China

Even the most optimistic have conceded that the Chinese will be the next superpower within a decade. It's inevitable. But they will have huge growing pains as well (witness the recent precipitous decline in the Chinese equity market), much like America did when we became a superpower. Look at their human rights and how they deal with social injustice and civil unrest, as well as their deliberate flogging of environmental issues (although America has no right to point fingers, given our track record of polluting). I just don't want America to be the next UK--a financial center with little else. The UK experienced a huge brain drain to the US because of our manufacturing and economic might. There could be a mass exodus of smarts out of the US this time--actually there already is.

My opinion of Sarbanes Oxley is that it has driven entrepreneurial spirit under or overseas. Instead of developing next-generation technology, entrepreneurs have become bean counters and lawyers, dealing with compliance instead of focusing on their core competence. London is now underwriting more IPO's than New York. Legislators rant about the evils of the outsourcing of jobs overseas--yet they misguidedly enact laws which encourage it. We don't need more regulation--we need enforcement of existing laws on fraud.

I've been engaged with venture capitalists and serial entrepreneurs focusing on China, the next great frontier for not just making Nike shoes, but also highly intellectual property-intensive semiconductor technologies. I used to be a vendor selling enabling tools to these semiconductor companies (I now manage money), and I was lucky enough to participate in the tech boom in silicon valley in the late 90's. These people are replicating that business model in China. Some VC's ONLY invest in Chinese startups--serial entrepreneurs (Chinese natives) who had success in the States, and aim to replicate it in their return to China. They are creating another silicon valley in China--lots of them. The brain drain is already occurring.

For instance, those from San Diego are well aware of Qualcomm, the developer of the 3G wireless standard. They double dip because they make money on the semiconductor hardware as well as through royalties from their intellectual property (3G technology). Broadcom (socal) and Marvell (norcal) are also semiconductor icons which have had very successful IPO exits in the last decade. They are industry leaders in networking and storage, as they developed the silicon content enabling many technologies. The intellectual property in these leading edge technologies resides in the silicon, much like Intel's Pentium controls your computer.

Hence, the Chinese are getting tired of paying royalties on technologies and standards US companies developed. The domestic Chinese market is big enough to support development of their own standards--they're basically saying "screw the US--we can do it better and more pervasively--and we're tired of paying you royalties". And while there are challenges--this stuff ain't easy--they will get there.

And don't pooh pooh these efforts. Some of you recall the last big downturn in the economy, the housing markets, and the thing called the S & L crisis--during the early 90's. We had the riots, the closing of naval bases, debilitating earthquakes, the defense industry downturn, etc. as well. You could have bought a home on a 1/2 acre lot in Beverly Hills (north of Wilshire) for half a million, and a 12 unit apartment building in Long Beach for $350,000 via foreclosures.

Sounds awfully similar, doesn't it? Low-end homes have tanked first this time, and it's just a matter of time before higher-end markets take a dump, too.

But here's the silver lining: do you also remember when the internet was spawned (no, Al Gore did not invent the internet)? It happened many years ago, then known as DARPA, part of the Defense department communications network. Companies like Netscape and Yahoo rolled out the internet to the masses during these dark economic times, thereby enriching thousands of shareholders and employees. They went public in the teeth of that recession--I would argue they helped end the recession and catalyzed the start of the great tech boom.

I can assure you innovation in labs is still occurring today, what techies geeks affectionately coin "disruptive technology". These soothsayers can see around corners and will develop the next "new thing". My concern is that the next wave of value and wealth creation in the US will be dampened because much of this technological innovation is occurring overseas. The wealth generated by these startups won't be as widely distributed in the States. In other words, we need more Google's and fewer pets.com's. Long-term, I shouldn't be so cynical, because it is not a zero sum game. We should encourage innovation abroad as well as domestically. But my fear is that the US will not be playing at the adult table--and relegated to the kiddie table.

I've been a doom and gloomer for 2 years, and people thought I was heretical. Well, the manure did really hit the fan, and it turned out I understated the magnitude of this crisis. We'll climb out of it, and I have a feeling I'll be fine by staying close to the next wave of faster bandwidth, Moore's Law, and bio-entrepreneurship, but I'm afraid the deep end of the pool is going to be more treacherous this time. More people will lose their homes and jobs, and more realtors and loan officers will be waiters and waitresses. It's disheartening, but we are paying penance for our excesses.

Until our schools seed more engineers, scientists, and computer scientists, we will lose more high-intellectual, high-paying jobs overseas. It's got nothing to do with outsourcing--capital flows where it gets more bang for its buck. It's got everything to do with upgrading our skill sets, because the market will determine where the next good jobs will be.

Innovation cycles in an economic downturn

I am a student of history, and it seems innovation accelerates during economic downturns. Innovative technologies blossom as the economy recovers, serving as a catalyst to increasing our productivity. California was in a serious recession in the early 90's, but that backdrop merely served as a precursor to the adoption and pervasiveness of the internet. What followed was an unprecedented boom in technological innovation (and equity market capitalization). While California was in the depths of a recession, researchers in university labs and private industry were busy bringing interconnectivity to the masses. Innovative high-tech companies, especially forward-thinking incumbents, were increasing their R & D budgets, while their competitors were merely trying to hold market share. Startups by nature, were continuing to develop the next great mousetrap.

You could probably follow the timelines of breakthrough technologies for the transistor, integrated circuits, PC's, biotech, software, databases, web technology, etc. and see similar trajectories of mainstream adoption and penetration.

Unfortunately, we are entering one of the steepest economic declines in quite a while, due to the mortgage lending crisis, rampant abuses and over-speculation (that's polite-speak for greed--does this sound familiar?). I am hoping that the silver lining is that our industry overall will be allocating more resources to develop the next gee-whiz technology. The companies who slash their R & D will suffer relative to their competitors when we turn the corner--whenever that is. Increasing research expenditures may be unpopular during a downturn, but it is absolutely crucial in order to thrive in the next upcycle.

University research labs need to deepen their relationship with private industry. I have visited several campuses recently, trying to get a glimpse of the next new, new thing. I believe UCSB, my alma mater, and other university engineering departments are doing the right things, increasing their fund raising efforts, as well as collaborating with private industry. They still need to maintain their academic integrity and independence, but by working closer with private industry, they can make a bigger impact and monetize their research efforts quicker. Time to market still matters even in academic ivory towers. It takes initiative and commitment.

The promising technologies I predict will be in sustainable technologies (greentech), nanotechnology, and biotech. Moore's or Metcalfe's Laws won't be invalidated, as we continue to make tools and products faster, smaller, and cheaper. These incremental improvements will be crucial to nurturing nascent industries. But the "Blue Ocean" industries will be spawned from breakthroughs developed in labs where pocket protectors are fashion accessories. I'm enthused that UCSB's Engineering departments share my vision, and that they are applying a multi-disciplinary approach to solving our society's pressing needs, engaging with other departments on campus, as well as corroborating with other universities.

I've made visits and taken tours of Cal Tech and plan on doing so at Stanford and UCI, as these outstanding institutions map out how we all will live years from now. They are corroborating with private industry more than ever, and raising their visibility among influential alumni in private industry. Many faculty members continue to create and invest in promising, innovative early-stage companies.

My fear is that myopic legislators and technocrats do what is traditional and popular--cut R & D spending, which will portend very bad outcomes for our country, because the rest of the world isn't standing still. If the US wants its citizens to continue enjoying our high standard of living, we have to remain competitive as a technological power. Terrorism isn't our only foe: so is poverty.

My next blog will dispel the myth that the US is not in a recession...