Thursday, August 13, 2009

Business Creation in a Global Recession: Opportunities to Explore New Horizons in Entrepreneurship

4th Asia Pacific Conference on Business Incubation
August 6-7, 2009
Coimbatore, India

Keynote Address by: Dr. David E. Martin
Executive Chairman, M•CAM Inc.

Batten Fellow, Darden Graduate School of Business Administration,
University of Virginia

Honorable Delegates and Friends,
Few occasions could be imagined that would serve as greater evidence of the unquenchable spark of the human spirit than holding an event organized around the genesis of value creating business against the backdrop of systemic global economic volatility. It is appropriate, at this juncture in the story of modern social evolution to take an honest stock of where we’ve been, where we are, and where wisdom invites us to craft a more ethical and suitable future. Regrettably, when words like “economic crisis” are invoked, we respond with rather unsophisticated reflexes. Reflexes, by their very nature necessitate rapid, unconsidered, hyperactive responses short on the consideration of consequence or collateral damage. Reflexes do not seek, nor do they function with, considered consequence. So it is, that when we hear talk of “recovery” or “market resilience”, we fail to ask whether the pathologic condition that precipitated the current instability is a condition to which we should aspire. Do we want to return to a nostalgic view of a few years ago?

Who among us wish for a return to the optimistic days of 2007? Which one of us long for days when financial innovation involved placing bets – in the form of derivatives and credit default swaps – at 5 times the face value of the global GDP hoping for the failure of our fellow man and the taking of monies from the gullible public? Which one of us longs for the “wealth” that was created by hedge funds generating in excess of 10 times greater returns by betting against the performance of industry rather than investing for a more fruitful future? Who among us would like to see the public and private sector continue to abuse pension funds by leveraging them for short-term usury, failing to consider the social and political upheaval which now looms when the illiquidity of entitlement programs and pensions are evidenced? While we pursued ever faster bit rates to transmit data across the globe, we saw a record number of humanity enter severe malnutrition without a bite to eat. While we obsessed about speculative market returns, we saw a record number of humanity fall deeper into poverty. While we gained efficiency with unconsidered labor outsourcing, we saw a rise of human trafficking. While we spoke of global stewardship and the environment, we saw unchecked expansion in devastating mining and the growth of metals markets which supported paramilitary violence. We celebrated the iPod but turned the seed pod from food into ethanol to charge the batteries for our energy consumption addiction. I, for one, don’t want a return or a recovery. Rather it’s time for reconsideration, reconciliation, and renaissance.

We did not arrive at this point in our economic history by accident. This was not an unanticipated shock that “no one saw coming”. To the contrary, the present conditions were wired into the system from its birth and came to full bloom almost two decades before the spoiled fruit was plucked. While many economists debate the mechanics of the failures – which are many and rather simply discerned – I would like to address three issues which don’t enjoy frequent consideration.

First, we saw unchecked capital disequilibrium where ignorance arbitrage was the rule of the day. For the past two decades, capital migrated from receivables financing and dividend returns from profitable operations to speculative equity with returns from a carnivorous market food-chain where most died and the moderately successful were cannibalized by the few. This condition worsened when the few at the top of the food-chain, lured by “cheap” capital decided to leverage their insatiable desire to consume ever more. Public accountability and its surrogates turned a blind eye to untold abuses in every sector.

Second, under the politically correct construct called “Free Trade”, those framing the schemes removed the very utilities that they used to arrive at their powerful positions insuring that poverty could serve as the outsourcing energy of last resort at all costs. We will revisit this item a bit later.

Finally, greed simply eclipsed rational consideration both for self-preservation and for ecosystem survival. Returns of 30-50% were justified because the knowledge economy was full of risk, we were told. However, what we were not told was that “risk” was a mask used to cover careless due diligence, value chain assessment failure, and opaque dealing.

We now have an opportunity to pursue an alternative path – one that is not foreign to humanity but rather draws on some of the greatest models from the distant and proximal past. This new path involves the perpetual interaction between three macro dynamics which serve as both organizing principles and metrics of performance. They include Innovation Literacy – rightly understanding the core of innovation and its deployment; Gross Innovative Output – linking innovation to commercial consequence using all requisite economic tools and with the customer consumer precedent over the capital source; and, Innovation Recycling – using the fossils of the excesses of the past thirty years as catalysts of new growth.

Some of you are familiar with the epistemology of innovation but it’s worth reminding ourselves that we live with an ever more confused sense of what innovation is and what it is not. There are three distinct dynamics that are too often blended in conversations about innovation. They are:
• Invention: The creation of something entirely new, without precedent or anticipation;
• Innovation: The assembly or contextualization of components and knowledge for a new purpose; and,
• Incrementalism: The nuanced modification of a thing or utility for a specific market purpose.

Most of what we see called invention and innovation isn’t. Most of it is incrementalism and serves only finite, unsustainable purposes. By building civil society structures and proprietary frameworks around it, we afford it consequence that it neither deserves nor does it stimulate “sciences and the useful arts” to use the phrase on intellectual property from the U.S. Constitution.

Innovation is not synonymous with intellectual property. In point of fact, while its purveyors would love to find some shred of data to suggest otherwise, IPR is seldom the core or even the catalyst for successful venture formation and sustainability. In fact, the majority of innovation lives a rather unremarkable life. It is found in internally funded and contracted research, academic pursuits, commercial responses to market demands, and internal enterprise optimizations. Those who wish to say that IP is core to attracting capital need to admit that to date, no effective collateral position exists for IP to be counted as an investment grade asset and in the global market, no jurisdiction on the planet has a reliable treatment of IP in bankruptcy. More dramatically, while subject to general intangible liens, only a fraction of all intangibles are even correctly transferred when enterprises are sold or liquidated.

Innovation illiteracy is prevalent largely to serve as a protectionist utility for multi-national corporations to manipulate and control markets. Therefore, when we consider venture creation, we must address Innovation Literacy. In most of the world, the notion of turning ingenuity into profit is antithetical to local or regional values. The growth of the “Commons” model in the free and open source software movement and the expanding use of the general purpose license or GPL are wonderful examples of the growth of commons stewardship even in markets like the U.S. and Europe. When one focuses on innovation arising from a network – the nature of most endeavors now – one understands that it is the fusion of contributors to that network linked to markets which is the core of enterprise creation – not the access to restrictive, usurious capital seeking its rapid return. Programs like the Heritable Innovation Trust and the Peace Trade initiative have been established to formalize market accountability for programs that engage communities and networks – focusing on the dynamics of value in clusters of entrepreneurial endeavors rather than seeking the isolated lottery winnings for the few. In these and other programs, engagement of the full supply chain in every element of the commercial pursuit not only enhances the opportunity for more ethical treatment of people and their environments but also raises the value of production to include social benefit premiums.

Innovation literacy, put simply, is fundamental to engaging actors within communities around business and market models based on genuine conditions and market dynamics rather than holding out wistful models that are neither true in their telling nor reproducible in their promotion.

This cannot be more clearly critiqued than in the telling of the story of the last 60 years of entrepreneurial activity in the U.S. What the world has never been told is that we didn’t start our economy with angel funds and venture capital. We didn’t have a Constitutional right to an IPO. Rather, the U.S. and Europe deployed protectionist government procurement, aided by expropriated knowledge from enemies and allies, to create pockets of excessive capital that, when fully satiated in their own market hegemony, started capturing other pieces of industry in an ever expanding reach first in our own borders and then around the world. Holding out the false aspiration that others could follow suit, the U.S. promoted the fallacy of its model for others to replicate and without fail, countless nations have followed blindly into models which have left their populace disillusioned and more impoverished. It was government purchasing and preferential purchasing of everything from cars to chemicals to silicon chips that built American wealth – not fair trade. In fact, in the early 1980’s it was our fear of Japanese technology that reinforced our modification of patent laws and investment policy to artificially enhance our innovative position in the world.

In India alone, hundreds of U.S. Patents from thousands of labs have been filed with virtually no commercialization in any fashion. Meanwhile these pieces of property have served to inspire thousands of commercial projects for which no benefit has returned to India. Thousands of plants, heritable knowledge elements and know how has been taken from India with no concerted program to repatriate it or the profits derived therefrom. And all the while, India’s government and those throughout the world, are forced to accept fraudulent patents on medicines and technologies which have been granted in error without any access to equitable relief. In both IPR and trade, the U.S. and Europe utilized their market influence to generate wealth and, having arrived, then created rules forced on the rest of the world to deny the rest of the world the utilities they used in their own ascent.

I am reminded of the image carved into one of New York’s landmark buildings depicting the Auschwitz concentration camp with the inscription “Indifference to Injustice is the Gate to Hell”. Aligning with those who, having used protectionism to gain power, prohibit others from favorable purchasing and consumer dynamic enablement, is participating in an injustice that has cost millions their lives and livelihoods and cannot be tolerated. It is, in the final analysis, the case that any endeavor in business incubation must benefit from market and public policy that is willing to invest in enterprise by being its first customer, not creditor. Gross Innovative Output must be a condition adopted by, and assessed within all levels of tender and procurement and is essential for any nation to integrate if it is to create a dynamic and healthy domestic enterprise environment. The purchasing of locally supplied products and labor, at a premium, has been shown to be the fuel for the U.S., Japanese, Korean, Chinese, and European economies and it must be promoted for the benefit of all nations.

Now we come to my favorite topic – Innovation Recycling. To know me is to know that I have advocated my whole life for accountability in innovation. With over 50 million patents issued around the world covering all manner of technology, good, or service, the world is awash with disclosures of creativity and corruption, transformative enablements and imposters. However, in the past 10 years, this chaos has provided the compost – or recycling – for a new opportunity. During the expansion of the leveraged merger and acquisition markets over the past 15 years, it became quite common for larger integrated companies to acquire smaller innovative companies for one or two core products or capabilities. All in-process and non-core technologies held by the acquired company were abandoned as “non-core”. If a technology didn’t generate over $100 million in annual revenue, it was discarded outright by several major corporations. In short, the majority of acquired innovation was put in the rubbish heap for the short term exploitation of the select few. In every key environmental technology sector, for example, more patents were abandoned and expired into the public domain than all currently enforced commercial platforms. In short, the solutions for everything from distributed power, to fuel cells, to intelligent batteries, to wind, solar, water energy and purification, hydrogen fuel, and much more is available in the Open Source commons as expired and abandoned. This was not because it was useless. Rather it is because it had not yet achieved a level of commercial output to displace the incumbent – often inferior – technology. Every incubator and innovation lab should immediately put in place an active profile of this recyclable asset pool for research, development, repurposing and commercialization. In addition, the innovators, whose work was abandoned and discarded, can be re-enlisted to help bring new life to their discarded and overlooked creativity enabling new models of value creation and social network exchanges.

This type innovation network re-engagement facilitates what I refer to as “Fusion Networks” where we catalyze industrial and gross innovation output with the same restrictive properties – now in the public domain – that had precluded earlier use and adoption. By seeing what has been done and learning from barriers to commercialization, the emerging entrepreneur can pre-qualify countless resources that were once thought to preclude engagement and now repurpose these into value components. This open source innovation stewardship views innovation in the appropriate light of what it is – namely, a utility of enterprise, not the enterprise in and of itself. By right-sizing awareness of interdependency, the common impediment to incubation emanating from the innovator seeing him or herself as the exclusive enabler is mitigated with evidence sourced from numerous inputs provided by innovation recycling.

The journey towards a future integrating innovation literacy, gross innovative output and innovation recycling can begin here today. In point of fact, it has begun whether we like it or not. There will be no Silicon Valley or Bavarian economic miracle in India because it wasn’t a miracle where the legends started. Exploitative capital will not build the next economy or the next nation. By educating ourselves to see that value – and all the dimensions of wealth – manifest when we focus on humanity rather than the artifacts created thereby we can create models of providential wealth which create lasting industry with purpose rather than short term punctuated equilibriums of extractive excess. Rather than teaching our entrepreneurs how to win exclusively, we can support efforts to expand the use of and contribution to the commons. As David Bollier points out in his book Viral Spiral, the rise of social network utilities on the internet has already catalyzed the emergence of economic innovation not considered just 5 or 10 years ago. This dynamic can spread to other domains.

Specifically, we recommend that discussions of capital access be replaced with discussions of customer facilitation and value recognition. Realizing that investment is constrained to achieve a neutral effect – a dollar invested is a dollar spent – where as market validation is value accretive and capable of supporting ethical financial services, our efforts should be to map and then facilitate market access. At a public policy and NGO level, this means purchasing from local SMEs and, when larger tenders are constructed for national procurements, governments should insist on the use of innovation recycling, open source innovation and facilitate the same through the use of Global Innovation Credits. This scheme allows a government to purchase from suppliers who are ethically using open source and charging premiums only where genuine new effort and innovation is required.

Today, as we kick off the 4th Asia Pacific Conference on Business Incubation, let us commit to ourselves and the world that we will apply the same level of innovation to our thoughts and deliberations as we expect from our entrepreneurial community. Let us not perpetuate the myths and legends which have cost global economies billions of dollars in futile social and business infrastructure and at least three decades of fruitless wandering. Rather, let us rise in this occasion to the new day. A day which sees Heritable Innovation honored, that sees domestic production and innovation validated with customers, and that sees the masses rise on the innovation recycled from neglect and misuse and repurposed for a cleaner, greener, ethicological future.

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave