirty rounds of funding, totalling $25 billion, since its founding in 2009 and the technology is a web platform. This is one way to invest, a way that everyone thinks they want to pursue. At the other extreme is Moderna, which was founded in 2010 in a completely different way. It is not an accelerated company, or a company proposed by the investor, but a company conceived, tailored and developed by a systematic method of creating advanced technology companies. Moderna has required in the same period as Uber 2.7 billion of investment in twelve rounds. That's a lot, but it's a biotech company.
Both companies have global impact and both represent two very different schools of how to invest in technology, but they are nothing alike in the kinds of problems they tackle. Uber is a kind of company that is born by finding an investor, and by accompanying and accelerating a series of ideas. This allows for the development of one type of business, but it never allows for the development of another type of business. But to solve today's problems we need to create more Modernas, to develop more companies in the same way that Moderna was made, which is to conceive and develop organisations.
The current model is based on finding an entrepreneur and eliminating some risk by finding a parallel type of real estate business. Incubators, accelerators, etc., are basically real estate businesses that recover part of the investment by providing office space. There are many of these and many are very good. The question is whether this idea works to solve real problems. To answer it there is the other model: conceiving and developing organisations, which means inventing the organisation from scratch, including inventing the technology, and learning to recycle the ideas that don't work in order to be able to do this with economies of scale for the investment itself.
This second process can be done anywhere in the world, translating technology into real impact for society. At MIT they do this in the same time it takes to get Google off the ground. It's the most advanced method there is.
How does the accompaniment of ideas work? We have become accustomed to the image of an entrepreneur running, having an idea, going to present it, seeing if it is good and putting money into it little by little, trying to see what comes out. We have industrialised this vision and now we believe that most technologies are born this way. This process is to go through a series of investment rounds in which a next investment group with a little less risk aversion buys a good part of the ownership of the company from the previous investors. But this is a system of intermediation, not technology investment, and it doesn't have to be. So abandoning ourselves to this way of thinking in order to take the lab to market is probably one of the worst things we can do.
To begin with, it is very inefficient because nothing happens with the idea in the first year of life. In 2017, this way of doing things moved 77 billion dollars in the United States. In the same year, the world of philanthropy moved almost six times as much money. And why? We have technologies designed to move the world forward. All those technologies will have to be linked to cause development, plus they are very lucrative. We are not being able to bring these two ways together because that creation process is a speculative process, where there is so much fear of risk that we go small, we actually end up spending a lot of money, for example, the 25 billion of Uber, the 10 billion of AirBnb or the 2 billion of Dropbox, etc., and we lose sight of the possibility of solving problems in the world because we need a long-term vision to be able to do that. That long-term vision is incompatible with a speculative model.
This model has become so widespread that entrepreneurs are valued on the basis of how much money they raise, not on what problem they solve or how quickly they create a sustainable business. This is what we are up against.
What if we wanted to invest in problems that really mattered? What if we believed that in the act of solving problems we would create opportunities for profit far greater than we could create by competing with another platform to distribute something or democratise the taxi system? What investment process could we follow? That way of thinking is more compatible with technology than the other way of thinking is. Maybe that's why we see many incubators with software projects but few where we can talk about biotechnology, quantum computing, and few investors mentally prepared to deal with the idea of quantum computing. To invest in technology you have to have a different way of thinking and looking at the investment process.
How does investment in conceiving and developing organisations, with the aim of solving problems that matter and with the firm belief that it can lead to more profit than it would appear beforehand, work? All this lives in the long term in the sense that one has to believe in something that lives beyond one year. You can tackle a real problem and at the same time make a lot of money. We are talking about solving formidable and unexplored problems. We're talking about starting to think of technology as a tool, not a product, and sharing it as a tool that helps the ingenuity of all those people who believe in the possibilities of moving forward with technology. And we want to build organisations designed to solve that problem and make a fair profit by being the first and best at doing that. But we do it by creating a space so big that there is room for competition.
Real problems follow a different logic because they do not work by the speculative method. On the contrary, they are critical for society and are solvable for technology. But they are a challenge for investment theses based on this speculative way of thinking and investing, whose probability of success is around one in ten projects, or less. These real problems require a more efficient approach to innovation. It requires technologies thought of as tools, the idea of recycling and reusing the waste of innovation. That is, now that we know that something can be done, how do we change or reorient the investment thesis of that new possibility to create an organisation that can sustain itself? We can do this with any technology and even with failed startups. And we have to be able to reconcile philanthropic ambitions with commercial ambitions. Finally, we have to believe that these new areas open up a wide space of opportunity to be explored for doing good and for making money.
The process for this type of investment is simple. It all starts with exploration, i.e. there is a very big problem to solve. How can we make sure we solve it? Problems are not solved well when we think we are right with a single solution; problems are solved well when we map it out and look for ways to create robust organisations to solve it. A robust organisation is an organisation that can succeed in many different ways. The exploration takes two months.
Once it's finished, a plan is generated to, let's say, kill the idea. It's a plan to build an organisation that tries to prove in every possible way that what we thought was a great space of opportunity for all these technologies is in fact not a great space of opportunity for all these technologies. Every single experiment we do will go directly to removing risk from the operation. The idea is very simple. If a process is going to fail we have two ways of knowing: now, by doing an experiment that costs a lot of money but tells us in a year, or by doing piecemeal experiments that tell us in ten years. We don't want to do small experiments; we want to learn from those experiments and the sooner the better. Because if the idea is not going to work, it is better to actively kill it ourselves rather than wait for it to die of its own weight. This is done over a year and a half, developing the organisation and testing everything that could go wrong.
What happens after these twelve, eighteen months, is that maybe it works. Or rather, maybe we don't manage to kill the idea. It's still a good idea. Then, as we see that the organisation works, we take it up the ladder. But what happens if we manage to kill the idea? Well, we have to think about how to recycle all these things. We have to create a new system to be able to recycle all the things that we think could work in another context and that could be used to start again. This generates a whole series of economies of scale for innovation that make it much more interesting to keep investing in more and more ambitious projects. In the end, what we end up creating is our own pool of parts and pieces with which to build new and ever more ambitious solutions with which to explore new problems.
To invest in technology you have to be able to explore problems without the limits imposed by speculation, being able to explore up to ten ideas in a systematic way with the same capital that it would cost to fail with a single idea if you wanted to be right. You have to create an environment in which these ideas are shared with a society of what we call tinkers, which is a way of sharing technology as a tool to make them accessible to all entrepreneurs who also want to solve problems. And we also have to take into account the idea of recycling. Restricting oneself in time to the fact that the idea has to bear fruit now is the way to fail nine times out of ten. This generates a virtuous circle of investment.
The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.
The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.