Less Changey, But Still Hopey About 2011

1/6/11

Last year at year end, I wrote about technology trends. Those trends, like the merger of the cloud and mobile devices, personalized medicine, reprogramming of human cells to cure disease, and the re-emergence of nanotechnology, still hold. Startups are breaking down impossible barriers in computing, biology, energy, and materials science. The USA is leading and will continue to lead the world with tremendous innovation.

However, this year, the big impacts are will be made at the politico-economic level. Will government free business to innovate? Will we drown in debt, heading toward our own Greek or Irish “austerity?” There has not been a more critical year for the country since 1980 when we had a choice to leave the Carter malaise behind. The innovation community needs signals and concrete deeds that we are valued so we have some certainty about friendly policies in the future. Here are four trends to watch in the coming year.

Trend 1. Rediscovering innovation and the private sector. I hope we will look back at 2010 and 2011 as the year the United States began to save itself, rediscovering that technology innovation is the key to our economic recovery, and even to our success as a nation in the coming years. Venture funded companies contribute 20 percent of GDP, from zero 40 years ago. This means freeing the private sector to innovate to create new business that will be central to our productivity and economic growth. I was hoping the Obama Administration would have grabbed hold of this agenda from the start, but I am less hopey-changey now. Nonetheless, President Obama received the message this fall and is already reaching out like never before to entrepreneurs, and with folks like Austan Goolsbee leading the charge and a tailwind of fierce and justified rage from free-market advocates, there is reason for hope.

Alternatively, it could be the year that we cede control of our future to government, led by state employee unions, and runaway federal and state spending and debt, miring the country in an anti-business economic malaise that will cause us to make Chinese the primary language taught in our underfunded schools. Our Federal elected officials like Sens. Cantwell, Murray, and most of the representatives from WA seem to “get” innovation and have been effective advocates in DC, but it is not clear the governing party quite understands that it is innovative and entrepreneurial companies that create jobs and lead the United States into the future, not government. Spend one day in China and the entrepreneurial optimism whacks you in the face like a 2×4. Maybe our leaders will re-discover this in 2011, or they will be the minority party in 2012 with a repeat of 2010.

Our state politicians are another matter. While the Washington state federal delegation on both sides seems to understand innovation, the State folks in power seem to say the words, but their deeds show that they are captured by the unions and the backward looking partisans who want to make us France…or Greece. Last week, the state took $210 million federal dollars specifically set aside to prevent teacher layoffs and spent it to support the “cuts”(read “increases”) to the state unions that have no shared sacrifice at all. And while they are cutting teachers, the state still pays ferry workers 6 MILLION dollars a year to drive to work, including $70,000 to one person for driving to work.

So the choice is to free our innovators, provide them the right incentives, and to embrace competing head-on with the world, or to withdraw into a debt-driven shell, controlled by increasingly less productive government that can spend, but never cut the bureaucracy. We all know what the answer must be.

Trend 2. 2011 will be better. 2010 was the year that sanity returned, and businesses will respond to more certainty, by beginning to hire again. Technology will lead the way. Driven by the idea that some fiscal responsibility will take hold in government, and the private sector will be heard, investors will continue to write checks, and business will begin to hire again. A big question is whether regulations that led to a weak IPO market, like Sarbanes-Oxley and the Spitzer crusades which eliminated sell-side research entirely, will be simplified to open up capital flows. With weak IPO markets, investment will fall over the long run

Trend 3. The role of government will be smaller, yet there is room for innovation and collaboration from previous antagonists. It is not clear that the era of spending is over, but the spenders are under pressure. A new reality will set in in DC, and the threat of state bankruptcies might even provide some discipline for States like California to stand up to their $500 billion of unfunded health and pension liabilities. But there can be bipartisan compromise in the areas of energy independence, capital gains tax policy that creates jobs, and immigration for top scientists and entrepreneurs. Maybe even in our own state, new leadership can show us how to partners with private enterprise, create more start-ups, and free up the innovators at place like the University of Washington, so we can have more jobs via innovation. In WA, my New Years hope is that the antagonists on both side of the Initiative 1098 debate can come together to discuss how to fund education and free our university innovators, without writing a blank check.

Trend 4. The rise of China and the slide of Europe: China will continue to rise, with a few bumps from inflationary pressure. China will continue to lure some of the best and brightest scientists from the USA to China to jump-start their basic sciences, and to fund new clean-tech industries using their huge capital surpluses. Europe should be an example for the U.S. of exactly what not to do in innovation policy. The science is great there, with nowhere to go. The entrepreneurial culture is strong in the U.K. and Ireland and few other nations like Denmark, but the Continent culture is not conducive to risk taking or entrepreneurship. Their inventions lay stagnant. But the death knell for E.U. innovation are the onerous new regulations on investment in venture capital, which will be the nail in the coffin for any chance of the EU competing with U.S. startups in the long run.

Summary: We have all the basic strengths in the United States to win the battle. Our universities and labs are the most productive and innovative by far. It will be decades before anyone can dent that. Our venture capital community is bigger than the rest of the world combined, and although it is truly threatened, some of the policies that could have harmed it the most are being pushed back in D.C. There is an opening this year for those in D.C. to realize that the innovators and entrepreneurs are the way out of this mess, and we should be celebrating them, supporting them, and adopting policies which encourage and reward them. That is the trend I would most like to see come true.

[Editor's Note: This is part of a series of posts from Xconomists and other technology and life sciences leaders from around the U.S. who are weighing in with the top surprises they've seen in their respective fields in the past year, or the major things to watch for in 2011.]

Robert Nelsen is a co-founder and a Managing Director of ARCH Venture Partners. He focuses on biotechnology, pharmaceuticals, and nanotechnology. Follow @

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  • M. Plaia

    Sir,
    You make the following glib statement:

    >> This means freeing the private sector to innovate to create new business that will be central to our productivity and economic growth. I was hoping the Obama Administration would have grabbed hold of this agenda from the start, but I am less hopey-changey now. Nonetheless, President Obama received the message this fall and is already reaching out like never before to entrepreneurs, and with folks like Austan Goolsbee leading the charge and a tailwind of fierce and justified rage from free-market advocates, there is reason for hope <<

    How many trillion$ of dollars must the private sector be sitting on before innovation to start new business commences? Start up companies are dying on the vine or not even getting started due to lack of venture funding. Yes, this is "free market" but someone has to spend money to make the economy move. Companies, investors and financial institutions cannot sit on massive piles of cash and decry the fact the economy is not moving.